So, you properly file your construction lien claim within the time allowed by the New Jersey Construction Lien Law (“CLL”), and then timely send out a copy of the lien by certified and ordinary mail to the address of the condominium building where you performed your work.  All set, right?  Not so fast, according to a New Jersey appellate panel.

In the newly-issued, unpublished decision, Santander Condominium Assoc., Inc. v. AA Construction 1 Corp., Docket No. A-0525-15T3 (N.J. App. Div., October 13, 2017), the Appellate Division upheld a trial court’s decision ordering the discharge of a subcontractor’s construction lien claim upon the application of the condominium association (the “Association”) against whose property the lien was filed, and awarding attorneys’ fees and court costs to the Association.  While the subcontractor apparently followed the letter of the law in filing its construction lien claim, its fatal flaw lay in its defective service of the lien claim.

The subcontractor, which had performed façade repair work for the contractor of the Association, filed its construction lien claim after the contractor failed to pay the subcontractor for its work.  The subcontractor then sent the lien for service by certified and ordinary mail to the street address of the condominium property.  The CLL allows for simultaneous certified and ordinary mail service, but it must be made “to the last known business or residence of the owner or community association….”  The physical condominium street address was not the business address of the Association, which, like all corporations, had an easily discoverable registered agent address filed with the State.  Service, therefore, was defective.

While service is supposed to be made within 10 days of the lien filing, it may be made later and still be enforceable as long the owner/association is not materially prejudiced by the late service. Disbursement of funds by the owner/association in the interim, however, is, on its face, deemed material prejudice under the CLL.  In the Santander case, after the lien was filed, the Association paid the contractor in full on its contract, and, because the lien was deemed to never have been properly served, the CLL’s clear and unambiguous language required that the lien be deemed unenforceable, as there was no longer a lien fund against which the subcontractor’s lien could attach.

The court noted that, even if service had been made to the Association’s proper business address, the certified mailing of the lien had been returned unclaimed and the subcontractor had failed to present any evidence relating to the status of the ordinary mail.  Though not discussed in the decision, had the service address been proper, the subcontractor should, at the very least, have proffered evidence that the ordinary mail was never returned as undelivered by the postal service and, therefore, should be presumed to have been delivered to that address.

The court also affirmed the trial court’s award of attorneys’ fees to the Association under the CLL (N.J.S.A. 2A:44A-30(c)) because the Association filed its application to discharge a lien that the court deemed to have been filed “without factual basis”.

That last determination, however, is questionable at best, as the lien at issue appears to have been filed with a factual basis, but was deemed unenforceable solely due to a failure of proper service and the Association’s subsequent payment in full to the contractor.  Improper service should not be equated with a lack of a factual basis supporting the lien.  In fact, under a different section of the CLL (N.J.S.A. 2A:44A-15), which provides the bases for a determination of the forfeiture of lien rights based on an improper lien filing, the CLL defines “without basis” for purposes of that section as “frivolous, false, unsupported by a contract, or made with malice or bad faith or for any improper purpose.”   The failure to properly serve an otherwise factually supported lien does not appear to be accounted for in the language of the CLL as a basis for the award of attorneys’ fees.

In any event, the Santander  case does serve to illustrate the critical importance of properly and timely serving a construction lien claim.  When filing a lien against a condominium association or any other corporate real property owner, a claimant must do a corporate search with the State to ensure it has the proper business address for that entity.  Of course, there may be other ways to determine the proper last known business address of the owner/association, for example, through recent correspondence or documentation from that corporation, but the corporation’s registered agent address, as filed with the State, should always be deemed a valid address for service of a lien.  Without proper service, the lien will remain unenforceable, and to the extent the owner makes payment to its contractor prior to proper service, the lien fund available to a subcontractor or supplier is at risk of complete depletion.   If there is any question regarding the validity or service of a construction lien claim, it is always a good idea to consult an attorney well versed in the requirements of the CLL.

In a decision that bodes well for developers, the New Jersey Appellate Division upheld the enforceability of a long-term settlement agreement between certain Jersey City property developers (the “Developers”) and the City Council of Jersey City (the “City”).  The Agreement stems from a 2010 dispute in which the City “downgraded” the zoning of certain property owned by the Developers in Journal Square (the “Properties”), which restricted their ability to construct a high-rise condominium near the PATH station.  In Robinhood Plaza, Inc. v. City Council of City of Jersey City, Docket No. A-1070-15T2, 2017, WL 2535913, at *1 (App. Div. June 9, 2017), the Developers filed a complaint claiming that this “downgrade of zoning” violated the Local Redevelopment and Housing Law (“LRHL”), a statute intended to streamline and promote the development process.

The parties ultimately entered into a settlement agreement (the “Agreement”) whereby the Developers agreed to dedicate certain land to the City for public use, in exchange for the City’s adoption of an ordinance allowing the Developers to construct and maintain a high-rise condominium for a period of 50 years.  The City subsequently claimed that the Agreement was null and void because it created an undue restraint on the ability of the City to perform legislative functions in the future.  Both the trial court and the Appellate Division ultimately concluded that the Agreement was fully enforceable.  According to the Appellate Division, the purpose of the LRHL is to promote the development of long-term projects and the Court concluded that the City had the authority to enter into the Agreement and was bound by its terms.

