Hiring a contractor to build you a new custom home, perform a home renovation or complete a substantial improvement of your residential property involves a major investment of time and money. At the start of a major residential construction project, a homeowner or property owner usually does not think about what will happen if a conflict about payment develops with the general contractor or subcontractor. Conflicts with the material suppliers of contractors are an even more distant consideration. Yet any of these conflicts could result in a lien claim against your home. This reality becomes difficult to ignore when someone sends you, the homeowner, a Notice of Unpaid Balance and Right to File Lien. When this happens, many questions run through a homeowners mind: What is a Notice of Unpaid Balance and Right to File Lien? Why did I receive it? What happens now? Is there anything I need to do? This post is aimed at answering these questions.
The concept of a construction lien must be understood in order to understand the Notice of Unpaid Balance. In New Jersey, material suppliers and contractors who have not been paid for materials supplied or work performed on a construction project can file a construction lien against the property on which the project is located. The point of the construction lien is to protect the contractor’s right to obtain payment through the sale of the property if the contractor is not paid.
When a construction project involves a home or other residential property, before a contractor or supplier can file a construction lien, they must take the additional step of filing a Notice of Unpaid Balance with the county clerk in the county where the property or home is located. The Notice of Unpaid Balance is an additional step that an unpaid supplier or contractor must take to protect their right to obtain payment through the sale of residential property. Thus, the reason you received a Notice of Unpaid Balance is because someone is claiming they supplied materials to or performed work on your home, but have not been paid.
After the Notice of Unpaid Balance has been filed, there is another step in the process before a construction lien can be filed against your home. Unless you signed a contract providing for a different procedure, within 10 days of the filing of the Notice of Unpaid Balance, the contractor or supplier has to begin an arbitration proceeding, by filing what is known as a demand for arbitration, with the American Arbitration Association. N.J.S.A. 2A:44A-21(b)(3). The contractor or supplier must notify you about the arbitration. The American Arbitration Association will then contact the homeowner and set a deadline for the homeowner to respond to the supplier or contractor’s claim that they are owed money. This is the homeowner’s opportunity to challenge the Notice of Unpaid Balance.
The point of the arbitration proceeding is to determine:
(a) whether the Notice of Unpaid Balance and Right to File Lien was filed and served properly;
(b) the earned amount of the contract between the owner and the contractor;
(c) the validity and amount of any lien claim which may be filed pursuant to the Notice of Unpaid Balance and Right to File Lien;
(d) the validity and amount of any setoffs or counterclaims to any lien claim which may be filed; and
(e) the allocation of costs of the arbitration among the parties.
N.J.S.A. 2A:44A-21(b)(4). As a result, if the homeowner in any way disagrees with the statements in the Notice of Unpaid Balance filed by the contractor or supplier, it is important that the homeowner file a response in the arbitration proceeding. If the homeowner believes they have suffered damages due to a failure to complete work, a failure to deliver materials, the performance of defective work or some other reason, the homeowner should raise these issues in the Notice of Unpaid Balance Arbitration.
Unless otherwise agreed by the parties, the arbitrator has 30 days after receiving the demand for arbitration to make the above-described determinations. However, if no response is filed, the determination is to be made within 7 days of the expiration of the time to respond set by the arbitrator. N.J.S.A. 2A:44A-21(b)(7).
If the arbitrator ultimately determines that at least some portion of the unpaid amount is valid, then the contractor or supplier within 10 days of receiving the determination must file a construction lien with the county clerk in the amount determined by the arbitrator. If the construction lien is not filed within the 10 day period, the lien claim becomes invalid. N.J.S.A. 2A:44A-21(b)(8).
It is important to be aware that the Notice of Unpaid Balance Arbitration only determines whether and in what amount a construction lien can be filed. If the arbitrator determines that a construction lien can be filed, the claimant must ultimately file a lawsuit in order to obtain a judgment to enforce the construction lien. In addition, in the Notice of Unpaid Balance Arbitration no determination is made as to the validity of any breach of contract or other claims. Thus, even if an arbitrator determines a lien claim is invalid, and the Notice of Unpaid Balance must be discharged, a contractor or supplier may still pursue breach of contract or other claims. Determinations or judgments as to these other claims may be made in court if a party files a lawsuit, or in a separate arbitration or other proceeding if the relevant contract provides for the same.
If the arbitrator makes an error in rendering his or her award in the Notice of Unpaid Balance Arbitration, the Construction Lien Law does provide an appeal procedure. A lien claimant or property owner can appeal the decision by filing a complaint in the New Jersey Superior Court, Law Division. N.J.S.A. 2A:44A-21(b)(10).
Our firm devotes a significant amount of its practice to New Jersey construction law and litigation, including construction liens. As part of this practice, we serve as attorneys in Notice of Unpaid Balance Arbitration proceedings. We welcome you to contact us for further information if you have received a Notice of Unpaid Balance and Right to File Lien or if you wish to file one.
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