Real Estate & Construction Law Monitor : Real Estate & Construction Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Development & Building

Last week (on Monday, June 21, 2010), the New Jersey Assembly unanimously passed the long-awaited revisions to the New Jersey Construction Lien Law (N.J.S.A. 2A:44A-1, et seq.) (the “Lien Law”). Next up is the parallel Senate bill which, after its introduction in early May 2010, was referred to the Senate Commerce Committee, where it is expected to remain for review until the Fall. The proposed Lien Law revisions, based almost entirely on the March 2009 final report of the New Jersey Law Revision Commission, seek to fill the gaps in, and improve on the practical application of, the original 1993 Lien Law. Some of the proposed amendments are a codification of decisions of federal and state courts, including the New Jersey Supreme Court, which have sought to interpret the Lien Law since its enactment.

The proposed Lien Law revisions are comprehensive. Among the more critical Lien Law amendments contained in the new legislation are:

1. an increase in the time within which a potential lien claimant may assert a construction lien claim relating to a residential construction contract from 90 days to 120 days from the claimant’s last date of work. The current 90-day period has, in practice, been problematic for prospective lien claimants, who must also file and serve a Notice of Unpaid Balance and Right to File Lien (“NUB”) and a demand for arbitration -- and then obtain an award in arbitration – before they may file lien claims. The extra 30 days provides additional breathing room for the lien claimant to fulfill all of the statutory prerequisites, particularly the arbitration proceeding. Note, however, that the proposed amendment sets a deadline for filing a NUB at 60 days from the claimant’s last date of work and a 10-day deadline thereafter to serve the required demand for arbitration on all parties against whom the lien is asserted. If those deadlines are not met, the extra 30 days to file the lien means nothing, as the lien claimant will be barred from filing its lien;

2. the addition of statutory definitions of “residential construction,” “residential unit,” “real property development,” “community association,” and “dwelling,” and the amendment of the statutory definitions of “residential construction contract” and “residential purchase agreement,” which, together, seek to better reflect the types of construction subject to the residential rules of the Lien Law. For example, settling a contentious issue under the existing Lien Law, the revisions provide that, in general, large-scale residential condominium, coop and townhouse development projects, including, without limitation, mixed-use projects and the common elements of such projects, would be subject to the Lien Law’s residential filing requirements. Projects designed to contain rental units or non-residential units, however, would not be subject to the Lien Law’s residential filing requirements;

3. the clarification of a number of other statutory definitions, as well as the addition of other new definitions, including, without limitation, new definitions of “lien claim” (and the term “value” within the “lien claim” definition), which allow for the inclusion of retainage in the amount of a lien claim, and incorporating within the definition of “contract” the requirement that the lien claimant’s contract be a writing signed by the party in direct privity with the lien claimant and evidencing the consideration to be paid and a description of the improvement subject to the lien;

4. a substantially more thorough description and calculation of the “lien fund” - that is, the amount of money available for distribution among valid lien claimants performing work under any particular line of contracting – and an explanation of how that lien fund is to be distributed among multiple lien claimants at different contracting levels. In fact, the term “lien fund” is not defined or otherwise used in the current Lien Law, so the proposed revisions provide the basic definition of the term. Most of these proposed revisions are a reflection of court decisions interpreting the Lien Law and formulating the concept of the “lien fund.” Among other things, the proposed revisions would make clear for the first time under the Lien Law that the lien fund is not to be reduced by: (i) payments not made according to written contract provisions; (ii) payments made but not yet earned by the time the first lien is filed; (iii) liquidated damages; (iv) collusive payments; (v) the use of retainage to pay a replacement contractor after the filing of the lien claim; or (vi) setoffs or backcharges not agreed to in writing by the claimant or adjudicated in an arbitration;

5. a clarification that the date on which the County Clerk has marked the lien claim as received (rather than when the Clerk has actually indexed the lien claim – which is not within the control of the lien claimant) is to be used to determine whether a lien claim has been timely filed;

6. a much-needed expansion of the existing deficient statutory forms and/or procedures for filing, amending or discharging a lien claim or NUB, and prosecuting a suit to enforce a lien claim; and

7. clarification: (a) of when lien claims may be filed against the owner of real property for tenant improvements (See this article); (b) that work performed on common elements of a real estate development may be filed against “community associations” such as condominium or homeowners’ associations; and (c) that a mortgage takes priority over a lien claim, even when recorded after the filing of that lien claim, where the funds are used for the purchase of and/or improvements to the subject property.