While the decision is not precedential, it certainly demonstrates that our Courts are inclined to enforce governmental redevelopment agreements even when they span lengthy periods and will have the effect of binding subsequent governing bodies.

In an Advisory Opinion issued near the end of 2016, the New York State Department of Taxation and Finance has determined that the transfer of real property in New York State from an “exchange accommodation titleholder” to a taxpayer in connection with a so-called “reverse” like-kind exchange under Section 1031 of the Internal Revenue Code is not subject to the New York State Real Property Transfer Tax. In the more typical or “forward” like-kind exchange, a taxpayer sells real property (the “relinquished” property) and deposits the proceeds from such sale with a qualified intermediary.  Subject to the rules established under IRC Section 1031, the qualified intermediary holds the proceeds until the taxpayer has identified one or more “replacement” properties and the proceeds are then held by the qualified intermediary are used to acquire the “replacement” property or properties.  In a “reverse” exchange, the “replacement” property is acquired before the “relinquished” property is sold by way of an “exchange accommodation titleholder” or EAT.  The EAT holds title to the “replacement” property (generally using a newly-formed limited liability company that is disregarded for tax purposes) until the taxpayer transfers the “relinquished” property.  The Advisory Opinion concisely describes the process of a “reverse” exchange and the rules governing “reverse” exchanges.

The taxpayer provides the funds used by the EAT to acquire the “replacement” property; the EAT does not use any of its own funds.  The funds provided to the EAT are generally evidenced by a promissory note and secured by a mortgage on the “replacement” property.  The taxpayer is also responsible for maintaining the “replacement” property, usually by way of a lease.  The EAT leases the “replacement” property to the taxpayer until the exchange is concluded, with the rent paid to the EAT being consistent with the debt service payments made by the EAT on the mortgage securing the loan from the taxpayer for the funds used by the EAT to acquire the “replacement” property.

The opinion examines the exemption to the payment of the Real Estate Transfer Tax allowed under Tax Law § 1405(b)(4) with respect to “conveyances of real property without consideration and otherwise than in connection with a sale, including conveyances of realty as a bona fide gifts.”  The opinion further states that two conveyances are made for consideration in a “reverse” exchange: the purchase of the replacement property by the EAT and the sale of the relinquished property by the QI to a purchaser.  The EAT is considered to be acting as the agent of the taxpayer by holding title to the “replacement” property for the purpose of timing under a like-kind exchange, no consideration was found to have been provided for the conveyance of the “replacement” property from the EAT to the taxpayer, thus qualifying for the exemption under Tax Law § 1405(b)(4).  In addition, the fees that the EAT receives from the taxpayer for its services in acting as the “exchange accommodation titleholder” were not deemed to be consideration subject to taxation.

As a side note, the New York City Department of Finance came to a similar conclusion in a letter ruling back in 2003 as to properties located within New York City with respect to the application of the New York City Real Estate Property Transfer Tax; the full text can be found here.  The full text of the Advisory Opinion from the New York State Department of Taxation and Finance can be found here.

In a recent tax court case, Holy Trinity Baptist Church v. City of Trenton (Docket No. 015909-2014, February 2, 2017), the court overturned the findings of the County Board of Taxation and upheld the tax exemption for religious/charitable use of properties pursuant to N.J.S.A. 54:4-6.3.  This statute exempts properties from taxation where “buildings [are] actually used in the work of associations and corporations organized exclusively for religious purposes, including religious worship, or charitable purposes.”  The Holy Trinity decision comes at a time when municipalities are aggressively challenging tax exemptions and was preceded by two other significant tax court cases discussed below.

Commencing with the tax court’s decision in AHS Hospital Corp. v. Town of Morristown, 28 N.J. Tax 456 (Tax 2015), involving the Morristown Memorial Hospital, it appears that elevated scrutiny by municipalities is calling the exempt status of many non-profit organizations into question.  In Morristown Memorial, the tax court found that the hospital’s entanglement with for-profit activities undermined the hospital’s ability to satisfy the well-recognized three prong exemption test.  This test requires an organization to establish that:  1) The organization is a New Jersey non-profit entity; 2) The non-profit entity is acting consistent with its charter in the performance of religious/charitable functions; and 3) The activities performed on the property are not conducted for profit.  Paper Mill Playhouse v. Millburn Township, 95 N.J. 503 (1984).  In reaching its conclusion the court in Morristown Memorial focused on the hospital’s failure to satisfy the third prong of the test.  In part, the court concluded that the activities conducted and services provided by the many private, for-profit physicians, dictated a finding that a significant portion of the hospital facilities were in fact being used for profit.  The court there also concluded that it was unable to distinguish and segregate those portions of the hospital facilities where the involvement of for-profit activities did not apply.  Consequently, other than in the most distinct and limited areas (e.g., the hospital parking garage, auditorium and in-house fitness center), the hospital facilities were deemed to be taxable.

