February 4, 2021
By Jacqueline Greenberg Vogt
I often advise clients on multi-million dollar construction contracts, where lawyers on both sides are brought in early to make sure the agreement is properly structured. But owners who undertake smaller construction projects, such as the build out or renovation of an office space, often mistakenly think that a comprehensive contract review is cost prohibitive, so they wait until problems arise to bring on construction counsel. To the contrary, retaining construction counsel during the contracting phase has significant long-term benefits, as it adds safeguards, helps anticipate and address problematic language in the contract, and adds a level of project oversight that frequently nips problems in the bud – before they start to cost money.
One of the key issues that I frequently discuss with project owners is a preemptive strategy for addressing potential construction liens, something that is directly tied to an often misunderstood concept called the “Lien Fund”.
In both New Jersey and New York, once a construction lien is filed as a result of work performed or materials supplied to a construction project, the Lien Fund is automatically created for the benefit of contractors and suppliers. This means that the project’s remaining contract balance is preserved for subcontractors and suppliers who have not been paid as they should have been by the general contractor (“GC”). Owners are also protected in that the Lien Fund represents the maximum amount for which the owner may be liable to lien claimants.
Here are five tips every project owner should keep in mind, if such a situation arises:
- You should not make any payments to the GC on the project unless they provide you with signed lien waivers. Lien waivers are written statements by the GC, which certify that all work encompassed by the payment requisition, and all materials used in that work, have been paid for or are scheduled to be paid in full by the GC to its subcontractors and suppliers.
- The moment you become aware of a lien, all payments to the GC should cease, and any funds due to the GC for completed work should be held.
- You should serve a demand on the GC for a verified list of subcontractors and suppliers, so you can identify all potential lien claimants before any payments are made to lienors.
- You should also demand proof of the GC’s payments to its subcontractors and suppliers to determine if the lien claims are legitimate.
- If the amount of the Lien Fund is less than the total amount due on all liens, your payments to obtain the discharge of liens must be made proportionally to all lienors; the owner may not favor one lien claimant over another, regardless of the order of the filing of the liens. For example, if there are two liens totaling $200,000, and the lien fund is only $100,000, each lien claimant may only be paid 50% of their total claim. However, this rule does not apply if the first lien is paid and discharged before the second lien is filed.