Real estate law in New Jersey requires attention to a variety of substantive skills and practice areas. In virtually every deal, there are tax issues, corporate issues, government issues, environmental issues, and labour and employment issues (among others), so the attorney must guide the client and understand the business issues within the framework of the legal issues.

Trends and deals occurring in New Jersey cannot be shared at this time.

The most important reform proposal is New Jersey Assembly Concurrent Resolution 89, which proposes a temporary constitutional amendment allowing a state constitutional convention convened to reform the system of property taxation, to propose statutory changes.

Fee Simple Absolute

Fee simple absolute is the greatest interest in real estate in New Jersey, granting the owner the full and exclusive right to use, possess, sell, hypothecate and even damage the property. The transfer of real property in New Jersey is deemed to be the transfer of an absolute fee simple estate, subject to the terms of the conveyance instrument. See N.J.S.A. 46:3-13. New Jersey does recognise variations on fee simple ownership, including fee simple defeasible estates and fee simple estate subject to a condition subsequent.

Tenancy in Common

In New Jersey, tenancy in common is the most frequent form of ownership structure where there are multiple parties that will co-own real estate. Except in the case of spouses or express language in the deed, real property transfers in New Jersey to two or more grantees will create a tenancy in common in equal percentages and undivided (interests are all shared). See N.J.S.A. 46:3-17. Since there is no right of survivorship, upon the death of a tenant in common, the deceased party’s interests transfer pursuant to intestate statutes or the provisions of a written agreement.

Joint Tenancy With the Right of Survivorship

Joint tenancy is a form of co-ownership that is viewed less favourably in New Jersey than tenancy in common, and is primarily known for having a “right of survivorship” which does not occur with a tenancy in common. The rights of a deceased joint tenant automatically transfer to the surviving joint tenants. Pursuant to N.J.S.A. 46:3-17, co-owners must have express language to create a joint tenancy.

Tenancy by the Entirety

A tenancy by the entirety is a form of joint property ownership available only to spouses. Transfer of real estate to a husband and wife creates a tenancy by the entirety unless the deed provides otherwise. See N.J.S.A. 3B:9-1. Real property is not typically held in this manner.

Life Estate

A life estate in New Jersey will convey an interest in real property granting the right to possess the property to a “life tenant” until the death of a named person. Upon death of the named person, the property automatically transfers to a designated remaindermen.

Leasehold Estate

In addition to the above, New Jersey also recognises non-freehold estates such as the leasehold estate, which involves possession but not ownership.

The main statute governing transfer of title is Title 46 of the 2022 New Jersey Revised Statutes; NJSA 46. For any property that has multiple dwellings (including hotels and motels), the New Jersey Hotel and Multiple Dwelling Law (N.J.S.A. 55:13A-1 et seq) may also apply. Properties that have been used as “industrial facilities” as defined by the Industrial Site Recovery Act (ISRA) will also be subject to compliance with ISRA (N.J.S.A. 13:1K and N.J.A.C. 7:26B). In addition, there are over 500 municipalities in New Jersey, virtually every one of which has its own ordinance with respect to transfers of property.

ISRA

ISRA is a unique New Jersey statute that requires that owners of certain facilities investigate and remediate property prior to or in connection with property transfers, business sales or when a business ceases operations. Whether or not a business is subject to ISRA is based on its North American Industry Classification System (NAICS) classification, and the use or presence of hazardous substances in its operations. If the property is ISRA-subject, appropriate provisions must be inserted in the purchase contract to ensure compliance and protection of the parties. The actions of the Licensed Site Remediation Professional (LSRP) are tightly regulated by the state to ensure compliance with the state’s laws by a non-state entity. ISRA is a complex and detailed statute, and its provisions cannot be adequately summarised in this format.

“Green Cards”

The Bureau of Housing Inspection administers the New Jersey Hotel and Multiple Dwelling Law, which requires that multi-family properties, hotels and motels maintain valid Green Cards that are issued after property is registered, inspections and re-inspections have been conducted, all violations are corrected and all fees are paid.

Bulk Sales

New Jersey has a bulk sales law that imposes on purchasers an obligation to notify the New Jersey Department of Treasury, Division of Taxation (the “Division”) of any transaction involving the transfer of business assets outside the ordinary course of business of the owners. The purpose is to identify and capture the taxes owed by the owner before sales proceeds are distributed from the closing of the transaction. Failure to comply with the bulk sales law in a timely manner could result in a bulk sales violation.

Certificates of Occupancy

As noted, there are over 500 municipalities in New Jersey, many of which require the issuance of a certificate of occupancy upon a conveyance, commonly referred to as a “CO”. The property owner usually must complete the application for inspection and issuance of the CO along with payment of a fee.

In New Jersey, lawful and proper transfer of title to real estate is effectuated by execution, delivery and recordation of a proper deed with the county clerk for the county in which the subject property is located, along with the payment of the applicable taxes and fees in order to obtain the benefits of recording. The deed must be signed, acknowledged and contain an adequate description of the property.

Flood Hazard Disclosure

As to any transactions of real estate in New Jersey after 20 March 2024, the Flood Hazard Disclosure Law shall apply, and names certain required disclosures that must be made before a purchaser is obliged under a contract for the purchase of real estate, including a disclosure as to whether the property is located in the Federal Emergency Management Agency (FEMA) Special or Moderate Risk Flood Hazard Area.

The due diligence process is complicated, and the level of scrutiny would depend on the facts. Typically, real estate due diligence involves the review and inspection of the following by the purchaser and/or its attorneys of materials that would include:

• title reports;
• surveys;
• rent calculations for compliance with rent regulations;
• leases and tenant estoppel certificates;
• service contracts;
• warranties;
• property condition reports;
• zoning;
• environmental reports; and
• certificates of occupancy.