More recently, the tax court was asked to focus on the exemption afforded non-profit universities.  In Fields v. Trustees of Princeton University, a group of third-party taxpayers challenged the exemption afforded Princeton University.  Although that matter was resolved without a trial, it appears the settlement may have been precipitated by the University’s concern with what has been widely perceived to be an increasingly unfriendly environment for the exempt treatment of non-profits in the aftermath of the Morristown Memorial decision.  The settlement, which only temporarily resolves the ultimate exemption question, requires the University to pay over $18 million dollars in payments to third-parties and contributions to the municipality (in the form of payments in lieu of taxes) through the year 2022 when the University’s settlement obligations expire.

With this recent history and the presence of numerous pending cases specifically attacking the exemptions afforded non-profit hospitals throughout the state, the tax court’s decision in Holy Trinity may offer non-profits, at least religious organizations, some solace from what appears to be a concerted effort on the part of municipalities to challenge the efficacy of real property tax exemptions in all areas.  Importantly, the Holy Trinity court concluded that despite evidence indicating that religious activities on the subject church property had diminished (as the church purchased a new property for its operations and had already commenced the process of shifting its activities to this new location), the church continued to make actual use of the property in furtherance of its religious purposes.  In particular, the Holy Trinity court found that the church continued its schedule of weekly meetings, made the space in question available for future meetings and gatherings, conducted receptions, and stored books at the location in connection with its religious/charitable functions.  As a result, the continued application of the tax exemption was determined to be appropriate in Holy Trinity.

The Holy Trinity court also made clear that neither an intent to sell the property nor diminished use of otherwise exempt property in of itself will destroy the tax exemption.  The court’s decision is consistent with City of Hackensack v. Bergen County, where the listing of the property for sale and removal of certain items to increase the marketability of the property were found to be insufficient to undermine the exemption.  Id. 405 N.J. Super. 35 (App. Div. 2009).  Further, the Holy Trinity court acknowledged that a property remains exempt even where a property’s use is limited to the occasional storage of goods used in furtherance of religious and charitable purposes.  Borough of Hamburg v. Trustee of Presbytery of Newton, 28 N.J. Tax 311, 319-320 (Tax 2015).

Consequently, in the current ratable hungry environment, non-profit organizations must now be more vigilant in ensuring that their properties continue to be used for the organization’s exempt or charitable purposes.  Only by regularly reviewing the entity’s activities and documenting continued property usage for its non-profit purposes, can these organizations improve the prospect of preserving the significant benefits that flow from application of this statutory exemption.

So you’ve managed to successfully file a construction lien claim in New Jersey.  Well, don’t then kick back and relax for too long, because if you fail to take action to enforce that lien claim within the limited time required by statute, the lien will be rendered unenforceable.  Under the New Jersey Construction Lien Law (“CLL”), a lien claimant must file a lawsuit seeking to enforce its lien within one year of the date of its last provision of work, services, material, or equipment.  This is a strict statutory deadline, which cannot be extended based on equitable circumstances.  It is important to note that the deadline is not one year from the date of the filing of the lien claim itself.  It is also important to ensure that the work, services, material or equipment, on which you are basing your last date of provision, was actually required to be provided by your contract, as the following case illustrates.

In the recent unpublished decision, WJV Materials, LLC v. Erin Contracting, Inc. (Docket No. A-2453-14T1, August 12, 2016), the New Jersey Appellate Division affirmed the trial court’s dismissal with prejudice of the claim in a supplier’s complaint seeking to enforce its construction lien claim.  The supplier had filed its complaint on May 2, 2014, which was more than one year after it provided its last delivery of materials on April 3, 2013.   The supplier attempted to argue that its actual last date of work was May 16, 2013, the date its quality control expert visited the site to review and approve the subcontractor’s work product.  The court rejected that argument, as the supplier had been hired solely to provide concrete to the subcontractor at the worksite, which it last did on April 3, and not to unilaterally inspect the work performed with the materials by the subcontractor.  There was no evidence in the record that the subcontractor contracted with the supplier to provide any such inspection services.  Note that this same issue may arise in connection with your initial filing of a construction lien claim, which, on a commercial project, must be filed within 90 days of your last provision of contracted-for work, services, material or equipment.

Many times after filing and serving a construction lien, the property owner or contractor for whom you worked will seek to immediately resolve your lien claim – or will file its own action to discharge the lien if it believes you filed a defective lien.  Often, however, a claimant will file a lien and no immediate action is taken by any party (or the lien is bonded, which still requires you to take timely enforcement action).   Filing a timely and valid construction lien claim is difficult enough.  Once you do so, it is critical that you not fall asleep at the switch and that you file your enforcement action within the time required by the CLL – that is, within one year of the last date of work, services or materials provided pursuant to your contract.