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New Jersey’s Appellate Division has once again served a stark reminder to prospective construction lien claimants regarding who may validly sign a construction lien claim.  The consequences of failing to properly execute a construction lien claim are dire – not only because the lien claim is subject to discharge, but along with that discharge may come an order requiring the payment of the attorneys’ fees and costs of the party making application for such discharge.

In Diamond Beach, LLC v. March Associates, Inc., Docket No. A-1704-17T1 (N.J. App. Div. December 24, 2018) (approved for publication), the court determined that the 2011 revisions to the Construction Lien Law did not serve to clarify or limit the then-existing construction lien signatory requirements, and therefore the 2011 revisions did not apply retroactively to lien claims filed prior to 2011.  Before the 2011 revisions, Lien Law Section 6 explicitly required that a lien be executed by a corporation’s “duly authorized officer.”  The 2011 revisions to Section 6 removed the “duly authorized officer” language, and instead stated that the lien claim form, provided in Section 8, “be signed, acknowledged and verified by oath of the claimant[.]”  The form in Section 8, however, requires that an “officer/member” sign the form, and the suggested notary form provides that the notary be satisfied that the signatory is the “Secretary (or other officer/manager/agent) of the Corporation (partnership or limited liability company)” with “authority to act on behalf of the Corporation (partnership or limited liability company) and who, by virtue of its Bylaws, or Resolution of its Board of Directors (or partnership or operating agreement) executed the [lien claim] on its behalf.”

The trial court in Diamond Beach had ordered that the subject lien claim be discharged because it had been signed by the subcontractor lien claimant’s Accounting & Information Systems Manager, and there was insufficient evidence to support the claimant’s contention that that manager had been expressly authorized to execute lien claims by the claimant’s Board of Directors.  Thus, the court found, under the pre-2011 Lien Law, that the lien claim had not been executed by a “duly authorized officer” of the lien claimant.  The trial court further awarded attorneys’ fees to the project owner, which had sought the discharge of the lien.  The Appellate Division affirmed the trial court’s determinations, including the award of fees, reading broadly Lien Law Section 15’s language regarding the circumstances under which lien rights are forfeited and an affected party is entitled to a fee award for obtaining such a determination.

Even under the post-2011 Lien Law, the court signaled that the results would have been the same for essentially the same reasons.  In last year’s published decision, NRG REMA LLC v. Creative Environmental Solutions Corp., 454 N.J. Super. 578 (App. Div.), certif. denied, 234 N.J. 577 (2018), the court conducted much the same analysis under the current law, and held a lien claim unenforceable that had been signed by the claimant’s “financial director” without any written evidence presented that such “financial director” was a corporate officer or designated by the Board of Directors to execute such documents on behalf of the claimant.  In doing so, the court noted that the Lien Law’s “procedural requirements were intended to be stringently applied.”

The critical lesson from the foregoing cases is that any business entity, however formed, that seeks to file a New Jersey construction lien claim, must ensure that the person signing that lien claim, is authorized to do so by the governing documents of that business entity – or by a written resolution or authorization duly executed by the appropriate board, officer, member or partner of that business entity – as that entity’s business form dictates.  The failure to have a properly-authorized individual execute the lien claim will, if challenged, prove fatal to the lien claim and extremely costly to the lien claimant.

 

Developers often employ the “time of application” rule (“TOA Rule”) to avoid having to comply with certain legal requirements enacted after an application has been submitted to a local planning or zoning board.  More specifically, the TOA Rule provides that “notwithstanding any provision of law to the contrary, those development regulations which are in effect on the date of submission of an application for development shall govern the review of that application….”  See N.J.S.A. 40:55D-10.5 (emphasis added).  Notwithstanding this statutory provision, developers must still comply with any new laws that specifically relate to health and public safety.

The TOA Rule replaced the “time of decision” rule, which allowed municipalities to apply new or amended ordinances to pending development applications.  As a result, applicants were often compelled to incur significant costs and delays associated with altering their applications in an effort to meet the new legal requirements.  The TOA Rule only applies, however, once a development application has been “submitted” to a municipality.  Until that time, a developer remains responsible for complying with all legal requirements regardless of when they took effect.

While the term “submission” is not expressly defined under the statute, the New Jersey Supreme Court squarely addressed the issue in Dunbar Homes, Inc. v. Zoning Board of Adjustment of Franklin Township, 233 N.J. 546 (2018).  In Dunbar Homes, the developer filed an application to construct 55 garden apartments on a site where garden apartments were considered a permitted conditional use.  The next day, the Township enacted an ordinance that prohibited garden apartments in the zone where the site was located. The zoning official subsequently determined that the developer had not submitted all documents required by the zoning board’s development application checklist.  The developer was then notified that the TOA Rule was inapplicable and that it would need to file a new application with the zoning board seeking a “use” variance pursuant to the more stringent standards implicated by N.J.S.A. 40:55D-70(d)(1).