Sophisticated clients typically handle some of the above diligence activities on their own – specifically, review of rent rolls and rent calculations, operating statements, and service contracts on the property.

It is worth noting that the diligence process in New Jersey is not dissimilar from the process in other jurisdictions; however, the environmental diligence is more nuanced as a result of New Jersey’s environmental laws. In this context, it is typical and often advisable for a seller of real estate to impose strict access requirements, especially in reference to LSRPs.

In New Jersey, purchase and sale agreements have representations and warranties of both purchaser and seller, which are often carefully negotiated. The most common are:

• organisation and formation of the seller along with full right, authority and capacity to execute the agreement and to perform its obligations under the purchase and sale contract;
• no pending or threatened lawsuits against the seller or otherwise affecting the property;
• the seller’s resident or non-resident status;
• no pending or threatened eminent domain or condemnation proceedings against the property;
• no third parties have any options to purchase the property or other possessory rights that may frustrate the sale;
• no known environmental defects with the real property or any actions being taken by any agency with respect to the environmental condition of the real property;
• the existence of all licences, permits and certificates necessary for legal use or occupancy of the real property; and
• no pending or threatened changes in the zoning classification of the property.

Foreign investors must register with the New Jersey Department of Treasury as a foreign entity authorised to do business in the State of New Jersey.

Foreign investors that are non-US entities or persons should pay attention to the usual issues on a federal level, such as:

• international tax considerations;
• collateral regulatory burdens; and
• the Committee on Foreign Investment in the United States (CFIUS) review.

No additional regulations for non-US purchasers are imposed by the State of New Jersey.

New Jersey is known for having some of the strictest environmental statutes in the United States. Typically, the purchase and sale agreement will allocate responsibility for any conditions on the property that were caused during each party’s respective period of ownership and indemnifying the other during such period.

In New Jersey, zoning matters are governed by state law and by municipal ordinances, so the rules vary by municipality and location. Municipal ordinances typically do not apply to property owned by a greater governmental authority, such as a county or state agency or by the federal government’s agencies. A buyer may have legal counsel perform a zoning analysis of the property during due diligence. Municipalities will typically provide a zoning letter that certifies that a property is compliant with current zoning and/or may be used as intended by a purchaser of the property. Owners who wish to change the zoning of a property may seek to change the municipality’s zoning ordinances, or they may obtain variances or other approvals and permits from local municipalities.

While it is typically only a remote risk, governmental taking through eminent domain or condemnation is possible in New Jersey where such power has been delegated to various agencies, public bodies and public utilities. New Jersey’s exercise of condemnation rights is most typically seen with respect to widening roads and highways and otherwise in connection with utilities. As a general matter, the condemnation process is as follows:

• there must be an attempt to resolve the acquisition outside litigation through bona fide negotiations with the property owner (which includes an offer in writing by the condemnor);
• provided that such attempt does not result in an agreement, there must be a final disposition by judgment of the authority and due exercise of the power of eminent domain by the condemnor;
• there must be a non-binding arbitration of the issue of just compensation by commissioners appointed by the court; and
• there is a trial of the issue of just compensation.

New Jersey does not have any mortgage recording taxes. However, New Jersey does have a realty transfer fee (RTF), a controlling interest transfer tax (CITT) and a supplemental fee to the RTF pursuant to N.J.S.A. 46:15-7.2, known simply as the “mansion tax”. The mansion tax, paid by the purchaser, is 1% of the consideration where that consideration exceeds USD1 million, and applies to all deeds where the property conveyed is classified as any of:

• Class 2 residential;
• Class 3A where the property is a farm (but only if the farmland contains a building or structure intended or suited for residential use);
• Class 4A commercial (other than industrial or apartment); and/or
• Class 4C co-operative units.

New Jersey recognises certain exemptions from the supplemental fee.

The RTF is typically paid by the seller; see 8. Tax.

Foreign investors are required to register with the New Jersey Department of Treasury as a foreign entity authorised to do business in New Jersey.

Acquisitions of commercial property are typically financed by mortgage loans, mezzanine loans and investments of preferred equity.

Mortgages

New Jersey is a lien theory state and, therefore, regardless of the language of the mortgage, title to real property does not vest in the mortgagee but remains with the borrower. The mortgage must be acknowledged and is recorded in the county wherein the property is located.

Mezzanine Loans

A mezzanine loan may be made to upstream entities secured by a pledge by the borrower’s principals of their ownership interests in the borrower.

Investments

The borrower may seek additional capital by accepting an investor from a “preferred equity” source, usually a privately held fund established for such purposes.

The security provided to a mortgage lender typically consists of a first-priority mortgage loan and an assignment of leases and rents. In certain circumstances, a first-priority lender may allow secondary financing (ie, a second subordinate mortgage). Priority of a mortgage is based on its recording date and, although it is not required, some lenders elect to file UCC-1 financing statements in the state where the borrower was formed to secure its lien on other non-real estate assets.

A mezzanine lender’s lien is secured by a pledge of ownership interests in the property owner, and such security interest can be perfected both by the filing of a UCC-1 financing statement in the state where the pledging principal of the borrower resides and, if the lender requires the borrower to “opt-in” to Article 8 of the UCC, by delivery of actual ownership certificates.

See 2.6 Important Areas of Law for Investors.

There are no specific New Jersey laws relative to this issue other than general corporate laws that require all entities that earn money from businesses located in New Jersey to be authorised to do business in New Jersey. Earning money from a borrower located in New Jersey sufficiently constitutes doing business in New Jersey such that authorisation (to do business in the state) is required. If authorisation is required and not obtained, the lender may be barred from bringing claims before the courts in New Jersey until such time as all required state taxes have been paid.