We will likely have to wait until the Fall at the earliest before these proposed revisions, and possibly others the Senate Commerce Committee recommends, are presented for vote in the Senate. In light of the Assembly’s unanimous vote, it is probable that the bill, in its present or slightly modified form, will pass and be sent to the Governor for his review and signature (or improbable veto). The proposed amendments to the Lien Law have been well thought out and debated and are long overdue.
 

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On September 6, 2008, in response to unprecedented economic and financial crisis and as an attempt to protect development permits that were scheduled to expire, then New Jersey Governor John Corzine signed P.L. 2008, c. 78 (N.J.S.A. 40:55D-136.1 et seq.), legislation known as the Permit Extension Act of 2008 (the “Permit Extension Act”). The Permit Extension Act extended the terms of certain governmental development permits and approvals to July 1, 2010, with up to a six-month phase-in period until January 1, 2011. Governor Corzine, as one of his last acts as Governor, signed legislation (Chapter 336, Assembly No. 4347) extending the end of the tolling period under the Permit Extension Act from July 1, 2010 to December 31, 2012.

The primary goal of the Permit Extension Act is to promote development once the economy has strengthened and prevent the abandonment of approved projects and activities. The Permit Extension Act tolls the running of governmental development permits and approvals obtained during the period from January 1, 2007 through July 1, 2010, with up to a six-month phase-in period until January 1, 2011, thus amounting to a maximum four-year permit extension period.

The Permit Extension Act is a compromise between developers and community activists, including environmentalists. As such, it excludes the following categories from eligibility for extension:

1. Permits and approvals issued by the US government or any permit or approval with a duration or fixed expiration date determined by a federal law or regulation;
2. Approvals in “environmentally sensitive areas”;
3. Permits or approvals issued pursuant to the “Pinelands Protection Act” if the extension would result in a violation of federal law or any state rule or regulation requiring approval of the Secretary of the Interior;
4. New Jersey Department of Transportation permits, other than right-of-way permits;
5. Flood Hazard Area Control Act permits, except where work has already commenced; and
6. Coastal centers pursuant to the “Coastal Area Facility Review Act” where (a) an application for plan endorsement was not submitted to the State Planning Commission as of March 15, 2007, and (b) was not in compliance with the Coastal Zoning Management Rules.

The Permit Extension Act does not prohibit the granting of additional permit extensions otherwise provided for under law when its tolling period expires. In addition, the Permit Extension Act does not affect any administrative consent orders issued by the New Jersey Department of Environmental Protection and in effect during the extension period, nor does it extend any approval in connection with a resource recovery facility.

Should you have any questions with regard to the applicability of the Permit Extension Act to any existing project, permits, or approvals, please contact an attorney knowledgeable with New Jersey laws and the Permit Extension Act.
 

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Bulk Sale Notification Requirements Apply To Deed in Lieu of Foreclosure

Based upon the findings of the Tax Court in N.J. Hotel Holdings, Inc. v. Dir., Div. of Taxation, 15 N.J.Tax 428, 437 (Tax Ct. 1996), the New Jersey Division of Taxation is enforcing recent changes in the New Jersey bulk sales notification requirements contained in N.J.S.A. 54:50-38 on the basis that such requirements apply to deeds in lieu of foreclosure (“deeds in lieu”) of real estate accepted by lenders, regardless of the fact that no monetary consideration is being received by the lender. If N.J. Hotel Holdings, Inc. is upheld it will mean that a lender who fails to comply with the bulk sales notification requirements before accepting a deed in lieu will be deemed by statute to have assumed liability for payment of all of the borrower’s outstanding tax obligations to the State of New Jersey. (For a more general discussion of the new bulk sales requirements under N.J.S.A. 54:50-38, see The New Bulk Sales Notification Requirements and Their Application to New Jersey Real Estate Transactions – Part 1)

N.J. Hotel Holdings, Inc. v. Director, Division of Taxation

The question before the Tax Court in N.J. Hotel Holdings, Inc. was whether statutory bulk sales notification applied to assets acquired by way of deeds in lieu. The court unequivocally answered in the affirmative:

In this case the court holds that a person who acquires assets by way of a deed in lieu of foreclosure and a bill of sale, and who fails to give notice to the [Director] under N.J.S.A. 54:32B-22(c), is liable for the sales and use tax liability of the person from whom the assets are acquired. [Note: the Tax Court’s analysis is equally applicable to N.J.S.A. 54:50-38 and it is unlikely the case can be distinguished on the basis of the new legislation].

