Getting Paid Faster with Liens, Bonds and Contracts - New Jersey Webinar

In this blog, presented by SunRay Construction Solutions and Kyle H. Cassidy, Partner, Trif & Modugno LLC, construction professionals can learn the various tools and mechanisms pursuant to the New Jersey construction laws that can help them get paid faster.

How to Get Paid Faster Through Your Contract?

Below are some important considerations you should consider when signing up for a project.

• First and foremost is an obvious consideration, i.e., to have a written contract. Although an oral contract is enforceable in New Jersey, it is best to always have a written contract because an oral contract will not allow you to have all your rights. A written contract should clearly specify what the services being performed are, the cost of those services, and it should be signed by all the parties involved. When you have just an oral agreement, it becomes difficult to prove what was agreed between the parties in terms of work scope, compensation, timing, etc.

• Your contract should include the payment terms and conditions. It should clearly be specific when the payments would be made and what conditions have to be met for a successful payment. For example, will the payment be made within a certain number of days upon receiving the invoice, should the contractor provide a lien waiver or any other documentation to get paid, etc. If you are in a position of getting the payment, then try to negotiate the contract and limit the conditions so that you can get paid in the least amount of time possible.

• Your contract should also include provisions for recovery of interest on payments that are due to you, and attorney fees and costs in case you must file a lawsuit to recover the pending amounts.

• Try to avoid including the pay-if-paid clause in your contract (which is enforceable in New Jersey). Let’s say you are a subcontractor having a subcontract with the general contractor. If your subcontract includes a pay-if-paid clause, then it means that for the subcontractor to get paid, the owner will have to pay the general contractor the money due and owed to you. If the owner doesn’t make the payment, then you will also ultimately not get paid. This can happen to general contractors as well where the payment is conditioned upon the lender making payment to the owner. So, if the lender delays the payment, then the general contractor doesn’t get paid on time. Hence, try to avoid the pay-if-paid clauses in your contract

• Finally, look for Alternative Dispute Resolutions (ADR) provisions in the contract. These refer to dispute resolutions like mediation and arbitrations. Having a mandatory mediation provision can be a benefit as well as a problem. The benefit is that you can sit down with the other party and try to work things out in the presence of a neutral mediator without filing a lawsuit. It might end up becoming a problem if you already know that the other side is not going to make the payment, and the mediation is just a waste of time. In such cases, mandatory mediation may end up as a roadblock in getting you paid faster.

How to Secure Your Lien Rights

A lien is an encumbrance on the property which is why it is considered as an important mechanism that can help construction professionals get paid. This is because once a property is liened, it can cause a lot of problems for the owner, such as it can affect their ability to get a loan and in extreme cases it could result in a foreclosure action where the title of the property is jeopardized. This is why construction professionals should leverage this mechanism to get their payments quickly.

However, simply putting a lien does not guarantee payment. There are several mandatory requirements that you need to adhere to to protect and preserve your lien rights. Also, it is very important to ensure that you understand liens thoroughly, how to file them, when to file them, etc., because if you miss out on the deadlines, then you can never file it again.

A) Construction Lien – Mandatory Requirements

1. Lien Contents – Your lien should typically include the below details:

1. Name and address of the claimants

2. Property address, lot and block information

3. Name of the property owner

4. Name of the general contractor (if any)

5. What is the interest of the property – is it for the owner or leasehold interest

6. Contract information (date, work performed, etc.)

7. Accounting: Base contract, approved change orders, credits, amount paid and due

8. Last date of work performed, or materials delivered

It is important to note that if there is any disputed change order or any written change order which has not been signed by the other party, then you cannot include it in your lien. So, make sure that your change orders are always in the written format and signed by all the parties.

Also, the last date of work is important because that will help in understanding whether your lien was timely filed or not.

2. Deadlines – There are different deadlines regarding non–residential and residential properties.

1. Non-residential – A non-residential property means that the property is not owner occupied or a single-family residence. It is typically a commercial building and if you are working on such properties, then you have 90 days from your last date of work to file the lien. Even if you miss it by one day, i.e., if you try to file it any time after the 90^th day, you will lose your lien rights.

2. Residential – Residential properties which means a typical single-family home allows you to file a notice of unpaid balance within 60 days from the last date of work. The notice of unpaid balance is a document similar to a lien and it includes the same details that you would include in a lien.  

3. Proximity – Another important aspect of the lien law is with respect to your proximity to the owner. Ideally, only first, second, and third tier claimants can file a lien. If you are a supplier to supplier, or if you don’t fall in any of the below categories, then cannot file a construction lien.

• A first-tier claimant would be an owner-general contractor relationship.

• A second-tier claimant would be a general contractor hiring a subcontractor relationship.