New Jersey does not currently have a mortgage tax. If a lender forecloses on its mortgage, and accepts a deed in lieu of foreclosure and seeks to have the mortgage survive the conveyance, the RTF will be applied on the outstanding balance of the mortgage loan. In addition, the “mansion tax” will be imposed on the transaction (certain classified properties) if the outstanding balance of the mortgage exceeds USD1 million.

If the lender elects to discharge its mortgage prior to or simultaneously with the deed in lieu of a transaction, no RTF or mansion tax will be imposed.

Generally, no New Jersey laws or requirements necessitate compliance by an entity providing security to a lender. Lenders and title insurance companies will review a borrower’s organisational documents to confirm that all approvals and consents from the borrower’s owners and/or officers required thereunder have been obtained.

With respect to commercial transactions only, debtor protections, if any, would appear in the loan documents. These might include notice and an opportunity to cure a default before it becomes actionable by the lender. With respect to residential foreclosures, laws enacted during the 2008 recession require mortgage lenders to take many time-consuming steps before they can foreclose a mortgage loan.

As a practical matter, New Jersey permits only judicial foreclosures, which are lengthy proceedings; even with respect to a non-contested commercial loan default, judicial foreclosure typically requires not less than nine months to one year to conclude. This time frame may enable a borrower to attempt to seek alternative financing or an amicable resolution of the dispute between it and the lender.

Once a lender elects to commence an enforcement action, there is nothing it needs to do to perfect, create or enhance the priority of its mortgage. New Jersey is a race-notice state and, therefore, once a mortgage is recorded, its priority is established. Within the foreclosure process, there are steps a lender needs to take to maintain the priority of its mortgage, such as conducting a rundown title search to make sure its foreclosure complaint lists all junior lienors.

The interests of those junior lienors will need to be extinguished through the foreclosure process. Counsel for the foreclosing lender will also file a lis pendens in the county where the property is located to ensure that any new lienors cannot interfere with the foreclosure and will be bound by its outcome, even if not a party thereto. Real estate taxes, municipal water and sewer charges, and certain environmental liens will always have priority over a mortgage, regardless of when such charges are imposed.

A lender entitled to priority on its mortgage may agree to subordinate its priority to a subsequent mortgage lender’s mortgage through a subordination or postponement agreement.

New Jersey recognises the doctrine of equitable subordination. Under this doctrine, a mortgagee who negligently accepts a mortgage without knowledge of intervening encumbrances will subrogate to a first mortgage with priority over the intervening encumbrances to the extent that the proceeds of the new mortgage are used to satisfy the old mortgage. This provides the new lender with the same priority as the old lender. Please note that if the new lender has actual knowledge of the prior encumbrances, it is not entitled to the priority described.

Lenders in New Jersey may be exposed to environmental liability for hazardous substances affecting their collateral under federal and state laws. However, New Jersey has created “safe harbours” for lenders which, in general, shields lenders if they act properly under the law.

New Jersey law provides that, if a lender does not participate in the management of a facility, it is not deemed an owner and, therefore, not the discharger of hazardous substances. A lender is not deemed to be involved in management if it responds to an environmental issue and remediates it or directs its borrower to do so, nor is it required to perform an environmental inspection prior to making a loan to avail itself of this safe harbour. In addition, taking title to the property after a foreclosure sale with the intention of selling it in order to realise on the collateral falls within the safe harbour.       

If the borrower becomes insolvent and is the debtor in a bankruptcy proceeding, any previously commenced enforcement actions will be subject to the automatic stay of the Bankruptcy Code. However, provided that the mortgage was properly recorded and there are no defects in the mortgage itself, the priority of the lender’s mortgage will remain intact. Throughout the pendency of the foreclosure action, the property will typically be operated by a receiver, if requested by the lender.

Until ten days after the actual sheriff’s sale of a property ordered to be sold pursuant to a judgment of foreclosure, the borrower retains its equity of redemption and can regain control of the property by paying off the balance of the mortgage loan, together with all costs, attorneys’ fees and interest as calculated in accordance with applicable law. 

New Jersey does not currently have any existing, pending or proposed rules, regulations or requirements regarding recording taxes in connection with mortgage loans or mezzanine loans related to real estate.

New Jersey has adopted the Municipal Land Use Law, which imposes certain uniform requirements on municipalities with respect to land development. However, New Jersey is a home rule state and, accordingly, controls with respect to design and appearance are primarily local in nature and vary by municipality. Other governmental authorities with jurisdiction over the affected site may impose such obligations (see 4.3 Regulatory Authorities).

The method of construction is not customarily different than the Uniform Construction Code, which has been adopted with modifications by New Jersey, though each municipality applies the requisite inspection and approval obligations in its own procedural manner. Unique design and/or construction requirements are routinely imposed with respect to (among other aspects) waterfront properties, properties within flood zones, and properties in or bordering on wetland areas. In addition, municipalities often have a historic preservation committee which opines on, and may have approval authority over, development applications.

Generally, municipalities are responsible for regulating the use of real property within their jurisdiction. Counties and other governmental authorities may also regulate development and use of property within their jurisdiction through (for example) various county planning boards and the State Planning Board. All such governmental authorities have the right to designate what uses may be made of real property within designated zones, and they may grant relief from such requirements in appropriate cases (through variances or rezoning).