The zoning board sided with the zoning official and the developer appealed to the Law Division.  The Law Division judge disagreed and concluded that the application was deemed “submitted” because it provided the board with “sufficient information to begin its review” and, therefore, the TOA Rule applied.  The Township appealed and the Appellate Division reversed that decision after finding that the relevant statute defining the term “application for development” included all documents prescribed by the board’s checklist for development.  Applying this bright-line rule, the Appellate Division concluded that the failure to submit even one of the items on the board’s checklist precluded application of the TOA rule.  The Supreme Court ultimately agreed with the Appellate Division, noting that N.J.S.A. 40:55D-3 expressly defined an “application for development” to include:  “the application form and all accompanying documents required by ordinance.”  Because it was undisputed that the developer failed to submit all required documentation and neither sought nor obtained a waiver regarding any requirements, the Court found that the application was never submitted and the TOA Rule did not apply.

Accordingly, developers must be certain to submit all documents identified in the municipal development application checklist or seek and obtain a waiver.  Only by vigorously complying with the requirements of the municipal checklist can a developer expect to avail itself of the protections afforded by the TOA Rule.

Florida has implemented a rather simple statutory scheme to address claims that a real property owner believes she may have against a contractor, subcontractor, supplier or design professional for construction defects on her property—whether those defects involve construction, repairs, remodeling or alterations to the property.  The law, Florida Statutes Sections 558.001-005, attempts to strike a balance between protecting the rights of property owners and reducing the litigation associated with such claims.

In a nutshell, before a property owner files a lawsuit in court or a demand for arbitration, to the extent arbitration is required, she must first, at least 60 days (120 days if the action involves an association that represents more than 20 parcels) prior to filing that lawsuit or demand for arbitration, serve a written notice of her claim on the contractor, subcontractor, supplier or design professional whom she claims is responsible for the defects.  Defects encompass a number of different deficiencies arising from defective materials, components and products; violations of applicable codes; failure of a design professional to comply with applicable standards; or a failure to build or remodel property consistent with accepted trade standards.

The 60-day pre-suit notice must describe in detail each and every construction defect that the owner believes exists, as well as all known damages resulting from the defects and the location of each defect.  Within 30 days of service of the owner’s notice of claim, the contractor, subcontractor, supplier or design professional to whom the notice is directed is entitled to inspect the property in order to assess each defect.  If the contractor, subcontractor, supplier or design professional determines that destructive testing is necessary to determine the nature of the alleged defects and what caused those defects, there are certain other notice rights and obligations associated with that destructive testing, including the right of the owner to object under Florida Statutes Sec. 558.004.

Within 45 days after service of the property owner’s notice of claim, the contractor, subcontractor, supplier or design professional served with that notice is required to serve a written response which must provide for one of the following:

  • an offer to remedy the defect, at no cost to the owner, with a detailed description of the necessary repairs and the timetable for completion;
  • an offer to settle the claim by a payment of money;
  • a hybrid, for lack of a better term, offer to settle the claim by a combination of repairs and a monetary payment, with, again a description of the required repairs and the timetable to complete those repairs;
  • a statement that the claim is disputed and that there will be no attempt to remedy the alleged defect or settle the claim;
  • a statement that any monetary payment will be determined by the contractor’s, subcontractor’s, supplier’s or design professional’s insurance company within 30 days after the insurance company is notified of the claim. This statement may include an offer under paragraph c.) contingent upon the owner accepting the carrier’s determination whether to make an additional payment of money.

An owner who receives a settlement offer must serve a written notice of acceptance or rejection within 45 days after receiving that offer.  If the contractor, subcontractor, supplier of design professional either disputes the owner’s notice of claim or does not respond to it, the owner can, without any further notice, file a lawsuit or demand for arbitration, where applicable.

If a contractor, subcontractor, supplier or design professional is sued for alleged construction defects without the owner first providing any pre-suit notice, that contractor, subcontractor, supplier or design professional should immediately move to stay the lawsuit under Florida Statutes Sec. 558.003

Home renovations and repairs is big business in Florida, especially in densely populated south Florida where it seems that every available square foot of property is occupied by a residence or commercial building.  That said, it is important to understand the lien rights of contractors, subcontractors and suppliers of materials under Florida law.

First, it is important to understand whether there is a difference between the lien rights of a company that has a contract with the owner of real property as opposed to a company that does not have such a contract.  The prime example of the latter is a subcontractor or supplier of materials for the company that actually does have the contract with the homeowner. One who has a contract with an owner is said to be in privity with the owner, meaning the relationship between the two parties is recognized by law.

The short answer is that both those in privity and those not in privity with owners of real property have lien rights in that Florida Statutes Sec. 713.01 includes in its definition of  lienors, contractors, subcontractors and those who contract with contractors and subcontractors.  The means of perfecting or protecting those lien rights is, however, different.

As an example, let’s say a homeowner contracts with Company A to install a new roof on her property.  The homeowner and Company A sign a clear, definite contract.  Company A, in turn, contracts with Company B to supply it with all of the materials to install the roof.  Company A and Company B have their own separate contracts, but there is no contract between the property owner and Company B.

Once the job is completed the owner refuses to pay the rather substantial balance that is due and owing to Company A.  Company A, in turn, does not pay the balance that it owes to Company B.  How do each of these respective companies perfect its lien rights on the owner’s real property?