• A third-tier claimant would be a subcontractor hiring another subcontractor or a supplier.

4. Recording the Lien – The lien must be recorded with the County Clerk where the property is located. This is important because it adds to the time component.  

1. For example, in some counties, you need to first book an appointment with the clerk in order to file the lien. So, if you wait until the 80^th or 85^th day to file it, you will miss out on the deadline because they will ask you to come back with an appointment.  

2. Sometimes, you may send your lien via mail or overnight delivery, you may not leave yourself enough time for the lien to get there, reviewed by the clerk and then ultimately recorded.  

3. In some cases, your lien may be rejected for some reason and if you file it late, then you may not have enough time to make the changes and file it again within the stipulated time.  

B) Construction Lien – Additional Requirements

5. Serving of Lien Claim – Once the lien is recorded, you need to serve it.  

1. The lien has to be served upon the owner and the contractor/subcontractor against whom the claim is asserted.

2. Also, the lien has to be served within 10 days of lodging the lien.

3. You can serve it via certified and regular mail.

4. If you don’t serve it withing the first 10 days, you can still do it, but it must be done before a foreclosure action can be commenced.

6. Statute of Limitations

1. The lawsuit must be brought within 1 year from the last date of work performed or materials delivered.

2. Remember that it is one year from the last date of work and not the last date of filing the lien.

7. Residential Projects Only – Notice of Unpaid Balance/AAA Arbitration Process

1. To avoid unnecessary filing of liens on other people’s homes and residences, there is a specific process in New Jersey.

2. The first step is to file the notice of unpaid balance within 60 days and once that it done timely, the next process is an arbitration process by the American Arbitration Association.

3. This is a basic process where they are only going to make sure that all the required technical requirements have been complied with. It is not a determination on the merits of the underlying amount due and owed. If the arbitration process is successful, then you can proceed with the filing of the lien.  

C) Municipal Mechanic’s Lien – Mandatory Requirements

if you're doing work for a county, a municipality, a city, a water commission, or any other public job, then you can file what's called a municipal mechanics lien. The difference between a construction lien and a municipal mechanics lien is that in a construction lien you can actually file a foreclosure action on the property whereas you cannot typically foreclose on a municipality’s property.  

But when you file a municipal mechanics lien, what it does is it prevents the money that is allocated in the contract from flowing. This means that all the contract funds will stop flowing and this can be used as a leveraging point to resolve your payment issue.

8. Lien Contents

9. Deadlines

1. The lien can be filed anytime when the work is being completed or within 60 days after the acceptance of the work of the whole of the project by the owner.  

2. If you are a second or third tier claimant, then you must file a notice with the owner and the contractor within 20 days of the first performance of work letting them know that they are performing work on the project.  

10. Recording of Lien

1. The lien must be recorded with the Municipal entity and the same do’s and don’ts will apply.

11. Proximity

2. Similar to construction liens, only first, second, and third tier claimants can file a municipal mechanics lien.

How to Secure Your Bond Rights?

A bond is typically a document, or a form and it is a guarantee made by an insurance company and it guarantees that the principal or the party who is secured by the bond will make payments to the beneficiaries. The parties to the bond are the surety company/insurance company, the party who is the principal, such as the general contractor, and the beneficiaries who have a contract with the principal and have not been paid. So, the payment bond basically guarantees payment to all the general contractors, subcontractors, and suppliers.

‍A) Mandatory Requirements – Public Improvements To be paid by the surety company under the bond, there needs to be a statement of claims submitted to the surety company and to the principal on the bond.

12. Statement of Claim

1. This is a written notice to the surety company and the bonded contractor.

2. It will identify the services that were performed, or the materials delivered.

3. It will identify the amount owed.

4. It will identify the bond and specify that a claim is being made under the bond.

5. It will identify the person/contractor for whom the work was provided.

13. Lawsuit Deadlines

1. Although there is no specific time frame by when the bond claim must be filed, given the lawsuit deadline, it should be filed as soon as possible.

2. This is because no suit can be brought until expiration of 90 days after the notice of claim. This means if you file a statement of claim, you cannot file a lawsuit the next day to get paid. You must wait 90 days which allows the surety company to review the claim, speak with the principal and determine whether the payment is due or not.

3. The deadline to file a lawsuit is within one year from the last date of actual work or materials delivered.  

4. The lawsuit will be brought against the surety company and the party who is bonded by the surety company, i.e., the principal.

5. The surety company can also deny the claim for being untimely or for not following the requisite requirements.  

14. Additional Notice Requirement for 2^nd and 3^rd Tier Claimants

1. Prior to commencing work, the second and third tier claimants must provide written notice to bonded contractor.

2. This must be sent by certified mail stating the claimant is a bond beneficiary.

As per the New Jersey statutes, every public project should be bonded. So, if you are working on a public project, then there will be a payment bond.  