In addition, depending on the nature and location of the proposed development, other agencies may have input into development and, in some instances, the authority to grant or deny the application or impose conditions at the granting of the application, such as:

• the New Jersey Department of Environmental Protection;
• the New Jersey Sports and Exhibition Authority;
• the Port Authority of New York and New Jersey;
• the New Jersey Department of Transportation;
• the Pinelands Commission;
• the Skylands Commission;
• various watershed management agencies;
• sewerage authorities;
• affordable housing agencies;
• storm-water management agencies; and
• the county in which the property is located.

The nature of the requisite approvals varies depending on where the property is located and the magnitude of the proposed development. As a general guideline (addressing municipal approvals only), a municipality will require submission of a site plan application to approve a development that is permitted in the applicable zone. Demolition and construction applications will typically be required where an existing structure is not being retained. If the use is not one that is approved in the zone, or if the structures are non-compliant with the zoning requirements, a property owner would submit a variance application (or a site plan and variance application) to the applicable municipal zoning agency.

Notice of the application must be provided to real property owners within 200 feet of the proposed development, and all members of the public, as well as anyone purporting to be affected by the proposed development, may appear and object at the hearing. Objectors also have the right to present evidence and expert testimony. The variance process may take as little as three to six months for a simple application or as long as 12 to 24 months for major variance applications.

Applications involving multiple agencies, particularly those located in sensitive ecological areas, may take up to several years.

An applicant or other person aggrieved by a municipal zoning decision has the right to file an appeal within 45 days of publication of the decision of the municipality in a newspaper of record (whether physical or digital). The Superior Court will then schedule a trial, and a single judge will determine whether, on the record created before the municipal agency, the zoning decision should be affirmed or reversed. Municipal zoning decisions are given great weight and are upheld unless they are determined to be “arbitrary, capricious or unreasonable”.  The trial court’s decision is subject to appeal to the Appellate Division, which typically consists of a three-judge panel.

In the case of denial of a variance or application for development, the municipality would obviously not issue any permits pending the appeal; in the case of the grant of an application for a variance or development, a municipality may issue such permits pending appeal, typically upon the posting of a bond by the applicant to ensure that, in the event the appeal results in a reversal of the grant of the variance or zoning application, the site can be restored. Many municipalities will not issue such permits during an appeal by objectors.

Agreements between developers and municipalities are properly available only in limited circumstances. In the ordinary course, a developer would have to proceed through a request for rezoning or an application for site plan approval (with or without variances) to obtain municipal approvals. However, it is not uncommon for such approvals to be “conditioned”, with the developer’s agreement, upon the developer addressing appropriate land use issues caused or exacerbated by the proposed development (for example, traffic flow, public safety).

Further, in the case of applications not requiring a use variance, it is typical for the municipality’s professionals to meet with the developer’s professionals to attempt to reach agreement as to any of the issues presented on the application. In certain other contexts, primarily with respect to blighted or distressed areas, Redevelopment Agreements and PILOT (Payments In Lieu of Taxes) Agreements are commonly used in New Jersey, but their use is not applicable to all properties. For a Redevelopment Agreement, the municipality must first designate the property at issue as an area in need of redevelopment (pursuant to state statutory criteria).

A Redevelopment Agreement can be negotiated, executed and approved by the municipality’s governing body (though it is common for such details to be agreed upon prior to the designation of a site for redevelopment). PILOT programmes similarly incentivise developers to restore distressed or blighted areas, and PILOT agreements are often executed in conjunction with a Redevelopment Agreement.

Municipalities typically employ code enforcement officials who respond to complaints, monitor ongoing construction, and conduct routine town inspections to ensure that unauthorised and/or unlawful developments are identified, and that appropriate municipal or court action is taken. State and county agencies also employ engineers and inspectors to oversee construction and development within their jurisdictions. In the case of construction (as distinct from unlawful use), a “stop work” order is usually issued by a code enforcement officer with a violation of such order resulting in fines, which can be significant.

In the case of an unlawful use, a notice of violation would be served on the property owner; again, violations of the permitted uses of a given property would typically result in fines. Each day of non-compliance with the applicable uses in a zone, or with construction that is not permitted, constitutes a separate violation. In addition, municipalities will typically not issue permits until it has first been ascertained that the construction has been authorised and that the use is a permitted one.

New Jersey recognises various business entities that are available to owners of real estate, including limited liability companies, corporations and partnerships. The most common entity is the limited liability company, which affords the most flexibility and pass-through taxation, as well as fewer formalities than corporations.

Corporation

A corporation in New Jersey, as elsewhere, provides a separation between the shareholders, directors and officers. The shareholders are the owners of the corporation, and they elect the board of directors. The directors manage the business trajectory and activities of the corporation. The directors appoint officers who manage the day-to-day business and affairs. The main benefit of a corporation is that shareholders have no personal liability for the corporation except for certain specific express instances.

Limited Liability Company

A New Jersey limited liability company (LLC) has many of the same benefits of a corporation, but is preferred for its flexibility of management while affording liability protection to its members. In addition, unlike corporations, LLCs are not taxed on the entity level; rather, tax liability passes through to each of the members individually.

Partnerships

Partnerships have become far less common in recent years, especially with the increased popularity and ease of LLCs. Partnerships in New Jersey are more likely to be limited partnerships that combine a limited partner and a general partner. The limited partner is insulated from unlimited liability, but does not participate in the management or operation of the business.

REITs are available in New Jersey and can be either public or private.

There are no minimum capital requirements in New Jersey.

In all instances, annual reports must be filed with the State of New Jersey Division of Revenue and Enterprise Services.

Many property owners have internal accounting groups or hire outside accounting firms to handle real estate investment entities. At minimum, annual reports will be required for filing for all New Jersey corporations, LLCs, non-profits, limited partnerships and limited liability partnerships. The process is relatively easy and can be completed online along with payment of applicable filing fees.

