Mechanics liens are rather simple. Generally, if you contribute to the improvement of property, you are entitled to a mechanics lien on the property. The lien gives you an ownership interest in the property. Some states will include exceptions to this general rule. For example, in New Jersey, construction liens cannot be asserted against public realty. A recent court decision sheds a little light on the specifics of this exemption. It is not as simple as it seems.
The Case Background
The case concerns 587 acres of environmentally sensitive wetlands owned by Meadowlands Conservation Trust (MCT). Earthmark was chosen as the successful bidder to construct on these wetlands. Beginning on January 22, 2009, MCT’s Board of Directors entered into a ground lease with Earthmark to construct the project. The ground lease required Earthmark, MCT, and the various federal and state agencies comprising the Meadowlands Interagency Mitigation Council, enter into the Richard P. Kane Natural Area Mitigation Bank. “Mitigation banks employ a market-based approach to preservation, placing the implementation and success of a project on a third party in exchange for credits, which may be sold to future developers, whose ventures in the surrounding area may impact the protected environment.”
The project was financed through a loan from EnviroFinance Group, LLC (EFG). Earthmark, in turn, granted EFG collateral security, which included 100% ownership and membership interests in Earthmark, including its leasehold and proceeds from sale of mitigation credits from the project.
Geo-Con was another contractor brought on to the project by Earthmark. Geo-Con started work on April 2010. Then, EFG alleged that issues arose on the project which were delineated in a September 7, 2010 agreement between Earthmark and Geo-Con. This agreement amended the initial construction contract, adding more than $2 million in expenses. EFG never saw or approved the amendment. Because of this and another separate agreement, EFG declared Earthmark in default in a December 8, 2010 letter.
By January 2011, Geo-Con stopped work because payment ceased. Geo-Con notified EFG that Earthmark did not pay Geo-Con for its October and November invoices. EFG challenged the work stoppage. They promised to cure payments as long as certain documents were submitted. After some more challenges concerning work stoppage and no remittance of cure payments, Geo-Con recorded two construction liens on March 28, 2011 in the Bergen County Clerk’s Office against Earthmark’s leasehold interest in the project.
The Issue and Court Decision
EFG and Earthmark looked to discharge Geo-Con’s liens. The trail court denied the request to discharge the mechanics liens, finding that the cited exception was inapplicable. In EnivroFinance Group, LLC v. Envt’l Barrier Co., LLC, 440 N.J. Super. 324 (App. Div. 2015), the Appellate Court affirmed. The exception referred to was N.J.S.A. 2A:44A-5(b) which states
No liens shall attach nor shall a lien claim be filed:
b. For public works or improvements to real property contracted for and awarded by a public entity; provided, however, that nothing herein shall affect any right or remedy established pursuant to the “municipal mechanic’s lien law,” N.J.S. 2A:44-125 et seq.
One lien was dismissed due to this exception because the lien was applied to the actually realty. The other lien, however, was allowed. The Courts reasoning was that the relationship from which the lien arose between Geo-Con and Earthmark was a private one and did not involve a public entity. The liens attached to the private interest in the ground lease owned by Earthmark. The Court rejected the argument that this provision for “improvements to real property” is not contingent upon a project being “contracted for and awarded by a public entity.”
The Exception is Narrowed
All legal jargon aside, the decision is rather simple. The exception found in the New Jersey Mechanics Lien Statute was limited in this case to public entities. Interests and agreements tangentially related to public entities do not fall under this exception. This decision is a great win for contractors because, if the Court decided the other way, this exception could have caused many valid mechanics liens be discharged. That would leave many contractors with little-to-no recourse when dealing with nonpayment. Now, construction parties such as Earthmark cannot hide behind a public exemption. The legal power of mechanics liens are preserved.