Bulletin: NJ2010005

Dear Associates:

Over the past several months the company has experienced an increase in claims arising from mechanics/construction liens. This bulletin will serve as an overview of the New Jersey Construction Lien Law and the underwriting requirements associated therewith.

In 1994, the Construction Lien Law (N.J.S.A. 2A:44A-1 et seq) became effective and replaced the previous Mechanics Lien Law. The Construction Lien law simplified the lien filing process by removing the pre-filing requirement of the prior law and abolishing lien waivers.

Under the law, contractors, sub-contractors, and suppliers of services or material are entitled to file a claim based upon the contract price. In order to file a claim, there must be a written contract between the parties. If the contract is with a tenant, the lien will only attach to the leasehold estate unless the owner of the fee has consented in writing. Construction lien claims must be filed within 90 days of the last work performed or services provided. Within 10 days after the filing of the lien the property owner must be served with a copy of the claim.

A Notice of Unpaid Balance (NUB) may be filed within 90 days of the last work or services provided. The NUB itself is not a lien but rather serves as notice that a claim may be filed in the future. Parties who acquire an interest in the land with a pending NUB take subject to a subsequently recorded Construction Lien Claim. The filing of a NUB and a hearing before an arbitrator are mandatory requirements in connection with enforcement of a lien claim on residential property.

An action to enforce a lien claim must be brought within 1 year of the filing of the claim or within 30 days of a demand by the property owner to commence suit to enforce the claim. A lis pendens must be filed in connection with an enforcement action.

UNDERWRITING CONSIDERATIONS:

(1) If your initial title examination or pre-closing rundown reveals a Construction Lien Claim or Notice of Unpaid Balance that are less than 1 year old they must be set up as exceptions and discharges must be obtained. If there is a Lis Pendens of record or you are advised that the parties are disputing the amount owed, the parties must post 110% of the lien claim with the Court. In the alternative a bond may be obtained in this amount. Upon deposit of the funds or filing of the bond, the lands and improvements are released from the lien claim and same may be omitted.

(2) If you are insuring a mortgage where there will be construction draws, a pending disbursement clause, PDCX14 NJ STGC, must be set up in the commitment and policy as follows:

I. Pending disbursement of the full proceeds of the loan secured by the mortgage insured, this policy insures only to the extent of the amount actually disbursed, but increases as each disbursement is made in good faith for the payment of construction costs, up to the face amount of the policy. At the time of each disbursement of the proceeds of the loan, the title examination must be continued down to such time for possible liens, including Notices of Unpaid Balance and Construction Lien Claims, and other matters, intervening between the date hereof and the date of such disbursement

II. Notices of Unpaid Balance and Construction Lien Claims must be discharged or released of record, or subordinated to the lien of the mortgage insured prior to each advance of the loan proceeds.

If your construction rundown turns out a NUB, Construction Lien Claim or Lis Pendens, these must be cleared so that the advance of funds will have priority over the lien claim.

(3) You may not omit a Construction Lien Claim or NUB simply because more than 90 days has elapsed from the last work or services. If the lien claim or NUB is in excess of 1 year, please contact your local underwriter or Stewart Legal Services.

During construction, upon satisfaction of the requirements stated in the pending disbursement clause, you may issue an endorsement dating down the Date of the Policy and increasing the Amount of the Insurance. You should use STG Construction Loan Endorsement 1. Any other form of Down Date must be approved by an Underwriter.

If you have questions related to this bulletin, please contact your local underwriting personnel or Stewart Legal Services.

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