A Residential Construction Lien Trap

 

In many instances, a homeowner will not make payments to a contractor, alleging the work was not performed or not performed properly. The best remedy for a contractor is to file a construction lien on the homeowner’s property. A construction lien will secure the amount due a contractor until the resolution of any dispute. However, a recent case, in which I represented a contractor who was clearly entitled to payment, raised the fundamental unfairness of a provision of New Jersey’s Construction Lien Law. This provision prevented enforcement of a valid lien.

Filing a residential construction lien is a three step process. First, the contractor must file a Notice of Unpaid Balance. Next, the contractor must file a demand for arbitration with the American Arbitration Association (“AAA”). The AAA is mandated by statute to determine if the contractor has demonstrated a valid lien, and establish the amount of the lien. This is done either by submission of documents, or an arbitration hearing.

The homeowner has the right to object and raise set-offs or counterclaims. In the case to which I refer, the contractor asserted a lien in the amount of $185,000. The homeowner objected, raising a set-off for work not done or not done correctly. However, the homeowner did not seek or prove any specific amount for his claims. 

The arbitrator found that a valid lien existed for my client in the amount of $148,000. However she could not determine the liquidated amount of the set-off alleged by the homeowner. The arbitrator invoked N.J.S.A. 2A:44A-21 (b)(5), which allows the arbitrator to order the contractor to post a “bond, letter of credit or funds” with an attorney-at-law of New Jersey in an amount the arbitrator determines to be 110% of the “approximate fair and reasonable value” of any set-offs or counterclaims raised against the lien claimant. 

The arbitrator ordered the contractor to post $54,000 in cash, bond or letter of credit to satisfy this provision. 

This decision resulted in the contractor having to put up an additional $54,000 in addition to suffering a loss of $148,000 by reason of the homeowner not making payment for work which the arbitrator found was legitimately due my client. As my client could not post $54,000 he was not able to file a construction lien and lost the benefits which he would have enjoyed by the filing of a lien. 

This result is fundamentally unfair to a contractor. The New Jersey Construction Lien Law was enacted to protect a contractor, not to make enforcement of a claim difficult, if not impossible. I strongly recommend you consider this potential trap before you start the lien process. 

John Petriello is a partner at Ehrlich, Petriello, Gudin & Plaza. He has concentrated his practice in civil commercial litigation for over 30 years, in trial and appellate matters in state and federal matters in New Jersey and New York. n

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