by: Steven P. Gouin
In New Jersey, certain construction contractors and subcontractors are entitled to file liens to secure payment for their services. Under the New Jersey Construction Lien Law, N.J.S.A. 2A:44A-1, et. seq. (“the Lien Law”), eligible contractors must make very specific filings and follow a strict timeline in order to ultimately foreclose on their liens. In many instances, a defectively filed lien can bar recovery or void the lien. However, in the recently decided Appellate Division case of Foulke v. Staval, Inc., a contractor, despite filing a defective lien, was still able to obtain partial payment of a debt.
In Foulke, a contractor-seller defaulted on several building loans. As a result, before its home was sold, the contractor-seller owed more on the home than it was worth. Ultimately, the contractor-seller sold to a homebuyer with the understanding that no money would be due at closing, so long as the homebuyer could negotiate acceptable settlements for the various liens and mortgages owed by the contractor-seller.
The homebuyer set about negotiating with a subcontractor who had filed a $49,893 lien under the Lien Law. Contrary to the Lien Law's requirements for residential construction liens, the subcontractor had not filed a Notice of Unpaid Balance and Right to File Lien within 60 days of the date services were last provided. Therefore, unbeknownst to the homebuyer or the representatives for the subcontractor, the lien was never valid.
Nevertheless, the homebuyer and the subcontractor agreed that the lien would be discharged in exchange for $40,000. When a subsequent title search revealed the lien’s invalidity, the homebuyer sued for, among other things, breach of contract for mutual mistake – namely, that the lien was valid. The trial judge noted that a contract may be voidable by the party for whom performance will be materially more onerous where both parties are mistaken about a material fact assumed by both. Here, however, the judge noted that the homebuyer was under an obligation to negotiate the $49,893 debt anyway, and, even if the lien was valid, the homebuyer could not have expected to receive a better benefit than $9,893.
While the invalidity of the construction lien did not ultimately cost the subcontractor, this case highlights the need for careful diligence when filing and negotiating construction liens in New Jersey. Because such liens are often a starting point for negotiations, it is crucial that contractors and homebuyers be aware of the strict requirements of the Lien Law.
Pete's Take 