While New Jersey does recognise licences and occupancy agreements, the most prevalent form of arrangement for the use of real estate is a lease. A licence (or occupancy agreement) will not result in the grant of an interest in property for the licensee/occupant, but will rather confer a lesser right for limited use that is often terminable and revocable at the will of the property owner.

The lease creates a possessory interest in property and affords the tenant greater rights, including exclusivity and assignability (as permitted by the landlord) and is not generally terminable prior to the expiry of the lease term, in the absence of a default by the tenant or other narrowly construed circumstances.

Commercial Leases

Commercial leases in New Jersey can be net leases or gross leases. In a gross lease, the landlord typically provides certain building services to tenants and charges back to said tenants a fractional share of the costs (sometimes above a base year and at other times at the amounts then-expended). In this scenario, the tenant will typically pay rent to the landlord that comprises two parts:

• a base rent payment that is fixed but may increase annually; and
• additional rent payments, which would include operating expenses for the property such as real estate taxes, insurance, maintenance and utilities (which are often those incurred by the landlord above a set base year).

Typically, gross leases are seen in shopping centres, office buildings and other properties where there are multiple tenants in a single building.

Conversely, with a net lease, the tenant pays a base rent payment to the landlord and separately contracts for and/or pays other costs and expenses of the property directly to the service provider or other proper payee. In a triple-net lease, for instance, the tenant would pay a fixed rent to the landlord monthly and separately pay all costs and expenses of the real property such as real estate taxes, insurance, maintenance and utilities.

Modified net leases may place certain burdens on the landlord to maintain the roof and structure regardless of whether a tenant leases the entire property.

Ground Leases

Ground leases are another type of lease in New Jersey. Typically, the landlord leases only the land to the tenant for a term of 20 or more years and maintains a reversionary interest where, upon expiry of the lease, the land and all improvements (whether installed by the tenant or the landlord) will revert to and be owned by the landlord at the expiry of the term. During the term of the ground lease, the tenant will be responsible for constructing improvements and maintaining the property.

New Jersey does not regulate commercial rents.

Leases typically range from five years to 15 years and will often afford the tenant at least one option to renew. The terms vary based on each deal; however, the rent during the renewal term is often based on:

• a fixed percentage increase over the rent previously in effect;
• the then-fair market value of the premises; or
• consumer price index adjustments.

In addition, it may be the greater of one of the foregoing determinations (ie, the greater of the fixed rent increases and fair market value). Ground leases have much longer terms, typically 25 years or more, and landlords and tenants generally file a Memorandum of Lease on the public records.

For space leases, the tenant has all repair and maintenance obligations within the premises; the landlord is generally responsible for maintaining the structural components of the building, the roof, common areas and the building systems (unless repairs are a result of the tenant’s careless acts or omissions). Typically, leases provide that, if the tenant fails to make its required repairs in a timely manner and following notice and opportunity to cure, the landlord has the right to make such repairs and then charge back the incurred costs to the tenant. In a ground lease, it is common for the tenant to be solely responsible for all maintenance, repairs and replacements.

Rent is typically paid monthly, although ground lease payments may also be made quarterly or annually.

Typically, base rent will increase at certain trigger points that are negotiated as part of the economics of the lease deal (such increase could be every three years, five years or another interval). The amount of the increase varies but is usually a predetermined percentage. Escalation charges are usually computed annually, with estimated payments until actual expenses are known and reconciled. In a retail context, the tenant will often be required to pay the landlord a “percentage rent” on the tenant’s gross sales receipts with a computation commonly done on an annual basis and with payments to be made on an estimated basis until actual sales figures are available.

The amount of the increase is usually known at the time of lease execution and is determined by either a fixed dollar amount, a figure based on cost per square foot, or another fair market valuation calculation or formulation such as the Consumer Price Index.

No VAT is payable in New Jersey.

Other than rent payments, diligence costs, legal fees and costs associated with posting a security deposit, the tenant may incur costs associated with obtaining permits for its intended use and any construction or fit-out costs associated with constructing or remodelling the premises. Typically, with a gross lease, the landlord will provide the tenant with a broom-swept empty space in a stated condition and provide a monetary sum to be used as a “construction allowance” for the tenant’s fit-out. The tenant factors this allowance in its economics and is responsible for any costs exceeding the allowance.

In this jurisdiction, the landlord is generally responsible for all maintenance and repair of common areas such as hallways, lobbies, elevators, parking lots and gardens. Leases will specify the services that will be provided by the landlord and will often include seasonal services such as landscaping and snow removal. The costs are passed to tenants as either operating expenses or common area maintenance, and each tenant pays its pro rata share based on the percentage set forth in the lease (which may be over a base expense year as well).

Often, these costs are estimated at the start of the year and billed monthly to tenants, but are reconciled when actual costs and expenses are determined. In a ground lease, the tenant is commonly responsible for all maintenance and repair costs.

The method of payment for telecommunications and utilities will vary based on the property. For electricity, the cost to the tenant is usually determined by a direct meter or a submeter. The landlord may also reserve the right to charge a flat rate to the tenant based on a per square foot cost (with an opportunity to increase costs to the extent that the landlord’s costs are increased). Charges for water, gas, heating, ventilation and air conditioning (HVAC) will also depend on each property.

Most commonly, tenants are all served by a single universal HVAC system during business hours (with the expenses to be built into the base rent and escalations) and are typically subject to additional charges for after-hours HVAC service. In some buildings, the HVAC system is designed so that each tenant has its own, with such expenses being charged to the respective tenant. Additionally, tenants may have their own supplemental air conditioning and cooling systems for data and telecommunications rooms, or to provide after-hours service, the expense of which is borne by each tenant.

