Recent Changes to The Pennsylvania Mechanics' Lien Law:What You Should Know
By Frank G. Murphy, Esquire

    On January 1, 2007, significant changes were made to the Pennsylvania Mechanics' Lien Law for the first time in years. "Mechanics' Liens" allow a contractor, subcontractor, material supplier, engineer, architect, or similar party to obtain a lien against an owner's property to ensure payment for services rendered. Pennsylvania has a strict Mechanics' Lien structure, requiring adherence to the technical provisions of the law and defining who can obtain a lien and for what purposes. The following describes the five key changes to the law and their potential impact on your business. 

Expanded Definition of Who Can Obtain a Lien

    The current law provides that only a party directly holding a contract with the owner of a property (a "contractor"), or a party that has a contract with the contractor (a "subcontractor") is entitled to a Mechanics' Lien. So, while a general contractor and its direct subcontractors may have Mechanics' Lien rights, suppliers of labor or materials to subcontractors ("sub-subcontractors") would not be entitled to a Mechanics' Lien. This often leaves the smallest and financially weakest parties left out in the cold when construction projects encounter financial difficulties. The recent changes to the Mechanics' Lien Law expand the definition of those entitled to a Lien to include: "One who, by contract with the contractor, or pursuant to a contract with a subcontractor in direct privity of a contract with a contractor, express or implied, erects, constructs, alters or repairs an improvement or any part thereof . . .The term does not include . . . a person who contracts with a subcontractor not in direct privity of a contract with a contractor." (Emphasis added). This means that an additional layer of claimants, including subcontractors, material suppliers, and sub-subcontractors will be entitled to seek Mechanics' Lien protection after January 1, 2007, as long as their contract was with a subcontractor operating under a contract with a contractor. 

Removal of "Preliminary Notice" Requirement

    There are two types of Mechanics' Lien available in Pennsylvania. A claimant can seek a Mechanic's Lien for "erection and construction," typically considered to be new construction or a significant addition. Or, a lien can be filed for "alteration or repair," which includes additions and repair work. Currently, claimants seeking a lien based upon alteration or repair work are required to provide "preliminary notice" on or before the date of work completion. A potential claimant under current law must, before completing their work, notify the property owner that if they are not paid in full, they may file a lien. Unfortunately, many subcontractors and suppliers fail to supply preliminary notice, since their work is completed at the early stages of a project before problems arise. Without this advance notice, a subcontractor or material supplier is not allowed to seek a lien. The Legislature has now removed this requirement of preliminary notice. 

Longer Timeframe to File a Lien

    Another significant change to the Mechanics' Lien Law is that the requirement that a claimant file a lien within four months of completing its work (or within four months of being prevented from completing its work) has been extended to six months. This longer timeframe allows claimants additional time to evaluate their position and to negotiate with the owner or general contractor prior to incurring the cost and expense of filing a Mechanics' Lien. 

Contractor Protection From Waivers

    Another major revision to the Mechanics' Lien Law addresses the practice of owners requiring contractors to waive their rights to Liens. Today, waivers of Mechanics' Liens are not only acceptable, but seem to be standard operating procedure. The new amendments to the Mechanics' Lien Law provide that, at least for contractors, waivers of Liens for commercial projects are "against public policy, unlawful and void, unless given in consideration for payment for the work, services, materials or equipment provided and only to the extent that such payment is actually received." Waivers of Mechanics' Liens will henceforth serve as more of a release of liens than an upfront waiver of liens. A contract provision that has clearly favored property owners is thus being limited by the Legislature. The amendments include certain provisions for the use of waivers when a payment bond is in place or for some residential projects (those less than $1million).The Amendments must be reviewed closely for such projects. It is important to also note that waivers will still be valid if executed by subcontractors and materialmen, since the non-waiver provision protects only first-tier contractors and not subcontractors or materialmen. A subcontractor or material supplier may still be required by a general contractor to waive its Mechanics' Lien rights to win a contract. 

Lenders' Rights Given Priority

    The last major revision to the Mechanics' Lien Law is designed to protect lenders rather than owners or contractors. Currently, Mechanics' Liens date back to the date work began on a project (for erection or construction) or the date of the filing of the lien claim (for alterations or repairs). This means that a claimant can, in some cases, jump ahead of a lender if work started prior to the lender's financing of the project. The Amended Mechanics' Lien Law states that: "Any lien obtained . . . by a contractor or subcontractor shall be subordinate to the following: (1) A purchase money mortgage, as defined in 42 Pa.C.S. Section 141(1) (relating to lien priority). (2) An open-end mortgage, as defined in 42 Pa.C.S. Section 8143(f) (relating to open-end mortgages), 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." Therefore, a lender's rights on a construction project are given priority regardless of when a claimant started work. 

In Closing

    These Amendments represent substantial change in a specialized area of construction law in Pennsylvania. However, Mechanics' Liens are a creation of the Legislature and will continue to be strictly construed against the claimant. Some of these amendments will impact certain businesses more significantly than others. It appears that the greatest gains are for sub-subcontractors who were formerly excluded from the protection of Mechanics' Liens, as well as lenders who will soon receive lien priority. Frank G. Murphy, Esquire, is a partner in the law firm of Deeb Blum Murphy Frishberg & Markovich and represents a number of construction companies with regard to corporate matters, dispute resolution and litigation. Contact Frank with questions or comments at fmurphy@dbmfmlaw.com. 

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