Firm News & Blog

THE NEW JERSEY CONSTRUCTION LIEN LAW - IF YOU DON'T KNOW WHICH WAY TO STEER YOU WILL RUN AGROUND

5/22/2013

The New Jersey Construction Lien Law (CLL) was last amended in 2011.  Like many multi-faceted legislative schemes, it has several ambiguities, and procedural quirks that must be avoided to enforce the rights of the unpaid contractors, or those of a project owner faced with claims of unpaid contractors or material suppliers.

The basic purposes of the CLL are to (a) provide a remedy for contractors or material suppliers who have not been fully paid for their services at a construction project by means of a lien on the project’s real estate; (b) to provide some statutory protection to a project owner, who under the old Mechanic’s Lien law, often found that it had to pay twice for the very same work, where a general contractor (GC) was fully paid on a project, but failed to fully pay its subcontractor, trades or material suppliers.

Project owners need to know how to navigate the CLL.   If an owner fully pays its GC or prime contractor, in accordance with the payment terms of its contract, all lien rights of lower tier subcontractors or suppliers are extinguished; an owner should not be required to pay twice for the same work.  See N.J.S.A. 2A:44A-9.  However, a few wrong moves by an owner can change that intended result, and cause a double payment for the same work.  The above statute determines the maximum amount which may be subject to lien by a subcontractor ( called the “Lien Fund”).  The “Lien Fund” concept means that the collectable amount of any lien claim, by any tier of contractors, subcontractors or suppliers, “shall not exceed the unpaid portion” of the contract price for services rendered.  Thus, for example, if (a) the owner paid its GC $900,000 of the $1 million contract value set forth in the GC-owner contract payment schedule before the GC walks off the job and (b) the GC had, for whatever reason, failed to pay its subcontractors and suppliers a total of $350,000 they had earned under their subcontracts with the GC, the maximum amount subject to lien would be $100,000, and the subcontractor’s s only remedy for the remaining unpaid $250,000 would be to claim against the, perhaps disappeared or bankrupt, GC.  So far this sounds good for the project owner.

Let us assume, however, that at the urging of this same GC, the owner agreed to accelerate payments due under the contract payment schedule because the GC told the owner that, due to unexpected working capital or cash flow problems, it could not complete the owner’s million dollar project on time, or at all, without payment accelerations (such as an advance payment of retainage or other payment enhancements).  Those advances, however, would not reduce the “Lien Fund” or  the maximum amount subject to lien by a subcontractor.  Under this scenario, if $350,000 of the $900,000 paid the GC represents accelerated payments rather than services rendered, the amount subject to subcontractor’s lien would  be $450,000, ($100,000 unpaid under the contract with the GC  plus $350,000 unearned payments.)  The owner would owe the unpaid lien claimants the unearned  $350,000-- leaving $450,000 of additional cash needed to complete the job –not so good for the owner!  (Good luck recovering the additional cash paid out from the disappeared or bankrupt GC!).

If you are a trade subcontractor who works on a job where the GC has not fully paid for your work, you need to be aware of this and other pitfalls (e.g. statutory limitation periods,  proper use of lien claim forms mandated by the CLL statutes, etc.).  If your only contract is with another subcontractor, and not with the owner or GC, your remedies may be limited only to the CLL.  Onorato Construction Inc. vs. Eastman Construction Co., 312 N.J. Super 565, 573 (App. Div. 1998); and F. Bender, Inc. vs. Jos L. Muscarelle Inc., 304 N.J. Super. 282, 286 (App. Div. 1997). If you are an owner or contractor who faces an issue where lien claims are being lodged against you, or where you have provided expensive contract services and materials for which you have not been paid, we would be happy to discuss your situation with you in detail. Contact Nick Filocco via email at nif@lawwmm.com, or by telephone at (201) 330-7458.