New Jersey’s Lien Laws: Update 2010

1. New Jersey’s Lien Laws: Update 2010 Special Provisions for Liens on Residential Construction Projects New Jersey Institute for Continuing Legal Education March 25, 2010

2. 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.

3. 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.

4. 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”

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

6. 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.

7. Definitions • "Residential construction contract" means a contract for the construction of or improvement to dwelling, or dwellings, or any portion thereof,oraresidential unit,orunits 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).

8. 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.

9. 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

10. 2A:44A-3Entitlement to lienTenancies • 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

11. 2A:44A-6Filing of lien claim; requirements • Time requirements1- Must be lodged of record within 10 days after receipt of arbitrator’s determination2- within 120 days from last date of work or materials

12. 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”

13. 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

14. Hirsch v. H&D Prime ConstructionAddresses 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

15. Hirsch v. H&D Prime ConstructionAddresses 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

16. Hirsch v. H&D Prime ConstructionAddresses 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

17. Hirsch v. H&D Prime ConstructionAddresses 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

18. Hirsch v. H&D Prime ConstructionAddresses 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

19. Hirsch v. H&D Prime ConstructionAddresses 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

20. Hirsch v. H&D Prime ConstructionAddresses 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

21. 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)

22. 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

23. 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

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

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

26. 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.

27. 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

28. Kara Homes - cont’d. • 4 Categories of subcontractor liens • Filed Construction Lien Claims • Filed Construction Lien Claims and NUB’s • Filed NUB’s only • Filed NUB’s proceeded to arbitration* • *All of the category 4 liens were settled

29. Kara Homes - cont’d. • 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

30. Kara Homes - cont’d. • 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.

31. Kara Homes - cont’d. • 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

32. Kara Homes - cont’d. • 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

33. 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.

34. 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.

35. 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.

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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?

42. 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

43. 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.

44. 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.

45. 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

46. 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