Payment of real estate taxes in commercial leases in New Jersey is generally determined by whether the lease is a net lease or gross lease.

In a gross lease, the landlord typically builds the base year taxes into the base rent and then charges tenants a fractional share of increases in real estate taxes above the base year (though some landlords may pass through the tenant’s fractional share of real estate taxes without regard for a base year).

In a net lease, the tenant would generally pay 100% of real estate taxes without regard to a base year, often directly to the taxing authority, in which event the tenant would then provide proof of payment to the landlord. The tenant will pay 100% of taxes on their personal property, and may pay any increases directly attributable to any improvements the tenant makes to real property. 

In New Jersey, the landlord and tenant each maintain their own insurance. Typically, the landlord will impose an obligation on tenants to maintain specific forms of coverage and to include the landlord as an additional insured. Such insurance will usually include general commercial liability, property insurance for the tenant’s improvements and personal property, and business interruption insurance, all in certain amounts and limits that will vary depending on the premises and the use. Landlords generally require that a waiver of subrogation be provided for the landlord’s benefit. Often, landlords will maintain insurance to cover the common areas, structures and roof as well as general commercial liability and personal injury, with such costs to be included in the operating expenses payable by tenants.

Restrictions on use are governed by local law as well as historic encumbrances.  Landlords generally require tenants to obtain any local approvals for a specified use (unless already covered by a certificate of occupancy). In addition, tenants are required to comply with existing and future land encumbrances.

Tenants must typically request the landlord’s prior written consent as to any alterations or changes to be made within its leased premises. This is especially important for a landlord in terms of any potential tenant alterations that could reach beyond the tenant’s own premises (ie, affect the structural portions of the building, the building systems, or affect ingress and egress). Often, the lease will provide that a tenant may make alterations without the landlord’s consent, provided that such alterations:

• are cosmetic in nature;
• do not exceed a dollar threshold;
• do not require a building permit; and/or
• do not affect the structure, the roof, the building systems, or ingress to or egress from the building.

All tenants in New Jersey are entitled to the right of quiet enjoyment. Residential tenants are given greater rights relating to a warranty of habitability.

In addition, case law in New Jersey imposes an obligation on landlords to mitigate damages in the event of a tenant default. This applies in commercial and residential contexts. Accordingly, in the event of a tenant default where the lease is terminated, the landlord must use commercially reasonable efforts to relet the premises.

The tenant’s insolvency in a lease context is governed by applicable bankruptcy, insolvency and creditor’s rights statutes. When the tenant files for bankruptcy under federal bankruptcy law, an “automatic stay” is imposed that initially restricts the enforcement of remedies or the termination of the lease by the landlord, in the absence of relief from the bankruptcy courts.

Thereafter, there are specific requirements under bankruptcy law with respect to whether a lease – which is a contractual agreement – is to be assumed or rejected, and which establish methods for calculation and recovery of rents unpaid as of the date of the bankruptcy filing. The lease is an executory contract, and bankruptcy law may impose rules and obligations on how this must be treated.

Typically, landlords require a security deposit at the outset of the lease in the form of either cash security or a letter of credit or guaranty from a well-capitalised parent entity. A letter of credit is generally considered more desirable to a landlord than a cash security deposit as such forms of security deposit may place the landlord in a better position in the event of the tenant’s bankruptcy (as a letter of credit is not part of a tenant’s bankruptcy estate). When holding cash, a landlord generally does not segregate the security deposit, and as such any cash held by the landlord would become part of a landlord’s bankruptcy estate. The amount of the security deposit is negotiated but is often based on monthly rent or a multiple thereof.

Assignment and subletting are extremely sensitive issues that are commonly negotiated in the written lease. Where a lease is silent, the tenant does have a right to assign its leasehold interest in the lease and/or sublet all or a portion of the premises; however, landlords and tenants usually draft language into the lease to ensure that there is no misunderstanding as to the terms and potential limitations.

In this jurisdiction, both landlord and tenant typically have a right to terminate in the event of a condemnation by a governmental authority and/or a casualty event that either exceeds a dollar amount or requires a stated period for remediation. In addition, landlords reserve the right to terminate a tenant’s lease if that tenant defaults on its lease obligations and fails to cure following notice from the landlord. In a retail lease, tenants often seek the right to terminate the lease if they fail to hit certain revenue milestones; all such rights are often referred to as a “kick out” and may be conditioned on a reimbursement of any unamortised landlord leasing costs such as its build-out expenses and brokerage commissions paid, as well as free rent previously provided.

Recently, early termination clauses have become more prevalent in non-retail leases as well, whereby tenants can terminate a lease prior to expiry by giving notice to the landlord together with payment of a termination fee of a fixed amount, plus reimbursement of any unamortised landlord leasing costs such as its build-out expenses and brokerage commissions paid, as well as free rent previously provided.

Leases in New Jersey are not required to be registered. A memorandum of lease may be recorded in the land records of the county in which the leased premises are located upon payment of nominal filing fees and costs, provided that generally a memorandum of lease would only be recorded in the event of a ground lease.

The Flood Hazard Disclosure Law, which applies to leases in New Jersey after 20 March 2024, requires landlords to make detailed flood risk disclosures when renting property to tenants. See 2.3 Effecting Lawful and Proper Transfer of Title.

In New Jersey, a landlord may terminate a lease and force the tenant to vacate its premises in the event of a default under the lease, such as failure to pay rent. Self-help is generally not permitted; the eviction process is pursued in court. The timing of the process varies, but in a non-payment of rent case the process should be expected to take no less than three months from notice to judgment.