In N.J. Hotel Holdings, Inc., a bank made loans to several entities, secured by mortgages, assignments, and security agreements on three hotels. Following a modification and transfer of the properties and related obligations, the new owners defaulted on their obligations to the bank. Pursuant to a subsequent foreclosure agreement, the bank acquired all of the hotel assets by way of deeds in lieu. Bulk sale notification of this acquisition was not provided to the Director. As a consequence, the Director deemed the bank liable for all taxes relating to the subject property due by the defaulting owner prior to, and following, the transfer. The arguments presented by the bank in appealing the assessments of the Director can be categorically summarized: (1) a deed in lieu is not a transfer within the meaning of the statute, (2) because the State would have not received payment upon foreclosure, it should not receive payment when transfer is made via a deed in lieu, and (3) because no cash is exchanged in a deed in lieu transaction, there was no escrow mechanism to ultimately comply with the statute.

The court spent minimal time, and found little difficulty, dismissing the claim that a deed in lieu was not a transfer within the meaning of the statute: “It is clear that N.J.S.A. 54:32B-22(c) is meant to extend beyond . . . simple sale for cash . . . and beyond the restrictive definitions of the bulk sales act.” In the present case, “the hotel assets were transferred to plaintiff in settlement of the foreclosure action.” This was evidence enough to satisfy the court that the statute should apply.

The court then goes on to address the contention that had the foreclosure been completed, the State would have no remaining lien on the property and, as a result, would have received none of the sales tax due by the transferor. The court thwarts this argument by citing the business decision rule, reminding the transferee that it was their choice to avoid foreclosure through this asset transfer mechanism, and it is in the public interest of the State to allow such independent decision-making:

The principle that a business decision will be given its tax effect according to what actually occurred promotes public interest in tax certainty and thereby conforms with general business expectations. Indeed, planning by individuals and businesses alike would be frustrated if courts failed to give predictable effect in formal legal documents . . . simply because of asserted ignorance of law. . . .

‘As a general proposition, the answer must be that it is for the taxpayer to make its business decisions in light of tax statutes rather than the other way around.’

Finally, the court focused its attention on whether the statute should be deemed inapplicable because no cash is transferred in a deed in lieu transaction, rendering a cash escrow impossible. The court viewed this as a practicality argument of little merit. The fact that a deed in lieu transaction involves other consideration rather than cash does not relieve the transferee of liability based solely on the structure of the transaction. According to the court, the value of the “choses in action, or other consideration[s]” were greater than the sales tax obligations of the transferor, thus rendering the existence of a cash escrow irrelevant when determining the applicability of the notification requirements. Although the bank cites the interpretation of out-of-state statutes by the courts of other jurisdictions, the court rejects these alternative interpretations on the grounds of differing public policy objectives.

Life After N.J. Hotel Holdings, Inc.

The practical consequences of the holding in N.J. Hotel Holdings, Inc. are significant.

The Division’s application of N.J. Hotel Holdings, Inc. in applying the rules to deeds in lieu, when coupled with N.J.S.A. 54:50-38 which applies the bulk sales rules to a wide array of real estate transactions, effectively gives the State of New Jersey a super priority lien for outstanding taxes if a lender, in accepting a deed in lieu, fails to comply with the notification requirements. This is due to the fact that the lender’s deemed assumption of a borrower’s outstanding tax liability to the State of New Jersey will force a lender, who has accepted a deed in lieu without complying, to first pay the State of New Jersey the outstanding tax liability before it allocates any amounts recovered from the property to the debt.

