Bulletin: NJ000005

Dear Associates:

Effective April 24, 1994 there will be an entirely new mechanic's lien law.

Summary

Substantially all of the old mechanic's lien law has been repealed and replaced with a new method of asserting a mechanic's lien claim on real property. Instead of the former system of filing Mechanic's Notices of Intention followed by a Mechanic's Lien Claim and suit (or the filing of a construction contract and stop notices), the new system differentiates between residential property and other property and provides for a system of filing a Notice of Unpaid Balances ("NUB"), Lien Claims with mandatory arbitration for resolving claims.

Underwriting Practice

As under the prior law wherein the company would require a discharge of all Mechanic's Notices of Intention or Stop Notices before providing lender coverage over mechanic's lien claims, the company requires all Notices of Unpaid Balance or Lien Claims be discharged before insuring a construction loan advance or any other interest in real property. In cases where a discharge can not be obtained and a request is made to insure over a possible mechanic's lien claim, specific approval by the company to assume such a risk must be obtained.

The new law requires that the county clerks provide for a system of recording and indexing the new notices. These notices should be reported in Schedule B-II of the commitment as exception to title and Schedule B-I should require the discharge of same.

Detailed Summary

As with any new law, there is some uncertainty as to exactly how each provision will be implemented and ultimately interpreted by the courts. The following is a summary of some of the relevant provisions of the new law based solely on a literal reading of the law and its legislative history. As the law is implemented and interpreted by the courts further clarification will follow.

Name:

Construction Lien Law

Definitions:

1. Contract - means any agreement or amendment thereto in writing evidencing the responsibilities of the parties, in the case of suppliers it includes signed delivery slips.
   
   
2. Contractor - means any person who contracts directly with the owner or construction manager, an architect, engineer or land surveyor.
   
   
3. Filing - means lodging for record and indexing of any document authorized under the Construction Lien Law with the county clerk of the county where the property is located.
   
   
4. Improvement - includes excavation, demolition, construction, repair, etc.
   
   
5. Interest in real property - means fee title, easement rights, covenants and restrictions, leases and mortgages
   
   
6. Owner - means any person, including a tenant, who has an interest in the real property or their authorized agent.
   
   
7. Residential construction contract - means a written agreement for construction or improvement of a 1 or 2 family dwelling including condominium, co-operative or PUD unit.
   
   
8. Subcontractor - means any person who enters into an agreement with a contractor or a subcontractor who has an agreement with a contractor.
   
   
9. Supplier - means any supplier of material or equipment (including rental equipment) directly contracting with the owner, contractor or subcontractor.

Lien Provision:

Any contractor, subcontractor or supplier who provides work, services, material or equipment is entitled to a lien based on the contract price. If the contract is with a tenant, the lien is only on the leasehold estate, unless the owner of the fee authorizes the work in writing.

There are special provisions as to how the lien is applied to docks, piers, relocation of improvements, demolition, excavations, landscaping and similar improvements.

Excluded from Obtaining a Lien Claims:

1. Material subject to security agreements (UCC-1).
   
   
2. Public works or improvements.
   
   
3. Residential construction where the Construction Lien Law is not followed exactly.

When to File:

A lien claim must be filed with the county clerk within 90 days following the last day of work. Service calls and other work performed after the completion of the contract do not extend the time for filing.

Notice of Unpaid Balance and Right to File Lien:

Similar to the old Mechanic's Notice of Intention, the new law provides for the filing of a notice called a Notice of Unpaid Balance and Right to File Lien, sometimes called a "NUB". Like the Mechanic's Notice of Intention, it does not constitute a lien but merely a notice that the claimant may file a lien claim in the future.

For non-residential property the law does not require that NUB to be filed and if filed to be served on "interested parties" which may mean the owner may not be required to be served when it is filed.

On residential 1 to 2 family dwellings the NUB must be filed and served on the owner in the same manner as a notice of lien claim.

The NUB is effective for only 90 days from the date of last work or delivery of materials as specified in the NUB. If a lien claim is filed within the 90 days its priority will relate back to the date of the filing of the NUB. Accordingly, if a continuation search discloses a NUB it must be discharged before authorizing an advance under construction mortgage.

Service of the Lien Claim:

Within ten (10) days of the filing of the lien claim, notice of the claim must be personally or by certified mail served upon the owner and contractor and subcontractor, if any.

Form of Lien Claim, NUB, etc.

The forms for all notices are set forth in the law. (See the attached copy of the law.)

Amount of the Lien Claim:

Unlike the old law where a claimant did not have to specify the amount of the claim in the Mechanic's Notice of Intention, the new law now requires that the lien claim specify the amount of the claimed lien which can not exceed the balance due under the contract.

Effective date of Lien:

The lien is effective as of the date of the filing of the lien claim or in the event a Notice of Unpaid Balance and Right to File Lien ("NUB") is filed, the date of the filing of the NUB. Where a NUB has not been filed, if the property has been conveyed to a good faith purchaser or mortgaged to a bona fide mortgagee before the lien claim was filed, the purchaser or mortgagee take free of the claim. The filing of the lien claim is also subject to the Notice of Settlement statute.

County Clerk's Office Records:

The county clerks under the new law are required to maintain a new "book" and index called the "Construction Lien Index Book". A search of this index will be a required part of all title searches. The fees for recording the various notices under the new law are set forth in the statute.

Enforcement of Liens:

An action must be brought within one (1) year after the last day of work to enforce a lien claim; or within 30 days, if the owner sends the claimant a demand that suit be commenced. As a practical matter we are not going to be in a position to omit a lien claim based on the one year limitation because we will have no way of determining with certainty the last day of work. The company may be able to rely upon proof submitted as to the 30 day notice provision. Such proofs must be submitted to the company for approval. In most cases a discharge of the lien claim will be required.

Within 10 days of commencing the enforcement action in the superior court, a notice of the commencement of the suit must be filed with the county clerk. The lien claim will be marginally noted that the action has been commenced.

A lis pendens must also be filed when the action is commenced.

Special Rules for Residential Properties:

In order to enforce a lien claim against a 1 or 2 family residential dwelling the claimant must first file a Notice of Unpaid Balance and Right to File Lien ("NUB") and strictly adhere to all the filing and notice requirements under the law. The filing of the NUB is not a prerequisite for enforcing a lien claim for other types of property.

Penalties for Improper Filings:

Unlike the prior law which had no real penalties for improperly filing Mechanic's Notices of Intention, the new law does penalize a party who improperly files a lien claim. The penalties include, forfeiture of the right to lien the property, counsel fees and possible damages.

No Lien Waivers:

The new law provides that it is no longer possible for a contractor, subcontractor or supplier to waive the right to a lien under the new law. Therefore, any waiver of the right to a mechanic's lien would be void.

Bonding of a Lien Claim:

It is possible under the new law to bond off a lien claim by posting security equal to 110% of the alleged lien amount with either the county clerk or superior court.

Miscellaneous Provisions:

The law has numerous other provisions which may be relevant in particular cases, for example there are specific provisions dealing with amendments to the various notices and permitting certain advances under construction mortgages to have priority over a filed lien claim. Therefore please consult with the state office as particular situations are encountered for specific advice on how to proceed.