Construction Liens – What is a Lien Fund?

Although many contractors have never heard of the expression “lien fund” having an understanding as to what this phrase means is crucially important in the context of seeking payment pursuant to a construction lien. In general terms, a lien claimant is only entitled to payment from the project owner if there are available funds in the lien fund with which to pay them. As discussed below, the determination of a lien fund depends upon the work completed, as well as the payments issued which relate to said work.

Under New Jersey Construction Lien Law, the lien fund is the total amount of the contract price less any payments made. N.J.S.A. § 2A:44-10. For example, if a contractor has performed, however, the owner has failed to pay him, then in that event, the entire contract price is the limit of the lien fund. On the other hand, if the owner has paid the contractor a portion of the contract price for work that was completed, the owner’s property is protected to the extent of such payments.

The purpose of the New Jersey Construction Lien Law is to strike a balance between the interests of owners, subcontractors and suppliers by securing payment from monies owed by an owner to a contractor. This point is dispositive, as it allows a lien claim only to the extent that the owner is indebted to the contractor for materials or services that were provided, and further, provides the owner with the right to use that money to pay the unpaid subcontractors and suppliers directly. Therefore, in any case in which no money is owed by an owner to a contractor for materials or services that were provided, no lien fund exists. When a contractor walks off a job at a point at which he has been paid to date and is owed no money by the owner, there is no lien fund which could be subject to a lien claim by a lower tier contractor or supplier.

It is crucially important that a subcontractor or supplier understand the lien fund concept, as it directly controls whether a potential lien would reap any benefit. As such, this is an issue which must be carefully considered prior to filing a construction lien, and it is suggested that a subcontractor or supplier consult with competent counsel about this issue prior to incurring the expense of filing a lien claim.