New Jersey’s Lien Laws: Update 2010

New Jersey’s Lien Laws: New Jersey’s Lien Laws: Update 2010Update 2010

Special Provisions for Liens on Special Provisions for Liens on Residential Construction ProjectsResidential Construction Projects

New Jersey Institute for New Jersey Institute for

Continuing Legal EducationContinuing Legal EducationMarch 25, 2010March 25, 2010

Lien Law Revisions

Definitions – Defines Dwelling, Real Property

Development, Residential Construction, residential unit and community association for the first time, while revising the definitions of residential construction contract and residential purchase agreement.

Definitions Impacting Residential Liens

Lien Law Revision adds definition for “Community Association” where it enters into a contract

Defines as a condominium association, homeowners’ association, a cooperative association, or any other entity created to administer or manage the common elements and facilities of a real property development that, indirectly or through an authorized agent, enters into a contract for improvement of the real property.

Definitions

“Dwelling” means a one, two or three family residence that is freestanding or shares a party wall without common ownership interest in that party wall. A dwelling may be part of a real property development.

This new definition is part of the effort to clarify what is within the meaning of “residential”

Definitions

“Improvement” has been amended to include a “renovation” which is referred to in 2A:44A-21 in relation to residential property.

Definitions

“Residential construction” also referred to as “residential housing construction” or “home construction” means construction of or improvement to a dwelling, or dwellings, or any portion thereof, or any residential unit, or units or any portion thereof. In the case of a real property development, “residential construction” or “residential housing construction” or “home construction” also includes all offsite and onsite infrastructure and sitework improvements required by a residential construction contract , master deed, or other document, the common elements of the development (which may also include by definition the offsite and onsite infrastructure and sitework improvements), and those areas or buildings commonly shared.

Definitions

"Residential construction contract" means a contract for the construction of or improvement to dwelling, or dwellings, or any portion thereof, or a residential unit, or units or any portion thereof in a real property development.

This language now better reflects the legislative intent language in section 2A:44A-21, which is consistent with the holding in In re Kara Homes, 363 B.R. 399 (Bankr. D. N.J. 2007).

Definitions

“RESIDENTIAL UNIT” means a unit in a real property development designed to be transferred or sold for use as a residence…

evidenced by a document, such as a master deed or declaration, recorded with the county clerk … or a public offering statement filed with the Department of Community Affairs.

Includes multi-use or “mixed use” development project.

Does not include a unit designed for rental purposes or a unit designed to be transferred or sold for non-residential use.

This definition is new. The above definition makes the touchstone for ascertaining whether a development of units is designed for residential use either the Recording of a master deed or declaration with the county clerk or the filing of a public offering statement with the department of community affairs. As a consequence, a party may be held to have had constructive notice that certain real property developments are residential in nature. A “dwelling” may be part of a real property development, as its definition indicates.

2A:44A-3Entitlement to lien

Adds “unit owner” and “community association” to those interests against whom a lien can be filed.

Includes interest in units not yet sold and proportionate share of common elements

For condominiums, if contract with owner of the development, lien attaches to interest, but if contract with community association, lien is filed, but does not attach to any real property.

In no event does it attach to the interest of the unit owner unless work is done for the unit owner

2A:44A-3Entitlement to lien

Tenancies If a tenant contracts, lien attaches to

leasehold interest. Attaches to fee simple interest if:

i) expressly authorized in writing and provides that the interest is subject to lien;ii) owner paying for majority of cost of improvement, oriii) owner is party to a lease that provides that the interest is subject to a lien

2A:44A-6Filing of lien claim;

requirements Time requirements

1- Must be lodged of record within 10 days after receipt of arbitrator’s determination2- within 120 days from last date of work or materials

2A:44A-7Mailing of Lien Claim;

Proof of Service A lien claim served upon a

community association need not be served upon individual “unit owners”

2A:44A-18Residential Construction

Contracts;calculation of proportionate

share Lien claimant shall release a proportionate share of interest in real property from lien upon receipt of payment for that share.