Lenders must notify the Director prior to accepting a deed in lieu for the real estate encumbered by the security instrument. This is so despite the fact that a lender could proceed to foreclosure without complying with bulk sales notification requirements. Failure to provide such notification under these statutory requirements will render the lender personally liable for all taxes, sales or otherwise, that may be due at the time of the transfer, as well as any taxes determined to be due later (for example, following an audit of the subject property). Once the lender has made the notification, if the Director requires an escrow for outstanding taxes then the lender will either have to secure the amount from the borrower, if the borrower in fact has any funds, or put up the escrow itself. Of course, a lender could foreclose and avoid the escrow, but foreclosure involves its own costs and expenses, therefore this is just one more part of the analysis to be made by the lender of the defaulting loan and the lender’s potential remedies. (For a discussion of how to comply with the new bulk sales requirements under N.J.S.A. 54:50-38, see The New Bulk Sales Notification Requirements and Their Application to New Jersey Real Estate Transactions – Part 1)

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In an effort to jump start New Jersey's economy, on July 27, 2009, Governor Corzine signed The New Jersey Economic Stimulus Act of 2009, A-4048/S-2299 (the “NJ Stimulus Act”). The NJ Stimulus Act contains a series of incentives to stimulate development in New Jersey including: grants funded by future development, relaxation of and expansion of eligibility for Urban Transit Hub Tax Credit, boosting of construction on college campuses and the temporary suspension of the affordable housing growth share fee requirement for commercial developments of 2.5% of the equalized assessed value.

The NJ Stimulus Act imposes a temporary moratorium on the collection of the 2.5% non-residential development fee imposed by the “Statewide Non-Residential Development Fee Act” for approved projects prior to July 1, 2010; provided that a permit for construction of the building has been issued prior to January 1, 2013. In part, the 2.5% non-residential development fee imposed under the Affordable Housing Reform Statute (P.L.2008, c.46), which made significant changes to the Fair Housing Act, N.J.S.A. 52:27D-301 et seq., also known as the Statewide Non-Residential Development Fee Act, does not apply to:

(1) non-residential property for which either temporary or final site plan approval has been issued prior to July 1, 2010; or
(2) certain non-residential planned development which has received approval or a non-residential development for which the developer has entered into a developer’s agreement pursuant to a development approval prior to July 1, 2010; or
(3) non-residential projects that, prior to July 1, 2010, are referred to a planning board by the State of New Jersey, a governing body or other public agency for review; or
(4) non-residential property for which a site plan has received approval by the New Jersey Meadowlands Commission prior to July 1, 2010; or
(5) individual buildings within a non-residential phased development that received either preliminary or final approval prior to July 1, 2010;

in each case provided that a permit for construction of the building has been issued prior to January 1, 2013.

Additionally, under the NJ Stimulus Act, developers who paid the 2.5% non-residential development fee in connection with certain projects that, prior to July 17, 2008, received approval or were referred to a planning board by the State of New Jersey, a governing body or other public agency for review are entitled to a return of any fees paid that represent the difference between monies committed prior to July 17, 2008 and money paid on or after that date. To obtain a refund of the development fees, the developer must file a claim for refund within 120 day of the effective date of the NJ Stimulus Act.

Developers should act quickly to entitle their projects to avoid the 2.5% non-residential development fee and/or file a claim for refund if a developer has already paid the non-residential development fee under the Statewide Non-Residential Development Fee Act. It may be prudent to consult with an attorney if you have questions regarding eligibility for return of a developer fee payment or any other provision of the NJ Stimulus Act.

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In two recent decisions, the New Jersey Appellate Division made clear that purchasers of homes from the original owners cannot sue the manufacturer of an exterior siding product for the home under the New Jersey Products Liability Act, N.J.S.A. 2A:58C-1 to -11 (“NJPLA”) if they suffer only economic losses. In addition, the purchasers also cannot assert a claim under the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 to -184 without some evidence of representations or concealments from the manufacturer made to them regarding the product. These two decisions should cause home buyers to be especially diligent when reviewing their home inspection reports, as they now may be precluded from asserting tort claims against the manufacturer of faulty or defective products or systems, and will have to rely primarily on contract claims against sellers for relief.

