In this troubled economy, with many general contractors seeking protection under the federal bankruptcy laws, the ability of subcontractors and suppliers to obtain payment for their work is often limited to their rights under New Jersey's Lien Law, N.J.S.A.§2A:44A-1, et. seq. ("Lien Law"). When the work performed is pursuant to a residential construction contract, the additional requisites for filing a lien create severe time constraints for potential lienors. Due to ambiguity in the language of the Lien Law, owners and potential lienors have waged a battle over whether the statutory definition of "residential construction contracts" includes large scale, multi-dwelling projects, on which the work is performed in a commercial setting for developers rather than home owners. The law in New Jersey is now settled on this issue.
            In 2007, the New Jersey Bankruptcy Court's decision in In re: Kara Homes, Inc. interpreted the Lien Law to include multi-dwelling projects.  That decision has now been affirmed by the United States District Court for the District of New Jersey. The impact is significant.
            Pursuant to the Lien Law, construction lien claims must be filed within 90 days of one's last work on a project. With payment terms of net 30 days and a reasonable period of time to pursue collections, this 90 day window is generally sufficient to get a lien filed. When the work is performed pursuant to a "Residential Construction Contract," there are additional requirements, which must be satisfied as a condition precedent to the filing of a Lien Claim. Specifically, a Notice of Unpaid Balance and Right to File Lien ("NUB") must be filed and then the filed copy must be served simultaneously with a Demand for Arbitration on the Owner. These documents are filed with the American Arbitration Association, along with a proof of service. An arbitrator then has 30 days to determine whether the potential lienor has the right to file a lien and in what amount before the Lien can be filed. Despite the requirement that these documents be filed and served and that a truncated proceeding take place, the 90 day period provided by the Lien Law for commercial projects is not extended.
            While many "residential contractors" who perform work for homeowners are aware of these requirements and adjust their billing accordingly, the issue of what constitutes a "residential construction contract" arose when the work performed was for large scale, multi-family development projects, which many subcontractors and suppliers justifiably interpreted to be commercial in nature. By way of example, a contractor performing excavation work directly for a large developer on a 100 single family home development has no dealings with a homeowner and may reasonably think of its transaction as commercial.
            On August 29, 2007, the New Jersey Bankruptcy Court for the District of New Jersey held that contracts for large-scale residential construction projects with numerous dwelling units constituted "residential construction contracts" within the meaning of New Jersey's Lien Law, and that by failing to file NUB's, numerous creditors had failed to perfect their lien claims. When Kara Homes, one of the largest developers in the area, filed for bankruptcy, the hopes of payment for many subcontractors and suppliers on numerous jobs were pinned on the validity of the liens that had been filed in the absence of adherence to the additional requirements for residential construction.
            The Bankruptcy Court granted summary judgment against subcontractor Michael J. Wright Construction Co., Inc. ("Wright") and other creditors and declared their liens invalid for failure to comply with the requirements of the Lien Law for creating and perfecting construction liens on residential projects.
Wright appealed that decision to the United States District Court for the District of New Jersey. The issue on appeal was whether the contracts at issue are residential or non-residential construction contracts within the meaning of the Lien Law. In its analysis of the statute, the U.S. District Court acknowledged that there is ambiguity in the Lien Law, which leads to more than one plausible interpretation. Consequently, the court considered public policy and the New Jersey Supreme Court's specific direction that the Lien Law must be interpreted "sensibly and with an understanding of the policies underlying the Lien Law."
            From a public policy perspective, there are two primary and competing policy goals underlying the Lien Law: first, "to help secure payment to contractors, subcontractors, and suppliers who provide work, services, material, or equipment pursuant to a written contract"; and second, "to ensure the rights of property owners who have met their financial obligations and to preclude imposing upon them the burden of double payment for work and materials." Those competing interests were noted by the New Jersey Supreme Court decision in Craft v. Stevenson Lumber Yard, Inc., 179 N.J. 56, 68 (2004).
            On appeal, Wright argued that the Lien Law's literal definition of "residential construction contract" does not speak to contracts dealing with numerous residential units and that the arbitration provisions of the Lien Law applicable to residential construction contracts would become unworkable if applied to large-scale construction projects. In support of its argument, Wright points to the definition of residential construction contract, which is a contract for the construction or improvement of "a" dwelling, not numerous dwellings and therefore applied to only a single residential unit.
            That argument was rejected by the Bankruptcy Court and the District Court. The court noted that, although the definition of "residential construction contract" made reference to "a" dwelling, it also specifically referenced condominiums, housing cooperatives, townhouse developments, horizontal property regimes and planned unit developments, all of which include more than one unit or dwelling.
            With regard to public policy, the District Court referred to the New Jersey Supreme Court's decision in Craft, which noted that the Legislature's intent was to afford the ultimate residential consumer greater protection at the expense of abrogating the lien benefits accorded to contractors, subcontractors or suppliers and the absence of any suggestion that this protection is dependent upon whether the consumer lives in a single-family home or a unit within a larger complex.
            While many view the Lien Law as primarily a remedial statute for the benefit of subcontractors and suppliers, the court noted that it was the legislature's intent, in adding additional conditions for residential liens, to facilitate the expedient transfer of title to real estate without excessive encumbrances.
            Finally, the District Court noted that section 18 of the Lien Law, which references residential liens on condominium units and cooperatives, demonstrates the Legislature's intent to include construction contracts for multiple-unit dwellings as part of the residential construction contract definition. They suggested that acceptance of Wright's interpretation would render section 18 superfluous.
            In a "catch-22" of sorts, the District Court noted, in dictum, that its interpretation is consistent with the proposed amendments to the Lien Law drafted by the New Jersey Law Revision Commission's Draft Tentative Report relating to Construction Lien Law, while not mentioning that the proposed amendment is based, at least in part, on the holding in In re: Kara Homes.
            In sum, it is now clear, if it had not been previously, that contracts for multiple-unit dwellings are considered "residential construction contracts" within the meaning of the Lien Law. Unless the legislature changes course, which does not appear to be likely, subcontractors and suppliers are cautioned to comply with the requirements for residential liens in order to protect that statutory rights.