PENNSYLVANIA'S NEW MECHANICS LIEN LAW
The Pennsylvania Mechanics Lien Law of 1963 (the "Prior Lien Law") was substantially amended by House Bill No. 1637, which was signed by Governor Rendell on June 29, 2006 (the "New Lien Law"). The New Lien Law becomes operative on January 1, 2007. It impacts all parties involved with mechanics liens including property owners, contractors, subcontractors, material suppliers, mortgagees and title insurance companies.
The New Lien Law makes sweeping changes to mechanics liens in Pennsylvania. Mechanics lien waivers (including both no lien stipulations that are filed prior to or at the commencement of construction project and lien waivers subsequently executed) are greatly limited. The definition of "subcontractor" is expanded to now allow "sub-subcontractors" (including material providers that sell to first tier subcontractors) to file mechanics liens, whereas they were not permitted to do so under the Prior Lien Law. Certain technical requirements to establish a lien are also modified. And, certain types of mortgages are established as having priority over mechanics liens.
II. Waivers/New Limitations
The treatment of lien waivers is one of the most potentially far reaching changes in the New Lien Law. Under the Prior Lien Law, a No Lien Stipulation executed by a property owner and prime contractor and properly filed in the local Prothonotary's Office at the commencement of a construction project could prevent the filing of mechanics liens not only by that contractor but by any subcontractors thereof. The New Lien Law essentially prohibits the use of such waivers, subject to a few very limited exceptions.
One of these exceptions applies to residential projects where the total contract price is less than 1 million dollars. Such projects are defined as a property where there is a residential building or zoning or other governmental approval for residential development, agricultural use or planned development. In this limited classification of "residential projects", contractors and subcontractors may still waive their rights to file mechanics liens in the same manner as under the Prior Lien Law.
As to all other construction projects, lien waivers are declared to be "against public policy, unlawful and void" except under the following circumstances:
(a) A lien waiver executed by a contractor can be valid on a residential project of 1 million dollars or more and on all commercial projects, but only if "given in consideration for payment for the work, services, materials or equipment provided and only to the extent that such payment is actually received..." Accordingly, blanket lien waiver forms that purport to waive lien rights beyond the amount of payment actually received by the contractor are considered invalid unless the criteria are satisfied for another exception under the New Lien Law (see subparagraph (c) below).
(b) Also, for residential projects of 1 million dollars or more, a subcontractor's lien waiver can be valid, provided that the prime contractor has posted a payment bond for labor and materials provided by subcontractor.
(c) With respect to commercial (i.e. "non-residential" projects), a subcontractor's lien waiver is valid only to the extent that payment has already been received by the subcontractor for the work, services or materials already provided, or the contractor has posted a payment bond covering such subcontractor labor and materials.
Under the New Lien Law blanket lien waivers involving the filing of a No Lien Stipulation by the property owner and prime contractor will still be permissible to waive subcontractor lien rights, but only on projects that otherwise have payment bonds covering labor and materials provided. Other lien waivers that are actually executed by a subcontractor will, under the New Lien Law, only be valid to the extent that they cover rights relating to payments actually received by the subcontractor.
III. Expanded "Subcontractor" Definition
Another change under the New Lien Law that is potentially very significant is the expansion of the definition of a "subcontractor" that has the right to file mechanics lien to include parties who enter into contracts with a "subcontractor". Under the Prior Lien Law, sub-subcontractors and the material suppliers that had contractual arrangements with a first tier subcontractor but not with a prime contractor were not able to file mechanics liens. Under the New Lien Law, however, such parties do have mechanics lien rights.
However, it should be noted that the New Lien Law does not go any further than parties which contract directly with first tier subcontractors. Accordingly, third tier subcontractors (or sub-sub-subcontractors, including material suppliers that sell to second tier subcontractors) still are not permitted to file mechanics liens.
IV. Technical Changes
The New Lien Law lengthens the period of time for filing a mechanics lien from four (4) months after completion of the claimant's work to six (6) months.
The New Lien Law also eliminates the need for a subcontractor to provide a preliminary notice of its intention to file a claim prior to completion of that subcontractor's work. Such preliminary notices were required by subcontractors under the Prior Lien Law on projects involving alterations or repairs. It should be noted however, that a "formal notice" is still required of a subcontractor of its intent to file a claim at least thirty (30) days before the actual mechanics lien is filed. The items required in a "formal notice" are set forth in detail in Section 501(C) of the New Lien Law. Following this formal notice, to perfect a mechanics lien a claimant still must file a "claim" with the Prothonotary and serve written notice of that filing on the owner within one month thereafter, but, as indicated above, the length for filing the mechanics lien claim has been extended to six (6) months after completion of the work (labor and/or materials) involved on that project.
V. Priority of Mechanics Liens
One area of the New Law that does not favor mechanics lien claimants relates to the priority of such liens versus other filed liens such as mortgages. Under the Prior Lien Law, the priority date on mechanics lien on new construction could relate back to the date that physical construction on the project began, thus allowing a filed mechanics lien to take priority over earlier filed liens such as mortgages. The New Law changes these priority rules by making mechanics liens subordinate to "a purchase money mortgage" or "an open-end mortgage...the proceeds of which are used to pay all or part of the cost of completing erection, construction, alteration or repair of the mortgaged premises secured by the open-end mortgage." Accordingly, there may be cases where a subcontractor or material provider is able to file a valid mechanics lien that nonetheless does not take priority over certain types of mortgages that secure loan proceeds actually used in the project itself.