Although nobody is immune from the effects of the downturn in the economy, contractors and subcontractors are especially vulnerable in these uncertain New Jersey.jpgtimes. Even after investing time and labor, contractors and subcontractors face the possibility of not getting paid. To fully protect itself from a defaulting owner, a contractor or subcontractor must file a mechanics’ lien against the owner’s property once the work has been completed.

What does it mean to perfect a lien?

Because the steps regarding mechanics’ liens vary from state to state, and for residential and commercial liens, it is crucial that a contractor or subcontractor be aware of the law of the state where the project is located. In New Jersey, a mechanics’ lien must be “perfected” by the contractor or subcontractor. Perfection simply means that the contractor or subcontractor has closely followed the law, taken all of the necessary steps, and filed the correct papers with the court.

In New Jersey, construction lien rights are governed by the New Jersey Construction Lien Law. To “perfect” a lien on a New Jersey residential project, a contractor or subcontractor must take each of the following steps:

  • First, the contractor or subcontractor must file a Notice of Unpaid Balance and Right to File Lien. This Notice should be filed within 50 days of the last day of work in order to ensure there is enough time to file the lien within 90 days.
  • Second, a Notice and Demand for Arbitration must be submitted to an arbitrator for a factual determination as to the value of the lien. The arbitrator must render a decision within 30 days of receipt of the Demand for Arbitration.
  • Third, the contractor or subcontractor must file a lien claim with the clerk of the county where the work was completed within 10 days of receipt of the Arbitration Decision. The lien claim amount must be limited to the amount determined by the arbitrator. Not only must the lien claim be filed within ten days after the decision is received, it must also be filed within 90 days after the work has been finished. The Lien Law provides a form that can be used to ensure the lien claim is properly drafted.
  • Finally, the contractor or subcontractor must serve the lien claim on the owner within 10 business days after filing it with the county clerk.

If the contractor or subcontractor has performed the work, it is likely that an arbitrator will make a factual determination that a lien can be filed. Problems sometimes arise because the contractor or subcontractor cannot control how quickly the arbitrator makes a decision.

Why does perfection matter?

For a lien to be perfected, the contractor or subcontractor must complete all of the above-outlined steps of the lien process. In New Jersey, this is important because once a lien is perfected, the contractor or subcontractor has rights even if the owner later files for bankruptcy. Unlike other states, if a project is residential, New Jersey’s process for perfection requires submission of a claim to an arbitrator. Arbitrators are not always quick to decide claims. If a claim is currently awaiting decision by an arbitrator, and the owner files bankruptcy before the arbitrator makes a decision, the contractor or subcontractor will lose all lien rights. This is true even though the contractor or subcontractor cannot control how quickly the arbitrator decides the claim. Simply starting the perfection process is not enough to protect lien rights. Currently, legislation to both modify and clarify the New Jersey Construction Lien Law is pending before the New Jersey Senate Commerce Committee.

We will continue to monitor and report on this pending legislation.