For Company A, the process is quite simple.  Under Florida Statutes Sec. 713.08, it must record a document known as a claim of lien in the county where the real property is located within 90 days of the last date that it provided labor, services or materials.  The statute sets forth, in detail, what must be contained in that claim of lien, and the actual form is provided in Florida Statutes Sec. 713.08.   Amongst other things, the claim of lien must include the name and address of Company A; the labor, services and materials that were furnished and the contract price or the value of what was provided; the name of the owner of the real property; a description of that real property; when labor, services and materials were first and last furnished; and the amount unpaid.

Company B’s ability to perfect its lien rights is a bit more involved.   Although it, too, must record a claim of lien and comply with the requirements of Florida Statutes Sec. 713.08, it has an additional step it must take to ensure that its lien rights are protected.  Pursuant to Florida Statutes Sec. 713.06, prior to furnishing materials or within 45 days of first furnishing such materials, it must serve the owner with a document known as a notice to owner.  Again, the statute  sets forth the actual form—which is quite brief and straightforward– that must be provided, and that form will contain Company B’s name and address, the description of the real property and a description of the materials that were supplied or are being supplied.

Published cases examining the New Jersey Construction Lien Law (“CLL”) tend to be few and far between, but recently the Appellate Division issued a decision to be published, helping to further illuminate, albeit on a fairly narrow issue, the scope of the CLL.  In NRG REMA LLC v. Creative Environmental Solutions Corp., Docket Nos. A-5432-15T3, A-0567-16T3 (N.J. Super. App. Div. April 25, 2018), the court analyzed the novel issue of whether, under the CLL, the salvage value of scrap recovered by a demolition contractor may be included in the “lien fund” available for distribution among lien-filing subcontractors and suppliers within that contractor’s chain of contracting.

In NRG REMA, the owner entered into a contract directly with a demolition contractor, pursuant to which the contractor actually agreed to pay the owner $250,000 for the right to demolish a power station but also for title to and the right to sell the resulting scrap metals and equipment (which it estimated at the time would net it millions of dollars).  While the CLL explicitly allows liens to be filed for demolition work, it does not specifically contemplate this type of payment arrangement in determining the “lien fund” – which, at the top contracting tier, is typically based on the simple calculation of the amount owed under the written contract from owner to contractor for the work performed through the date of the lien filing.  Thus, subject to certain limited exceptions, the more paid to the contractor prior to the lien filing, the less the lien fund available for distribution.

While the CLL’s lien fund provision and its lien claim form speak only in monetary terms, other relevant CLL provisions, incorporate the term “contract” whose definition refers to “price or other consideration to be paid” the contractor.  In this case, because the contract specifically required the transfer of title to the salvage materials to the contractor and “it was an essential component of the price [the owner] agreed to pay,” the court deemed such transfer non-monetary “consideration to be paid” to the contractor, and, therefore, part of the “contract price” paid by the owner to the contractor.

Following a lengthy analysis and a balancing of the interests between owner and lien claimant, the court ultimately concluded that, in this case, the lien fund calculation should be based on a contract amount that includes the value of the scrap obtained by the contractor pursuant to its contract, but reduced by the contractor’s cash payment to the owner made prior to the lien’s filing (note: where a contractor was paid for the demolition work and also received title to the salvage, the payment to the contractor would be added to the salvage value to calculate the total contract price).  The court further held that because the owner had transferred title to the scrap at the outset of contract performance, rather than incrementally, the value of the transferred scrap did not reduce the lien fund at that top tier at the time of such transfer, as the CLL provides that the lien fund is not reduced where the owner makes payment of unearned amounts to a contractor prior to a subcontractor’s lien filing.

The court, however, remanded the case back to the trial court for the difficult task of determining, for each lien claimant, both of which resided on the third-tier, the amount of the lien fund that was available at the time each such lien was filed based on the percentage of completion of the work at that time.  The court also made clear that it was solely dealing with the facts before it, and it identified a number of issues along the way, which if the facts were different may require a different analysis or outcome, and which the court made clear, it was not determining in its decision.  Thus, while instructive and useful when dealing with a project on which a contractor obtains salvage rights, the decision is fairly narrow and limited to the facts of that case.   

After the court’s extensive analysis on the lien fund issue, and an apparent victory for the lien claimants, the court found that one of those lien claimants, however, committed a critical technical error in the execution of its lien which precluded its enforcement.  The court reiterated and strictly applied the CLL’s express requirement that a signatory of a lien claim must be an authorized corporate officer pursuant to the company’s bylaws or as designated by board resolution.  The court found that one of the subject liens had been executed by an employee who was informally titled the company’s “financial director”, and had not been properly authorized to execute a lien on behalf of the company.  This case, therefore, serves as an additional warning that any company seeking to file a CLL lien must strictly adhere to its express provisions, lest it risk forfeiture of its lien claim and a potential damages claim based on an improper filing.

Update:  The property owner has appealed the Appellate Division’s decision to the New Jersey Supreme Court, so we will monitor whether the Supreme Court decides to hear the case, and if so, what decision it renders.