Pa Mechanic's Lien by AliceBegovich


									       Major Changes to the Pennsylvania Mechanics’ Lien Law Coming!
       Important amendments to the Pennsylvania Mechanics’ Lien Law take effect on January
1, 2007 that greatly increase the ability of general contractors, subcontractors, material suppliers
and laborers to protect their interests through mechanics’ liens. Governor Rendell signed
Pennsylvania General Assembly House Bill 1637 (“Act 52”) on June 29, 2006, which amends
the Pennsylvania Mechanics’ Lien Law of 1963, 49 P.S. 1101 et seq. (“Lien Law”). The
changes will immediately impact commercial property owners/developers and mortgage lenders
who must now re-examine construction planning and contract negotiations in order to avoid
mechanics’ liens on their properties.

         The centerpiece of the new Lien Law is section 401(B), which protects contractors and
subcontractors, by limiting the circumstances in which an owner may obtain a waiver of
mechanics’ liens prior to the time the contractor or subcontractor is actually paid. Before the
amendment, a contractor or subcontractor could waive its right to file a lien claim against the
property by the terms of the construction contract even before work is commenced and payment
has been made by the owner, thus eliminating the possibility that the contractor or subcontractor
could file a lien claim during the project. Under the new Lien Law, an express waiver given by a
contractor in a construction contract or otherwise is now, with few exceptions, unenforceable in
non-residential construction projects in Pennsylvania. One exception is for residential
construction projects with a total contract price less than $1,000,000. For a residential project
below $1,000,000, a contractor or subcontractor or both may waive their respective rights to file
claims against property for the erection, construction, alteration or repair by signing a written
instrument (waiver) or by any conduct which operates equitably to estop the contractor from
filing a claim.

         While lien rules in Pennsylvania remain largely the same for residential construction (not
exceeding $1,000,000), the new law will immediately change the relationship between
owners/developers and contractors on commercial projects. Owners and developers may now
be unable to bargain away a contractor’s lien rights at the time of contracting. What shall ensue
is a situation in which the contractors will have the ability to file liens on the project property at
any time during the performance of their work if there is a non-payment payment issue or a
breakdown in their relationship with the owner. For owners and developers who happen to face
a mid-project need to increase construction loan funding, any lien that has been filed will be a
roadblock to securing additional funds to pay for scope changes or other unexpected construction
expenses. The contractor’s lien will also impede the owner’s ability to borrow against or convey
the property once work is completed.

        Act 52 also eliminates the requirement that subcontractors provide owners (in the case of
alterations or repairs) with a preliminary notice of intention to file a claim prior to completion of
their work. Under the old law, owners were initially insulated from subcontractors’ liens to the
extent that the law forced subcontractors to first provide advanced notice to their general
contractors of their intent to lien, giving the general contractor time to make payment to the
subcontractor or materialman before a lien was filed against the owner’s property. As of
January 1, 2006, unpaid subcontractors and material providers will be able to go directly to the
courthouse and file a lien against the property without the advanced warning to the general
contractor or the owner. Additionally, because Act 52 changes the definition of “subcontractor,”

CPH 378794v1
a second-tier subcontractor or sub-subcontractor now has the right to file mechanics’ liens in
Pennsylvania. The old law’s definition of “subcontractor” was limited to a person (other than an
architect or engineer), who by express or implied contract with the contractor, erects, constructs,
alters or repairs an improvement or any part thereof, or who furnishes labor, skill or
superintendence thereto, or supplies or hauls materials, fixtures, machinery or equipment
reasonably necessary for and actually used therein, or any of the foregoing, whether as
superintendent, builder, or materialman. As of January 1, 2007, a “subcontractor” now includes
any person entering into a contract with a subcontractor that is in direct privity with the
contractor (i.e. a second tier subcontractor or sub-subcontractor).

        Despite the new law’s prohibition of lien waivers, owners and their counsel are not
without protection against the filing of mechanics’ liens on commercial projects. By requiring
the contractor to post a labor and materials payment bond at the outset of a commercial project or
a residential contract over $1,000,000, owners and developers may, under the new statute,
validly obtain advance waivers of lien rights from subcontractors and second tier subcontractors.
Of course, the price of the waiver is the increase in the project costs for the bonding. However,
for a project in which the general contractors will have a large number of subcontractors
performing the work, the benefits of the bonding costs shall likely outweigh the owners’
exposure to these numerous’ subcontractors’ liens.

        Pennsylvania’s previously accelerated timeline for contractors to file liens has also been
extended by Act 52. As of January 1, 2007, claimants may now take up to six (6) months from
the time they complete work on the site to file their lien claims, instead of four (4) months under
the old law. Although not as lenient as other states (8 months in New York), the additional two
(2) months added to the lien deadline in Pennsylvania is an advantage to contractors who wish to
preserve their rights to recovery by a lien, but because of business relationships, may be reluctant
to lien an owner who is 90 to 120 days late on final payment. More often than not, there are
residual issues on a commercial construction projects in the few months following completion of
work which are holding up final payment. The new lien law affords the parties more time to
resolve these issues after the project is over before the contractor is forced to file a lien in order
to stop the clock.

        The changes to the Pennsylvania Mechanics’ Lien law are “contractor-friendly,” but
lenders are also benefitted because Act 52 amends the lien priority rules afforded mechanics’
liens by making them subordinate to: 1) purchase money mortgages; and 2) open-end mortgages,
the proceeds of which are used to pay all or a portion of the cost of completing erection,
construction, alteration or repair of the property secured by the open-end mortgage. Purchase
money mortgage lenders and construction lenders can now operate without the concern that their
interests shall be subordinate to those of an unpaid or disgruntled contractor or subcontractor.

     In summary, the important changes in the new Pennsylvania Mechanics’ Lien Law to
remember are as follows:

           •   Lien waivers on commercial projects are unenforceable unless the owner insists
               that the contractor post a labor and materials payment bond or the project is a
               residential contract less than $1,000,000;

           •   Subcontractors are no longer required to give advanced written notice of their
               intent to lien to their general contractor and may, without warning, go directly to
               the courthouse and file a lien claim against the owner’s property;

           •   Contractors have up to six (6) months after work has been completed to file lien

           •   Sub-subcontractors or second-tier contractors are now permitted to file lien
               claims; and

           •   A contractor’s mechanics’ lien is now subordinate to the rights of purchase money
               mortgage lenders and construction lenders.

If you have questions or comments, please do not hesitate to contact any of the partners in the
Post & Schell, P.C. Construction, Government Contracts & Surety Law practice group:

Gary A. Wilson                   215-587-1489           
Kenneth L. Sable                 717-612-6036           
John W. Dornberger               717-612-6037           
Thomas L. Isenberg               717-612-6035           

Disclaimer: this e-flash does not offer specific legal advice, nor does it create an attorney-client
relationship. You should not reach any legal conclusions based on the information contained in
this e-flash without first seeking the advice of counsel.


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