In Marrone v. Greer & Polman Construction, Inc., 405 N.J. Super. 288 (App. Div. 2009) and Dean v. Barrett Homes, Inc., 406 N.J. Super. 453 (App. Div. 2009), the Appellate Division addressed similar claims by homeowners regarding the Exterior Insulation Finish System, or EIFS, siding that was applied to each of their houses. EIFS is a system that incorporates foam insulation panels, reinforced mesh and a textured finished coating to the siding of the house. The finished product resembles a stucco finish. In both cases, the Marrones and the Deans purchased their homes from the original homeowner.

Both houses were built in 1995. The Marrones purchased their home in 2003 and the Deans purchased their home in 2002. Each homeowner later developed problems with the EIFS siding. Each party then sued, among others, the EIFS manufacturer, the subcontractor who applied the EIFS, and the general contractor who built the house. Neither the Marrones nor the Deans sued either of the sellers of the homes. The buyers each settled with the general contractor and subcontractor, leaving only the tort claims against the manufacturer of the EIFS product for disposition by the Court.

The Marrones and Deans each ultimately discovered that the EIFS siding on their homes was defective and had caused damage to the EIFS itself, as well as damage to the roof, soffits, sheathing, framing, substrate of the house, windows and doors. Although it is not stated how much the Marrones spent to repair the EIFS on their home, the Deans spent approximately $150,000 replacing the siding and other work to the exterior and interior of the house. Neither the Marrones nor the Deans alleged that the EIFS caused any personal injury or damage to anything other than their homes.

The Appellate Division affirmed the granting of summary judgment on each of the NJPLA claims based on the ‘economic loss’ doctrine. The Court in Marrone defined economic loss as “the diminution in value of the product because it is inferior in quality and does not work for the general purpose for which it was manufactured and sold.” The Appellate Division concluded that actions where a purchaser is claiming damage to the product itself, rather than any personal injury or damage to other property, are better suited for contract claims, rather than tort claims, such as a claim under the NJPLA.

The Appellate Division emphasized the policy decisions underlying tort and contract principles and concluded that “the policy behind contract law ‘operated on the premise that the contracting parties, in the course of bargaining of the terms of the sale, are able to allocate risks and costs of the potential nonperformance.’” The Appellate Division determined that rather than pursue the tort claim under the NJPLA, the Marrones and the Deans had the opportunity to negotiate with each of the sellers over the EIFS siding, by either walking away from the deal or insisting that the sellers remediate the EIFS defect. Each of the sellers did not take that action and they were not then permitted to pursue a claim against the manufacturer in tort.

Each of the Marrones and the Deans argued that the EIFS siding did cause damage to “other property” far beyond just the EIFS itself. They each claimed damage to other parts of their houses, including the roof and soffits, windows, doors, sheathing and wood framing. The Appellate Division in both Marrone and Dean found that these other parts of the house were all component parts of the house and not separate from the EIFS. The Appellate Division concluded that the buyers purchased a house, not the components parts separately, and any damage to the other component parts of the house were still damage to the “product” itself. As a result, those claims did not take the cases outside of the economic loss doctrine and summary judgment was still appropriate.

A consequence of these two decisions is that it is incumbent upon buyers to negotiate with sellers over problems that may arise from EIFS, or any other potential system or product of a house, at the time of the sale, rather than waiting and asserting a tort claim if something later goes wrong.
 

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The U.S. Green Building Council, on April 27, 2009, implemented changes to Leadership in Energy and Environmental Design or LEED, the country’s most popular and recognizable green building rating system. The revised rating system, known as LEED 2009, contains several significant changes affecting developers who previously operated under the old system. LEED 2009 also features many positive improvements to the LEED rating system.

One of the most significant changes in attaining LEED certification now requires newly built, LEED certified buildings to submit electricity bills for at least one year following the building’s completion. The U.S. Green Building Council is attempting to move beyond certifying buildings based solely on their design and projected energy use and only certify buildings that demonstrate actual energy savings. However, buildings that have already been certified under the old system will continue to retain their existing LEED certification and will not have to reapply. 

Under the old system, buildings could attain a maximum of 69 possible points across 5 Classification Categories (i.e., Sustainable Sites, Water Efficiency, Energy and Atmosphere, Materials and Resources and Indoor Environmental Quality) and are ranked from “certified” to “platinum” based on the number of points earned. LEED 2009 enables developers to target a total of 110 possible points across 6 Classification Categories, including a new Classification Category known as Innovation in Design. 

