Value of Salvaged Materials Increased Contract Amount

Project Contract Amount Increased, Based on the Value of Salvaged Materials

Can the resale value of salvaged materials from a demolition site be included in the total contract amount and subsequently be lienable? According to one legal decision, yes.

New Jersey Construction Liens & Salvaged Material

New Jersey is an unpaid balance lien state, which means the construction lien is generally limited to the unpaid portion of the general contract. Here’s a statute snippet:

N.J. 2A :44A-9 Amount of lien claim.

a. The amount of a lien claim shall not exceed the unpaid portion of the contract price of the claimant’s contract for the work, services, material or equipment provided.

And the lien fund shall not exceed:

(1) in the case of a first tier lien claimant or second tier lien claimant, the earned amount of the contract between the owner and the contractor minus any payments made prior to service of a copy of the lien claim;

For example, if the general contract is for $100,000 and the owner has paid the general contractor $25,000, the lienable balance is $75,000. Or, if the general contract is for $100,000 and the owner has paid the GC in full, there are no lienable funds.

But, what happens to potential lien claimants when the terms of the contract include the general contractor paying the owner for the opportunity to demolish a generating station? The GC paid the owner (I know, it seems a little backwards; generally it’s the owner paying the GC). Do lienable funds exist? If lienable funds exist, where do they come from?

In Salvaged Materials to Pay Lien Claimants, author Patrick Johnson reviewed a New Jersey Appellate Court case, where the general contractor agreed to pay the owner $250,000 to demolish a generating station and, in return, the general contractor would have rights to the salvaged materials, which it could resell for a profit.

The general contractor hired a subcontractor & the subcontractor hired two sub-subcontractors. Unfortunately, the subcontractor failed to pay two of its sub-subcontractors and the sub-subcontractors filed liens for over $300,000 each.

The owner didn’t exactly “owe” the general contractor any money… which means, no lienable funds, right?

Enter the Value of Salvaged Material

The owner & general contractor argued the contract had been paid in full, leaving no lienable funds. Although, there was an allegedly unapproved change order for $52,000 outstanding.

Of course, the subcontractor argued the outstanding change order for $52,000 counted as lienable funds and should be used to satisfy the two $300,000+ liens filed by the sub-subcontractors.

Then, the sub-subcontractors argued the value of the material removed from the site should be considered as part of the overall contract.

What is the value of that removed material?

Apparently, the subcontractor removed material valued at over $2,000,000 from the demolition site. And, according to Johnson, the court held that the removal of this material increased the value of the property, thus becoming a part of the contract.

“The appellate court resolved the issue in the subcontractor’s favor holding that the salvage value did make up part of the contract price.  The transfer of title by NRG constituted a prepayment to Werner and was thus excluded from reducing the lien fund.  Instead of transferring title to the salvaged material upfront, the Court reasoned that NRG could have transferred title to Werner incrementally as the project progressed.  The court found the legislative intent was to prevent an owner from enjoying the benefit of labor and materials without paying for them.  The Court held the salvaged materials increased the value of the property and, therefore, they were an essential component of the “payment” under the NRG-Werner contract, even though it was non-monetary consideration.

Essentially, the original contract amount of $250,000 + the value of the removed materials of $2,000,000 = the lienable funds.

What This Means for Contractors Involved in Site Demos

Johnson recommends “all parties involved in a demolition project should use caution when structuring payment terms under a contract to take into account non-monetary consideration that could be constructed to be part of the lien fund.”

Keep this in mind as we enter the unfortunate tropical storm season and demolition work becomes more prevalent.

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