After judgment of eviction is obtained, a sheriff is required to enforce the judgment and evict the tenant. The sheriff’s eviction may be complicated by the tenant’s inventory or machinery located at the premises. In such cases, the landlord may need to arrange for a contractor to remove the tenant’s property under guidance of the sheriff.

A lease may be terminated by condemnation; a process which is described in 6.19 Right to Terminate a Lease. In the event of a condemnation, the award is given to the property owner, though tenants are often permitted to make separate claims for moving expenses and, in the case of a ground lease, the value of their leasehold. In addition, a mortgage lender may have rights to foreclose and terminate tenancies.

In the commercial context, a landlord’s damages are typically identified by category in the lease documents. Generally, a landlord is entitled to back rent, to evict a tenant that has breached the terms of the lease and to enforce any guaranties that were provided in connection with the lease. A commercial landlord is required to attempt to mitigate its damages, but is generally entitled to eviction, back rent, damages to property, attorneys fees and costs, and loss of future rents (although the landlord must attempt to relet the premises in a commercially reasonable manner and is entitled to recover costs of reletting from the breaching tenant).

In the residential context, a scheme of state laws and regulations governs this area of law, and these should be specifically reviewed for a detailed understanding. In New Jersey, eviction of a tenant and the money damages actions are separate judicial proceedings. Both residential and commercial landlords have rights as to tenant property left in the leased premises, but the rights differ under statute with commercial landlords not bound by the Abandoned Property Act.

Landlords in New Jersey typically hold a security deposit. The form of security differs, as discussed in 6.16 Effect of the Tenant’s Insolvency. Residential landlords have specific statutory obligations as to (among other things) where and how tenant security deposits must be maintained and when the security deposits must be returned to departing tenants.

Common pricing models for construction projects include the following.

• Fixed price (also sometimes referred to as lump sum or stipulated price).
• Cost plus, either:
1. subject to a guaranteed maximum price; or
2. not subject to a guaranteed maximum price.

Construction engagements are not limited to these approaches, and other project delivery models – such as design-build agreements, construction management agency/multiple-prime, engineer, procurement and construction (EPC) agreements, or integrated project delivery agreements – are also types of construction agreements that may be used depending on the nature, type and location of the project.

The responsibility for design is generally assigned to licensed professional architects and/or engineers. These disciplines may either be separately engaged or engaged under the responsibility of the designated architect, developer, design-builder or EPC contractor. Regardless of the approach, there are also commonly other professional disciplines that will be engaged separately, such as those providing geotechnical or environmental site services to assist in the design and engineering considerations for the intended project, among other things.

For construction, management of the project is often assigned to a construction manager who is either “at risk”, holding all the contracts for subcontractors, or “not at risk”, meaning that the owner holds all the trade contracts for the work, with the construction manager administering those contracts as the owner’s agent. The responsibilities may also be expanded in the context of a design-build contract or EPC approach; further responsibilities of the construction manager often include certain delegated design-assist and/or limited design-build scope responsibilities, notwithstanding the separate engagement of the architect or other professional disciplines.

Owners that elect to use a general contractor may also elect to engage a project manager or other owner’s representative to assist the owner with project oversight and management.

Construction risk in this jurisdiction is often managed by (among other things):

• indemnification;
• warranties;
• limitations of liability;
• delay damage limitations and other waivers of damages;
• provisions relating to insurance;
• bonding and subcontractor default insurance;
• subcontract pass-through provisions;
• contingency (in the case of a guaranteed maximum price contract);
• other economic provisions and controls (such as shared savings or other incentives); and
• liquidated damages.

New Jersey law prohibits an owner or other party from requiring contractual indemnity for damages arising out of bodily injury to persons or damage to property caused by, or resulting from, the sole negligence of the owner or such other proposed indemnitees. 

Parties should, therefore, be mindful to tailor indemnity clauses appropriately so as to not risk having the provision deemed unenforceable. Owners should be mindful to properly review and tailor insurance programmes to minimise potential uninsured exposures and require, by contract, that the contractor’s commercial general liability and excess/umbrella coverage be endorsed to include the owner as an additional insured, assuming the intended primary coverage is provided by the contractor and not an owner’s project policy.

There are continued concerns about supply chain disruptions and pricing volatility and, as a result, contractors and suppliers are qualifying pricing and scheduling commitments more so than has historically been the case. Owners should be mindful of such qualifications and consider appropriate contract contingencies.

Relatedly, consideration should be given to practical remedies versus contractual remedies, since it is not uncommon to have a contractual recourse or remedy that does not, in practical terms, actually resolve the issue at hand (namely allowing for the construction of the project to maintain pace and/or recover from such events).

Depending Builders’ Risk Coverage

Depending builders’ risk coverage, which may be provided by either the owner or contractor, will insure property loss to the work in progress and is typically provided with the insurer’s waiver of claims for subrogation for such insured losses. In such cases, the parties should consider allocation of deductible responsibilities; in particular for insured losses caused in whole or in part by the contractor or subcontractors, such as water damage where deductible exposures tend to be higher.

Subcontractor Default Insurance

Owners should also consider the limitations of subcontractor default insurance, which has been used with greater frequency over the last several years. These policies do not insure the interests of the owner and often include large deductibles and/or self-insured retention. Policy premiums are often paid upfront based on estimated enrolled volume with an accounting true-up at completion. However, the policies typically will not survive a contract termination (other than for contractor insolvency). It is, therefore, important to assess the coverage afforded under a subcontractor default insurance programme and to consider how covered claims are treated under the construction contract.

Contract provisions typically require contractors and subcontractors to adhere to established milestones, with corresponding schedules prepared by the contractor or construction manager. In particular, the contractor’s work should be subject to a “time is of the essence” clause, and construction schedules should identify key interim and completion milestones, as well as critical path activities. It is not uncommon for contracts to include liquidated damages for contractor delay and, often, depending on the nature of the project and timing considerations, they may also include early completion bonuses.