The increase in the total number of possible points is based in part upon re-weighting of credits within the LEED Classification Categories to reward the most important green building goals, namely, energy efficiency and the reduction of carbon dioxide. For example, under the old system, the installation of a bike rack and the implementation of water efficient landscaping with a 50% reduction based on the average size and vegetation were each worth 1 point. Under LEED 2009, water efficient landscaping with a 50% reduction based on the average size and vegetation is now worth 2 points. 

LEED 2009 projects will also be able to earn “bonus points” for implementing green building strategies that address the most important environmental issues facing their region. A project can now be awarded as many as 4 extra points for achieving these regional environmental priorities. In Northern New Jersey, bonus points are awarded for the preservation and restoration of damaged habitats, limiting the harmful effects of stormwater and wastewater and reusing existing building structures. 

The green building process is highly technical and complicated, and simple misunderstandings or lack of green building experience can lead to missed opportunities or failure to achieve the desired rating altogether. Consultation with an experienced attorney will result in more informed decisions in navigating the green building process. 

Watch this blog for updates on green building and green technology.
 

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In two recent decisions, New Jersey’s Appellate Division re-affirmed individuals acting within the scope of their employment can be personally liable under the State’s Consumer Fraud Act (the “CFA”), as well as related regulations governing home improvements, provided they actively participated in the consumer fraud. Lanza v. Secret Gardens, No. A-2613-07T22613-07T2 (App. Div. October 14, 2008) and Anne Milgram v. Comfort Direct, Inc. and Kevin Dyevich, A-0360-07T20360-07T2 (App. Div. October 28, 2008). The plaintiff in Lanza had hired the defendant, Secret Gardens Landscaping, Inc. (“SGL”), to perform remodeling and landscaping work on her property. After completion of the project, plaintiff filed suit against SGL, and SGL’s president and CEO, claiming they had violated the CFA. In reversing the trial court’s decision to dismiss the claims against SGL’s principal, the Appellate Division held there was undisputed evidence the principal, who had prepared the contract, supervised the work, and discussed change orders with the plaintiff, had participated personally in the alleged violations of the CFA, which were committed in connection with the execution and performance of the contract. Based upon those facts, the principal could be liable for any violation of the CFA in which he participated personally.

Placed more firmly in the construction context, these decisions subject a principal to the harsh penalties of the CFA. If the court finds the principal was involved in committing a consumer fraud, it will permit the aggrieved consumer to pursue the assets of the individual principal and those of the company.

What Constitutes a Consumer Fraud Act Violation?
The general standard for a CFA violation is “unconscionable commercial conduct,” which can include affirmative acts and intentional omissions. While there are no bright line rules as to what constitutes unconscionable commercial conduct in a new construction case, courts have held that the substitution of building materials inferior to those specified in the contract and even severe construction defects can constitute CFA violations. Violations of home improvement regulations, which are applicable to everything from minor improvements to significant renovations, are more clearly defined. A violation can include the failure to obtain a signed contract for the work from the property owner, the failure to specify start and end-dates in the contract, and misrepresentations regarding the quality of materials. Notably, the term “consumer” is broadly defined under the CFA and applies to businesses as well as consumers. As such, both residential and commercial projects can be subject to the CFA’s requirements.

Why I Should Care?
The CFA, which was implemented to protect the State’s consumers and punish those engaging in improper commercial practices, mandates the implementation of severe remedies in the event a CFA violation is found to exist. A consumer who can demonstrate it suffered a loss as a result of “unconscionable” conduct is entitled to recover treble damages and counsel fees. In the context of home improvement regulations, New Jersey’s courts have held that even if a consumer was not damaged by a violation of the regulations, the consumer is still entitled to recover its attorney’s fees. As a result, CFA violations can lead to significant exposure, both for the business and the individual -- with what might otherwise be viewed as a minor problem exploding into a major monetary loss.