Proportionate share is calculated by i)contract or other writing; Absent a contract or other writing,Allocation shall be proportioned:

ii) by lot if subdivision approval has been granted;iii) to each tract if no subdivision has been granted;iv) by share of common elements if master deed in condo or master declaration in coop filed before lien attaches

Hirsch v. H&D Prime Construction

Addresses 2A:44A-18a 20 upscale, single-family homes being developed

by Kara at the Tradewinds, LLC Tradewinds contract with Hirsch for $1.4 million –

July 2003 H&D enters into Master Subcontractor Agreement

with Kara Homes (GC) for siding of the homes Each home must be invoiced separately based on

price list for each model H&D worked on 13 of the 20 homes; paid for 4 Siding for Hirsch was $13,000 NUB filed for $146,322


Addresses 2A:44A-18a Last work August 2006 17 of the 20 had been sold Of the remaining 3, H&D had worked on 2 NUB filed on September 12 Demand for Arbitration on September 26 Closing on October 2nd, with knowledge of NUB Hirsch gave Tradewinds indemnification for the lien October 5th bankruptcy of Tradewinds and Kara October 26 arbitration award for $146,323 November 6th lien claim filed


Addresses 2A:44A-18a Hirsch complaint sought to establish

the proportionate value of services for her home

Counterclaim to enforce lien Hirsch argues only responsible for

proportionate share 44A-18


Addresses 2A:44A-18a NJSA 2A:44A-18 Upon payment, lien shall be released on proportionate

share, which shall be calculated in the following mannera- If there is a contract between the lien claimant and the owner which provides for an allocation by lot or tract, that allocation shall be binding.

Hirsch argued the NUB should have been filed for proportionate share

H&D argued that the contract did not provide for allocation by lot or tract and

Filing 14 separate lien claims would contradict NJSA 2A:44A-21a, which provides that a multiplicity of lien claims poses a serious impediment to the ability to transfer title to residential real estate expeditiously


Addresses 2A:44A-18a Lower court found that 2A:44A-19 applied,

which is titled: “Attachment of lien to interest of owner for work performed in a condominium or cooperative unit” even though this was not a condo or coop

That section says the lien attaches to the real property retained by the owner, but shall not attach to the real property or interest therein previously conveyed

Holding was that the entire lien was valid Appellate Division reversed


Addresses 2A:44A-18a Appellate Division held 2A:44A-18 governs all

residential construction a- If the residential construction involves contract

providing for allocation by lot or tract, it applies b- If it is for condo or coop, lien attaches only to

percentage of common elements attributable to each unit

c- If neither applies, lien attaches to entire interest in real estate

Issue was whether the contract provided for allocation


Addresses 2A:44A-18a Holding was that the contract did provide for

an allocation because it required H&D to designate its work and invoice separately for each lot

Lien should only be for work performed for that lot

Court dismissed argument that Kara had right to offset for other work and that the word “allocation” was not used or that it would create multiplicity of claims

2A:44A-20Notice of Unpaid Balance;

right to file a lien; form Makes reference to the “lodging for

record” of a NUB and provides a NUB form;

Provides for 120 day effect (still 90 in commercial)

2A:44A-21Legislative Findings; additional requirements for filing of lien on residential construction

(2) Condition Precedent – NUB lodged of record within 60 days

(3) Within 10 days, must serve demand for arbitration with copy of NUB and proof by affidavit that the NUB has been lodged of record. “Filed” NUB must then be served prior to arbitrator’s determination.

(3.1) All arbitrations pertaining to same residential construction shall be determined by same arbitrator when possible. Consolidation can be requested

Legislative Findings; additional requirements for filing of lien on residential construction

(4) Arbitrator will determinea- whether NUB was in complianceb- the earned amount of the contractc- the validity and amount of lien that can

be filedd- the validity and amount of any liquidated or unliquidated setoffs or counterclaimse- allocation of costs

Arbitrator shall consider all determinations made in other arbitration proceedings


5) If the amount of the setoff or counterclaim cannot be determined in a liquidated amount, arbitrator shall order the lien claimant to post a bond in 110% of the approximate fair and reasonable value of the setoff, but not greater than the lien amount


6- Arbitrator shall make determinations and arbitration shall be completed within 30 days of receipt of the lien claimant’s demand for arbitration by the AAA.

If no response is filed, determination must be made within 7 days from the expiration of the time to respond.

Lien must be filed within 10 days from arbitrator’s decision

2A:44A-24Suit to enforce lien claim

A judgment against a community association that is unpaid may be enforced by assessment against unit owners, but not by sale of common elements.

IN RE: KARA HOMES, INC.The Residential Nature of Commercial

Construction

Kara Homes and 56 affiliates filed for bankruptcy

Owned separate real estate development projects for single family homes and condominiums

Subcontractors had filed liens Kara Homes brought action to

discharge liens

Kara Homes - cont’d.