Any such bonuses tend to be based on economic terms and, while not uncommon, they are not an industry standard or norm. Delay events should be subject to prompt and timely notice with an obligation to substantiate impact on the critical path of the work. Owners should consider the extent of weather events that may be assumed within the contractor’s construction schedule, and clearly define force majeure events.

Also to be considered are economic impacts from delays, including potential pricing escalation as a result of such delays. New Jersey law will recognise “no damage for delay” contract limitations (ie, an extension of time being to the exclusive remedy for excused delay) provided that statutes may prohibit such limitations in public works contracts to the extent that the delay is caused by a contracting entity’s bad faith, active interference or tortious conduct.

Furthermore, New Jersey courts have permitted recovery for delay damages, notwithstanding any such contractual limitation, when:

• the delay was of a type not contemplated by the parties;
• the delay amounts to abandonment of the project or contract; or
• the delay was caused by active interference or bad faith of the party seeking enforcement.

It is therefore essential that any such provisions are carefully drafted to reflect the intent of the parties. Relatedly, unpredictability may increase with respect to the treatment of delay claims and such provisions in the continued wake of the COVID-19 pandemic and its ripple effects, now more generally referred to as “supply chain disruptions”; this includes, for example, the recent 27 March 2024 Key Bridge collapse in Baltimore, Maryland, which has resulted in a temporary port shutdown.

Risk allocation, for both schedule and economic impacts, has gained more focus over the last several years, with concerns related to supply chain disruptions and market volatilities continuing to be a point of emphasis. Parties should consider giving careful attention to bid clarifications and contract terms with respect to potential pricing holds and market fluctuation as a result of delays and independent of delays. Owners can receive compensation for delays, including liquidated damages, if provided for in the contract, though these recoveries will not resolve the issue of the project delays. Owners should consider additional monitoring and options, such as providing for clearly developed procurement schedules, early procurement and storage arrangements, and predetermining the availability of alternative supply sources and suitable substitute materials.

A common form of additional security to guarantee a contractor’s performance is a performance bond, which is required for most public projects. In private projects, there may also be completion guarantees provided from parent or related companies, depending on the nature of the transaction and the parties involved.

Subcontractor default insurance programmes are also being implemented to mitigate project performance exposures for contractors. These programmes insure the contractor for losses associated with defaulting subcontractors. Owners should be mindful that such insurance programmes do not include an owner’s ability to pursue insured claims, and that contractual provisions are needed between an owner and contractor/policy holder to make certain that the intended benefits of such insurance programmes are being realised.

Contractors and designers may file liens to encumber property in the event of non-payment pursuant to New Jersey liens law. Under New Jersey law, statutory liens for the prime contractor and subcontractors generally must be filed within 90 days of last providing labour or materials (120 days for residential projects) and the action to enforce the lien claim instituted within one year of the last provision of labour or materials to the project. The owner can remove a lien by posting a bond equal to 110% of the lien or by payment of money into court.

A mortgage lien filed prior to a statutory lien being recorded, or a lien claimant’s properly filed and served Notice of Unpaid Balance, will generally have priority over such liens, though statutory limitations apply and should be considered. In New Jersey, it is important to note that the New Jersey Prompt Payment Act provides that the contractor’s billing shall be deemed approved and certified 20 days after the owner receives it, unless the owner provides, before the end of the 20-day period, a written statement of the amount withheld and the reason for withholding payment.

Generally, a certificate of occupancy must be obtained before a building may be occupied following new construction. There are certain exceptions and rules that will otherwise govern renovations and improvements, not all of which require a certificate of occupancy.

New Jersey imposes a tax on real property transfers (RTF). The Division of Taxation has released tables showing the combined RTF on real property transfers, plus the fee on new construction. For consideration of not more than USD1 million, the RTF is USD6.05 for each USD500 of consideration. The RTF is paid by the seller.

New Jersey also imposes a 1% controlling interest transfer tax applicable to transfers of controlling interests of corporations, partnerships, associations, trusts or other organisations that own certain classified real property in New Jersey. The tax is 1% of the consideration paid for the transfer of the controlling interest in an entity that possesses a controlling interest in commercial properties, if the equalised assessed value of the real property exceeds USD1 million. If the entity possesses commercial and other property, the tax is 1% of that percentage of the equalised assessed value of the commercial property that is equal to the percentage of the ownership interest transferred.

Federal and New Jersey corporate tax will be due on the gain from the sale of real property. The New Jersey corporate tax rates range from:

• 6.5% for corporations with entire net income of USD50,000 or less;
• 7.5% for corporations with entire net income of USD50,001 to USD100,000; and
• 9% for corporations with entire net income of more than USD100,000.

Effective 1 January 2021, a transfer of real property that is an intercompany transfer between combined group members as part of the unitary business is exempt from the transfer tax (New Jersey Statutes Section 46:15-10 (r)).

A deed or controlling interest transfer is only subject to tax if consideration exceeds USD100. The New Jersey Tax Court held that no tax is due where there is no debt on the property and consideration stated is less than USD100.

The RTF includes a local component.

See 2.2 Laws Applicable to Transfer of Title regarding bulk sales law.

Taxpayers may increase their basis in real estate sold to the extent that a New Jersey tax benefit was not received due to limits on depreciation and net operating loss deductions in place for tax years 2002–05. For tax years beginning after 31 December 2013, income is apportioned to New Jersey based on receipts allocated to New Jersey. Having eliminated a property factor from the apportionment formula, owning real property in New Jersey will not increase the apportionment to the state.