How Can I Protect Myself?
Although it sounds obvious, the best way to protect yourself from CFA liability is to communicate frequently, openly, and honestly with the owner about the project’s progress and any issues that may arise. If a material specified in the contract is unavailable, do not simply switch the material out for something that may or may not be deemed by the owner or, ultimately, a court to be its equivalent. Instead, advise the owner and have it authorize the substitution in a change order. Avoid overstating the qualities of your products or services and make sure your contracts comply with regulations by having an attorney review them or familiarizing yourself with the regulations’ specific requirements.
 

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A widely held assumption among project owners and construction contractors is that private arbitration is faster and more cost effective than litigation of a dispute in the courts. The inclusion of mandatory arbitration of disputes in all AIA construction contracts since their inception in 1888 was premised on this assumption. Unfortunately, as many owners and contractors have discovered, arbitration is rarely fast or inexpensive. In complex disputes arbitration often proves as costly and time consuming as resolution through the court system. In addition, many consider arbitration inferior to the court system in maximizing the chances of a just outcome. In response to widespread demand within the construction industry, the AIA revised its 2007 form construction contracts, deleting mandatory arbitration and permitting parties to choose arbitration or litigation through the courts.

Arbitration certainly has some distinct advantages over litigation. For example, there is a very limited right to appeal an arbitrator’s decision, thereby reducing the cost of potential appeals and expediting the process of obtaining an earlier binding decision. In addition, arbitration allows the parties to select a decision-maker with considerable expertise in construction matters, eliminating the need to “educate” a judge or jury about construction issues.

The arbitration process, however, has some significant drawbacks. Unlike most trials, arbitrations are not necessarily held on consecutive days until concluded and may be scheduled over several months, particularly when several parties are involved. This requires the parties and their respective attorneys and experts to spend additional time getting up to speed on the case before each arbitration session. Moreover, previously scheduled arbitration hearings are disregarded by most judges if a judge’s schedule for a trial or hearing requires the attendance of one of the attorneys involved in the arbitration. Many arbitrators also permit extensive document production, depositions and other methods of “discovery” similar to those available in the court system, increasing the cost and duration of the arbitration. The parties are responsible for paying the arbitrators their hourly rate for all time spent in the hearings and related study and communications, a potentially substantial cost especially where multiple arbitrators are mandated. Finally, the legal standards governing arbitration strongly favor an arbitrator’s consideration of all evidence offered by a party, even if it is developed during or after the arbitration hearings. This can result in a set of facts and issues that evolves during the course of an arbitration and extends its duration.

Participants in the construction process should carefully consider the pros and cons of arbitration or litigation of their construction disputes, rather then reflexively choosing arbitration. Consultation with an experienced construction attorney will result in an informed choice.

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Under current law a tenant’s contractor cannot file a construction lien against the landlord’s property for amounts unpaid by the tenant unless the landlord provided written authorization of the specific construction contract between the contractor and the tenant. Even where the lease specifically provided for the work in question and the landlord was notified of the commencement of the work as required by the lease, current law prohibits a tenant’s contractor from filing a construction lien against the landlord’s property.

This will all change if a proposed revision to the New Jersey Construction Lien Law is enacted this spring. According to the proposed revision to the law, a tenant’s contractor will be able to file a lien against the landlord’s property for amounts unpaid by the tenant if the landlord has paid or agreed in writing to pay for the majority of the tenant improvement or if the lease provides the property is subject to a lien for the improvement. Accordingly, landlords should review current leases and keep this proposed change in mind for future leases in order to minimize the chances of unwittingly exposing the property to construction liens filed by contractors who have not been paid by the tenant for improvements to the property. 

If and when the revision to the law is enacted, in appropriate circumstances a landlord may wish to consider requiring all tenant improvement work be done by the landlord instead of reimbursing the tenant for the tenant’s cost to perform the work. This alternative will allow the landlord to control the work and pay contractors directly.  Another possibility to consider is for a landlord to provide the tenant with a rent concession, not tied to tenant improvements, while simultaneously providing in the lease all tenant improvements shall be done by the tenant at its sole cost and expense.  This latter approach, however, is not foolproof.  A court may interpret the latter provision as the substantial equivalent of a landlord paying for the improvements, thereby subjecting it to a potential lien against its interest in the property.

Watch this blog for updates on the proposed revisions to the Construction Lien Law.

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