4 Categories of subcontractor liens1. Filed Construction Lien Claims2. Filed Construction Lien Claims and NUB’s3. Filed NUB’s only4. Filed NUB’s proceeded to arbitration*

*All of the category 4 liens were settled


Threshold Issue: Whether the Subcontractor Agreements to perform work on Real Estate Development Projects are “Residential Construction Contracts” and therefore subject to the additional statutory requirements


Debtor – Projects are residential in nature.

Subcontractors – Applies only to single one or two family dwellings, not large scale residential projects.

Court recognized that case law on the issue is virtually non-existent.


Court held that large scale real estate developments are residential

Goal of Lien Law is to protect buyers, sellers, contractors, lenders and, most importantly, the economy


Court discussed whether filing of NUB creates a lien, which only needs to be perfected

Held that lien is not created until arbitrator issues an award

At that point, it needs only to be perfected

KARA HOMES APPEAL

On appeal, Wright argued that the Lien Law’s literal definition of residential construction contract does not speak to contracts dealing with numerous residential units, and that the arbitration provisions of the Lien Law applicable to residential construction contracts would become unworkable if applied to large-scale construction projects.

KARA HOMES APPEAL

In support of its argument, Wright points to the definition of residential construction contract, which is a contract for the construction or improvement of “a” dwelling, not numerous dwellings, and therefore applied to only a single residential unit.

KARA HOMES APPEAL

That argument was rejected by the district court. The court noted that, although the definition of residential construction contract made reference to “a” dwelling, it also specifically referenced condominiums, housing cooperatives, townhouse developments, horizontal property regimes and planned unit developments, all of which include more than one unit or dwelling.

The District Court also noted that its holding was in line with the Law Review Commission’s recommendations.

STRICT COMPLIANCE

Schadrack v. K.P. Burke Builder, LLC, raised issues regarding strict compliance with the residential process.

LED, a sub, filed and served a NUB and Arbitration Demand

Owner opposed, saying LED did not strictly comply with CLL because did not support its filing with documentation and misdesignated the contractor as K.P. Burke rather than K.P. Burke Builder, LLC

Strict Compliance

Appellate Division held that Law Division is to apply a de novo standard to review of these arbitration decisions

Arbitrator’s decision to allow document submission later is not governed by CLL’s strict compliance standard, but by AAA rules, which grant arbitrator discretion

Misdesignation of contractor name was a de minimus error with no prejudice

Simultaneous Service

Owner also challenged the lien filed by Burke, the contractor.

Burke did not serve the Arbitration Demand simultaneously with the original NUB

It cured by filing an amended NUB and served that with a Demand.

Owner argues strict compliance

Simultaneous Service

Ultimately, service must be in compliance with §7 of the CLL, which provides that late service must materially prejudice the party not timely served in order to preclude the lien enforceability.

Simultaneous Service is not a strictly construed requirement of the CLL

THE XANADU DILEMMA

Joins together issues of

The loophole of publicly owned, privately leased properties

Liens against leasehold interests The County Clerk’s right to refuse to

file liens based on their interpretation of the law

THE XANADU DILEMMA The Construction Lien Law (CLL) does not

permit filing of liens on public works MML does not cover State property and

only permits liens against the fund of money

What happens when State owned property is leased to private entity?

Can contractors lien the leasehold interest?

XANADU

Property owned by NJ Sports and Exposition Authority

Leased to private developer, who contracted directly with contractors

Attempted to file liens against leasehold interest

Bergen County Clerk refused to file

XANADU

Clerk’s position – while the lien attaches only to the leasehold interest, it will affect the State’s interest in real property

The foreclosure of the lien would require the sale of the lease and would affect the State.

XANADU

Response to Clerk’s Position – the county clerk has no discretion regarding the filing of liens

N.J.S.A. 46:19-1 – the clerk shall record when delivered to him for that purpose.

Clerk has no authority to analyze the statute. Owner has right to seek discharge The issues it is concerned about should be

left to the courts.

THE XANADU DILEMMA STATE’S POSITION FORECLOSING ON LEASEHOLD

INTEREST DISRUPTS THE LANDLORD/TENANT RELATIONSHIP

THE FILING OF THE LIEN TRIGGERS DEFAULT

IF LEASEHOLD INTEREST IS SOLD, IT AFFECTS STATE’S PROPERTY INTEREST

XANADU

Also raises issues about filing liens against leasehold interests in general

If not against owner’s interest, should it be filed in clerk’s office

How can it be foreclosed upon What if it is a default under the lease

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New Jersey’s Lien Laws: Update 2010

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