B) Mandatory Requirements – Private Improvements

• There is also the possibility of having bonds on private projects even though it is not required by statute. So, even if you're doing work on a private project, consider the fact that there may be a bond which may be a way for you to get paid.  

• It is good to ask the general contractor if there is a payment bond on the project. If it is there, then you need to get a copy of the bond and review the bond language to understand what the claim requirements and deadlines are to follow.

What Lien and Bond Traps to Avoid?

Here are some of the lien traps to avoid.

• All your liens should be accompanied with a cover page. If the cover page is not included, then the municipality will completely reject your lien.  

• Do not wait until the 90^th day (in cases of non-residential projects) to file the lien. If you wait until the last moment, you may not be able to file it for some reason or the other and if your lien is not timely filed, then you will not be able to secure your lien rights.

• Do not include any unapproved change orders in accounting. If you include it, then you run the risk of having an overstated lien which can be a basis to discharge the lien entirely. It can also put you under the liability for costs and fees by the owner to remove the lien.  

• Be sure to use an accurate last date of work or materials delivered. It should be the date when the work was actually performed. Your last date of work does not refer to warranty work, punchlist work, corrective work, etc.  

Here are some of the bond traps to avoid.

• If you are a second or third tier claimant, don’t forget to send the pre-performance notice.

• Don’t wait too long to send the notice of claim because if you don’t send it 90 days before that year, then you run the risk of not being able to file a timely claim against the bond or a lawsuit against the bond.  

• Make sure to use an accurate last date of work or materials delivered.  

What is the Prompt Payment Act?

New Jersey has a statute which specifically requires owners and general contractors to make payments within specified deadlines.

• The first tier of the payment deadline is between the owner and the general contractor. As per the statute, the owner is required to pay the general contractors within 30 days after the date of billing unless the owner provides a written statement explaining withholding within 20 days of receiving the payment request. If no such notice is made, then as per the statute, the payment is deemed due and owed to the general contractor.

• Next, the contractor must pay the subcontractor within 10 days of receiving payment for work performed by the subcontractor. If the general contractor fails to make the payment, then they will have to face the liability of interest, attorney’s fees, and costs.  

• The Prompt Payment Act also provides another mechanism wherein the contractor or subcontractor can send a written notice upstream advising that they intend to suspend performance if payment is not made within seven days. If the payment is not made within seven days, then the contractor or subcontractor can suspend performance without penalty until they are paid. This is applicable only in circumstances where the payment is due and owed.

This is another leveraging point to get paid because if the project's not progressing and there's a valid suspension of work by the contractor or subcontractor, the way that performance will resume is if payment is made.

How to Exchange a Release for a Check the Right Way?

Finally, let’s look at how to exchange a release for a check the right way. In a typical situation, when a general contractor provides you a check, they will also ask you to sign a lien waiver or some sort of release wherein the document will state that you are acknowledging the receipt of the payment due to you. In exchange for that receipt of payment, you agree to release all claims against the general contractor for the work performed up to that point of time. Here are a couple of things to focus on while exchanging releases:

• You need to pay close attention to the scope of the release. Make sure that you are comfortable with the language in the release and that you are only releasing claims that you are comfortable releasing.

• Preserve any disputed claims existing at the time of payment. If there are disputes that are outstanding prior to accepting that payment and you haven't been paid and you're not being paid in that check in connection with those disputed issues, you need to make sure you preserve those disputes. Most of the lien waivers will have a carve out that says that you are releasing all claims, and you can mention the claims that you are not releasing.  

• This carve out section should be used by all contractors and subcontractors because if you sign a lien waiver without mentioning what you are not releasing, then it means that you are releasing those disputed claims as well and when you accept the payment, you will forfeit your rights under those disputed claims.  

• Another way that you can potentially jeopardize your rights to recover amounts that are not included in the payment is if somebody puts the language “Full and Final Payment” or “In Full Satisfaction” in the checks. Your acceptance of a check with such language means that you are agreeing that the payment is paying for all work performed and it's encompassing all prior disputes and all prior amounts outstanding as between the recipient of the check and the party cutting the check.

• So, if you see a check in such language, do not accept it and do not cash it.  

Key Takeaways

To summarize -

• Securing and preserving your payment rights starts with having a clear, written contract.

• A well-defined contract is essential for ensuring timely payments.

• If you need to file a lien or record a bond claim, diligently follow all requirements and deadlines to protect your lien/bond rights.

• Ensure that your releases and lien waivers are within the appropriate scope, so you don't unintentionally waive payment rights for any undisputed claims.

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