One of the reasons why construction projects generate so many legal disputes is that the expectations of the parties – owners and contractors – often differ and may be at odds with each other. I’m sure that as a contractor, you have dealt with owner complaints about the schedule, change orders, quality of workmanship or materials, etc. A dispute then arises and the owner decides to withhold payment. You know you have lien rights but you don’t know what to do.
The New Jersey Construction Lien Law gives you a right to file a lien, but it is a very strict, meticulous law. You have to be careful with it because if your lien is deemed improper or frivolous, you may be liable for the attorney’s fees incurred by the owner in seeking to discharge it; and may even be liable for damages. For example, if a “bad” lien prevents an owner from refinancing a mortgage loan, and the owner loses a favorable interest rate, you may be liable for the higher interest cost differential of the owner’s ultimate loan.
But if you meet the Lien Law’s requirements, a lien is a powerful tool, because in the end it creates collateral from which to pay you.
The requirements for all liens, whether residential or commercial, include
1) a written contract signed by the owner;
2) it must be for improvements to real property; and
3) you must file the lien within 90 days of the last date of work – excluding any warranty or service work.
In the residential field, you cannot file a lien right away. You must first file a notice and then request a “super fast” arbitration with the American Arbitration Association (AAA) to decide if the amount you assign to the lien is correct, and then you still must file the lien or an amended lien within the required 90 days right after the arbitration is over. (The law was changed to protect homeowners against frivolous liens.)
Once a lien is properly filed, you have a year to “foreclose” it. That means you must sue. The owner can defend against it, of course, and argue the lien is improper; or as is often the case, the owner will file a counterclaim exceeding the amount of your lien.
If you obtain a judgment foreclosing the lien, you, like a mortgage lender, will have a right to force a judicial sale of the property to pay off your lien. If the property has a mortgage, and the owner’s bank or lender does not itself foreclose (because the owner allowing a lien to be filed may violate the terms of the mortgage), you can end up owning it (subject to any mortgage that preceded your lien).
Alternatively, the Construction Lien Law allows for the “bonding” of the lien it can be discharged from the public record. This means the owner can secure and post a bond for 110% of the amount of the lien, and then the bond replaces the lien as collateral. If you win the case foreclosing the lien/bond, and the owner still does not pay you, the surety insurance carrier that issued the bond is obligated to pay you. The surety will then probably sue the owner to seize whatever collateral the owner gave to back up the bond.
The very fact that you are able to achieve that – taking over the property or forcing a sale – should give you enough leverage to prompt a settlement or cause the owner to pay. But many times it is not that easy, because lawsuits to foreclose liens also involve breach of contract and breach of warranty claims or counterclaims by the owner, and those claims will have to be decided by a judge or jury before you can be paid.
The Lien Law’s purpose is to get you paid for your work. But to take advantage of its power, you will have to meet its strict legal requirements.
If you have any questions about this post or any related matters, please feel free to contact our Construction Law Practice Group.