12.12.17 Mechanic's Liens

Mechanic’s Lien Coverage Requires Underwriter Approval.

Can the Construction Loan Mortgage have initial priority over mechanics’ liens?

Yes. N.J.S.A. 2A:44A-10 of the Construction Lien Law (N.J.S.A. 2A:44A-1 et. seq.) states the construction lien attaches to the interest of the owner from and after the time of filing of said lien claim. The lien does not attach to interest acquired by a bona fide purchaser as evidenced by a prior recorded document and does not take priority to a prior recorded mortgage, judgment, or other lien.

N.J.S.A. 2A:44A-20 states any validly filed lien claim shall have priority over a prior recorded conveyance, lease, mortgage or other encumbrance only if a Notice of Unpaid Balance and Right to File Lien (“NUB”) appears of record before them. The NUB must be filed within 60 days of the last day of labor or materials were supplied. It is effective for 90 days or in the case of residential construction for 120 days from the date of the provision of the last work, services, material, or equipment delivery for which payment is claimed. Filing of a NUB is mandatory for residential construction.

Both the lien claim and NUB are subject to the effect of a recorded Notice of Settlement.

Will initial priority as to future disbursements be retained only if certain procedures are followed?

Yes. Before each disbursement is made a continuation of title must be performed. Anything found of record which would take priority to the disbursement would need to be addressed or excepted for prior to funding.

If priority is lost, can it be regained?

No. If the lien is recorded first it will take priority pursuant to N.J.S.A. 2A:44A-10. It would need to be discharged or bonded with the County Clerk.

Is there a difference between on-site and off-site work?

No. N.J.S.A. 2A:44A-3 states any contractor, subcontractor, or supplier who provides work, services, material, or other equipment pursuant to a contract shall be entitled to a lien for the value of the work or services performed, or materials or equipment furnished in accordance with the contract and based upon the contract price.

Is priority the same for all contractors and subcontractors on the same project?

No. Pursuant to N.J.S.A. 2A:44A-3 any contractor, subcontractor, or supplier who provides work, services, material, or other equipment is entitled to a lien and N.J.S.A. 2A:44A-10 states that lien attaches to the owner’s interest from and after the time and filing of said lien claim.  The priority of their liens would be based on the order in which they are recorded.

What are the time periods for recording lien claims by original contractors and subcontractors?

A construction lien claim must be recorded within 90 days following the date of the last work, services, material or equipment provided. In the case of a residential construction contract, the lien claim must be recorded no later than 10 days after receipt by the claimant of the arbitrator’s determination and within 120 days following the last work, services, material, or equipment provided. (N.J.S.A. 2A:44A-6)

After what period of time can you waive a mechanic's liens if no suit is filed?

Pursuant to N.J.S.A. 2A:44A-14 a claimant forfeits all rights to enforce the lien if they fail to commence an action in the Superior Court in the county where the real property is situated within one year of the date of the last provision of work, services, material, or equipment for which the lien claim was filed. You will need confirmation of no judgments of record or pending litigation in regard to same.

Is there a statutory procedure for affidavits of completion or notices of completion?

No, Not in New Jersey.

Can a statutory bond terminate the mechanic's liens as an encumbrance on the title?

Yes. N.J.S.A. 2A:44A-31 provides for the filing of a bond in favor of the lien claimant for 110% of the amount claimed plus a filing fee with the County Clerk or the Superior Court of New Jersey. N.J.S.A. 2A:44A-32 states once it is properly filed and deposited the improvements and land will be released and discharged from the claim.

Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanic's liens by general contractor and/or subcontractors?

No.  Lien waivers were abolished with the enactment of the Construction Lien Law unless given in consideration for payment for the work, services, materials, or equipment and are only effective if the payment is actually received. (N.J.S.A. 2A:44A-38)

Can a bona fide purchaser or bona fide lender take free of mechanic's liens later filed for earlier work?

Yes so long as their interest is evidenced by a prior recorded document (N.J.S.A. 2A:44A-10)

What are the customary requirements for issuing Loan Policies on construction loan mortgages?

The following pending disbursement clause must be an exception in the final loan policy:

“I. Pending disbursement of the full proceeds of the loan secured by the mortgage insured, this policy insures only to the extent of the amount actually disbursed, but increases as each disbursement is made in good faith for the payment of construction costs, up to the face amount of the policy. At the time of each disbursement of the proceeds of the loan, the title examination must be continued down to such time for possible liens, including Notices of Unpaid Balance and Construction Lien Claims, and other matters, intervening between the date hereof and the date of such disbursement.

II. Notices of Unpaid Balance and Construction Lien Claims must be discharged or released of record, or subordinated to the lien of the mortgage insured prior to each advance of the loan proceeds.”

The Notice of Settlement must be filed as soon as possible and continued if necessary to hold the priority of your transaction. Continuations must be run frequently to check for new liens up to and including the day of closing.

Is it customary to add a "pending disbursement" clause or mechanic's liens exception in the Loan Policy insuring a construction loan mortgage?

Yes, a pending disbursement clause. See previous question for clause. 

 

Also subject to any bulletins relating to mechanic’s liens.

Updated 2/8/17