Construction Liens: Is Your Tenant Encumbering Your Property?
New Jersey’s Construction Lien Law disallows liens lodged against an owner’s property rights if the contract at issue is between a tenant and a third-party. In other words, if a tenant contracts for property improvements, the lien attaches only
“to the leasehold estate of the tenant.” N.J.S.A. 2A:44A-3.
Of course, there are exceptions. A lien can attach to the property owner’s rights if the owner (1) agrees in writing to the improvement that forms the basis of a lien, or (2) has paid or agreed in writing to pay, for the majority of the improvement, or (3) is a party to a lease that specifically provides the owner’s interest is subject to a lien for the improvement. N.J.S.A. 2A:44A-3.
But unless the situation falls into one of those rare exceptions, Section 2A:44A-3 arms property owners with the ability to threaten the lien claimant with slander of title and attorney fee shifting. Recall that the Construction Lien Law states that if a lien is “frivolous, false, unsupported by a contract, or made with malice or bad faith or for any improper purpose,” or if “the amount of the lien claim is willfully overstated,” among other things:
the claimant shall forfeit all claimed lien rights and rights to file subsequent lien claims to the extent of the face amount claimed in the lien claim. The claimant shall also be liable for all court costs, and reasonable legal expenses, including, but not limited to, attorneys’ fees, incurred by the owner,  in defending or causing the discharge of the lien claim. The court shall, in addition, enter judgment against the claimant for damages to any of the parties adversely affected by the lien claim.
Therefore, in addition to determining whether a lien is willfully overstated (violating N.J.S.A. 2A:44A-9), or has not been appropriately served (pursuant to N.J.S.A. 2A:44A-7(a)), be sure to analyze whether a lien is properly lodged against a tenant’s leasehold interest, and not the owner’s interest. This is key because not only will the owner’s property interest no longer be encumbered by a lien once the lien is properly filed¹, but the lien claimant may discharge the lien altogether
because most lien claimants have no interest in filing or foreclosing on a lien against a leasehold interest. That is because even if the lien foreclosure is successful, the lien claimant obtains both the lease benefits and its obligations (like rent).
¹Keep in mind that a lien cannot be amended to cure a violation of N.J.S.A. 2A:44A-15. As a result, the original lien cannot be amended to attach to the tenant’s leasehold interest. The lien must be re-filed and therefore, time is of the essence for the lien claimant. See N.J.S.A. 2A:44A-6 (stating a lien must be filed within “90 days following the date the last work, services, material or equipment was provided for which payment is claimed.”).