Every state has certain requirements that must be met in order to successfully file a mechanics lien. While many states’ guidelines are fairly easy to comprehend, that is not, unfortunately, universal. In New Jersey, the mechanics lien process for residential construction projects involves filing a required notice, and an independent arbitrator making a determination regarding the acceptable amount of the lien (if any) and its validity, as well as the general sensitive timelines and requirements of filing and serving the lien.
Why Are Residential Projects Different?
The fact that residential projects are to be treated differently for the purposes of mechanics liens is built directly into New Jersey statutes. N.J.S.A. § 2A: 44A-21 is entitled “Legislative Findings; Additional Requirements for Filing of Lien on Residential Construction” and proceeds to set forth specific legislative findings as to why the requirements of residential mechanics liens and commercial mechanics liens are so different.
The reasoning behind the distinction is as follows:
. . . the ability to sell and purchase residential housing is essential for the preservation and enhancement of the economy of the State of New Jersey and that while there exists a need to provide contractors, subcontractors and suppliers with statutory benefits to enhance the collection of money for goods, services and materials provided for the construction of residential housing in the State of New Jersey, the ability to have a stable marketplace in which families can acquire homes without undue delay and uncertainty and the corresponding need of lending institutions in the State of New Jersey to conduct their business in a stable environment and to lend money for the purchase or finance of home construction or renovations requires that certain statutory provisions as related to the lien benefits accorded to contractors, subcontractors and suppliers be modified. The Legislature further finds that the construction of residential housing generally involves numerous subcontractors and suppliers to complete one unit of housing and that the multiplicity of lien claims and potential for minor monetary disputes poses a serious impediment to the ability to transfer title to residential real estate expeditiously. The Legislature further finds that the purchase of a home is generally one of the largest expenditures that a family or person will make and that there are a multitude of other State and federal statutes and regulations . . . which afford protection to consumers in the purchase and finance of their homes, thereby necessitating a different treatment of residential real estate as it relates to the rights of contractors, suppliers and subcontractors to place liens on residential real estate. The Legislature declares that separate provisions concerning residential construction will provide a system for balancing the competing interests of protecting consumers in the purchase of homes and the contract rights of contractors, suppliers and subcontractors to obtain payment for goods and services provided.
With that out of the way, now onto the three steps.
Three-step process for New Jersey residential mechanics liens
In order to simplify the process, it’s easier to think of the New Jersey mechanics lien process as three separate steps: 1) the Notice of Unpaid Balance and Right to File a Lien, 2) the arbitration process, and 3) filing the construction lien itself.
Step 1: The Notice of Unpaid Balance and Right to File a Lien
Many states have some sort of notice requirement (either a preliminary notice, or a notice of intent to lien) that must be met in order to secure the right to eventually file a mechanics lien. Meeting the notice requirement usually involves sending the required notice to certain parties (i.e. property owner, general contractor, etc.) by certain methods (i.e. certified mail).
The required notice . . . must be filed with the county clerk’s office . . . and must also be served on the parties up the chain from the claimant via BOTH certified mail AND regular first class mail. These requirements differ from state-to-state, but in many instances, the notice requirements are considered to have been met by the act of sending the notice to the required parties by the required means.
Residential projects in New Jersey differ in this regard, in that the required notice must be filed with the county, as well as being delivered to all parties up the chain from the client. The required notice, the Notice of Unpaid Balance and Right to File Lien, must be filed with the county clerk’s office in the county in which the property in question is located in within 60 days of last furnishing labor and/or materials on the project, and must also be served on the parties up the chain from the claimant via BOTH certified mail AND regular first class mail.
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Step 2: The Arbitration Process
After the Notice of Unpaid Balance and Right to File a Lien is filed with the county clerk’s office, the next step of the construction lien process is to submit the case to the American Arbitration Association (AAA) for review. The arbitration demand must be sent within 10 days of when the Notice of Unpaid Balance gets filed. Upon receipt, the AAA will make a determination as to the validity of the claim, and how much money can be claimed (if any), on the lien.
In order to submit to the AAA, many documents are required, including the Demand for Arbitration, a copy of the recorded Notice of Unpaid Balance and Right to File Lien, proof of delivery of the Notice of Unpaid Balance and Right to File Lien, and any documentation to substantiate the claim. This can include a copy of the signed written contract, invoices, change orders, itemized statements, etc.
The arbitrator reviews all of this documentation and makes a ruling on how much is to be listed on the lien claim. It is important to keep in mind that each arbitrator is an individual, and not a computer, and therefore makes their own opinions about how much can be awarded, and with what documentation. While some documentation may be acceptable for one arbitrator, another may deem it insufficient. For instance, one arbitrator may accept work performed without a signed contract to give rise to a valid lien, while another may not.
Procedurally, the arbitration demand, along with the Notice of Unpaid Balance & Right to File lien, must be delivered to parties up the chain from the claimant via certified mail-return receipt AND regular first class mail.
It is also important to keep in mind that the arbitration process can take 30 days, so it is vital to start this process early – not getting your claim back from the arbitrator does not extend the period in which the lien must be filed. Once the arbitrator has awarded the amount that can be claimed, it is on to the final step.
Step 3: Filing the New Jersey Mechanics Lien Claim
After the filing and service of the Notice of Unpaid Balance & Right to File Lien, and the receiving of the arbitrator’s decision, it is time to file the mechanics lien itself. The mechanics lien must be filed in the same office that the Notice of Unpaid Balance & Right to File a Lien was filed. It is important to reference the arbitrator’s award and date that the award was made on the face of the lien document to be filed, the general form of the document is set out by New Jersey statute.
The lien must be recorded within 120 days from the last date of furnishing labor and/or materials on the project, as well as be recorded within 10 days from receiving the award from the arbitrator.
When you have a recorded copy of the lien back from the county, it must be served upon all parties up the chain from the claimant via certified mail-return receipt AND regular first class mail. The lien must be served on the parties within 10 business days from when the construction lien was recorded with the county.
Failure to Comply
By statute, failure to comply with the above steps and sub-steps is fatal to a New Jersey mechanics lien on residential property. Technically, it may be possible to get a mechanics lien recorded if some steps are missed, but a subsequent challenge to the lien will result in the lien’s extinguishment and cancellation.