This article has recently appeared in the Fall 2011 issue of the Lancaster Builder, a newsletter published by the Building Industry Association of Lancaster County.
For anyone who is unfamiliar with the term Mechanics’ Lien, while it may sound like it involves auto repair, it is actually a form of legal recourse available to contractors and subcontractors who perform work on real property and are not paid for their services. The lien itself is against the property on which the work was performed and is used as leverage against the owner of the property to collect any unpaid amounts owed to the contractors and subcontractors. It can be a valuable tool in certain collection matters, especially in light of changes to the Lien over the last five years that have made the lien more available to contractors and subcontractors.
The lien arises from a series of Pennsylvania statutes known as the Mechanics' Lien Law of 1963 ("Lien Law"). Over the last five years, the Lien Law has undergone a number of changes that affect the rights of contractors, subcontractors and property owners alike. The most extensive changes were made by the Pennsylvania Legislature back in 2006, but those changes did not come into effect until January 1, 2007. Since then, a few other changes have been made.
It is almost impossible to properly communicate these changes without using a good bit of “legalease”. However, I have attempted to summarize the changes by category. If your eyes still glaze over and you wonder how this might apply to you, I would call your attention to the expanded definition of "Subcontractor", the elimination of many lien waivers and the elimination of the preliminary notice requirements which have opened up lien claims to many subcontractors to which the lien was previously not available. As a result, many contractors and subcontractors who had previous abandoned attempts to utilize the lien may want to reconsider.
Expanded Definition of "Subcontractor"
Generally speaking, the service providers who have contracted directly with the property owners are deemed "Contractors" while providers contracting with the "Contractors" are deemed "Subcontractors." Prior to 2007, the Lien Law specifically excluded all persons who contracted with a subcontractor from being a "Subcontractor" for purposes of the Lien Law. Thus, a sub of a sub was excluded. However, since 2007, the term "Subcontractor" has been expanded to include sub-subcontractors who do work or provide supplies for other subcontractors who are under contract with a "Contractor". Thus, the Lien Law currently includes the sub of a sub, although subcontractors below that second sub level (i.e. the sub of a sub of a sub) are excluded. Now that I've made all of our brains hurt, it's time to move on to something else.
Residential vs. Non-Residential
In 2007, the Lien Law began to differentiate between residential and non-residential property. The definition of "Residential property", added in 2007 to the Lien Law, was relatively straightforward and included, in general: property that actually contains residential buildings; property that is zoned or otherwise approved for residential development, planned development or agricultural use; or property that has received preliminary, tentative or final approval for residential development, planned development or agricultural use under the PA Municipalities Planning Code.
In 2009, the definition of "Residential property" was limited to buildings (or intended buildings) not more than three stories in height (not including basements). As discussed below, whether a building is "Residential" drastically affects whether and how contractors or subcontractors may waive their rights to file a claim under the new Lien Law.
Waiver of Lien
Prior to 2007, contractors and subcontractors could waive their rights to file a mechanics' lien no matter what type of project they were working on. The waiver was primarily made explicitly through a written instrument, but waivers could also be implicit. The Lien Law makes drastic changes to those rules, primarily by differentiating between residential and non-residential buildings.
When work was performed on residential buildings, after 2007, contractors and subcontractors could still waive their rights to file a mechanics' lien, but only if the total contract price between the owner and contractor was less than $1,000,000.00. In 2009, the $1,000,000.00 cap was removed and waivers are now permissible with all residential buildings, but remember that the definition of "Residential property" was limited to buildings of three stories or less at that time.
The 2007 amendments to the Lien Law made drastic changes with regard to non-residential buildings. Since then, neither contractors nor subcontractors can waive their right to file a claim under the Lien Law if the work is being performed on a non-residential building. To be sure, the law actually declares that such waivers are ". . . against public policy . . ." and are thus ". . . unlawful and void. . . ."
However, there are two exceptions with regard to non-residential buildings. First, the waiver can be made by both contractors and subcontractors if it is given in exchange for actual payment for the services and materials provided. Second, subcontractors can still waive if the contractor has posted a bond guaranteeing payment for labor and materials provided by the subcontractors. It is unclear as to the minimum amount for the bond, but common sense would suggest the contract price with some buffer for potential change orders.
The 2007 amendments to the Lien Law also made drastic requirements in the notice requirements for subcontractors. For some background, the Lien Law makes a distinction between "erection or construction" and "alteration and repair" projects. To qualify as the former, the project must generally involve new construction or drastic changes to an existing building that substantially changes the building's character. All other projects fall into the latter category.
Prior to 2007, in cases of alteration or repair, the Lien Law required a subcontractor to provide the owner of the property with a written, preliminary notice of the intent to file a mechanics’ lien claim before the subcontractor's work is completed. This requirement was difficult to comply with because a subcontractor's need to file a mechanics' lien does not always arise or become apparent until after the work had been completed. Preliminary notice was not required in cases of erection or construction.
Since 2007, such preliminary notice is now no longer required. This was a substantial change that enhanced the ability of many subcontractors to utilize the lien. It should be noted, however, that the formal notice requirements still apply to subcontractors. This notice must be given to the property owner in writing at least thirty days prior to the filing of a claim by a contractor. Because the claim must be filed within six months from the end of the work, this means that subcontractors have five months from the end of work to give formal notice. Contractors still do not have to provide the formal notice.
Extension of Time to File Claim
Prior to 2007, a lien claim was required to be filed within four months after the completion of the work. Since then, that time period has been extended to six months. Again, subcontractors must provide written formal notice within five months of the completion of the work.
Mechanics' liens are generally prioritized among other liens in the same way they were prior to the 2007 changes: erection or construction liens date back to the visible commencement of the work, while alteration or repair projects are dated as of the claim's filing date. However, since 2007, the Lien Law generally subordinates all mechanics' liens to certain mortgages that are used to pay for all or part of the work. Thus, it is important to consider how a project is financed and to what extent the owner of a property has equity in the property when contemplating a mechanics' lien claim.
It is clear that the Lien Law has undergone substantial changes over just the last five years. As I noted at the beginning of this article, you may find that a Mechanics’ Lien is a valuable tool in certain circumstances. Some of the changes substantially affect how it can be used. If you have questions about a Mechanics’ Lien you should consider speaking to a lawyer who is familiar with the details of the law and the necessary procedures. We will continue to monitor any future changes and keep you informed, so please check back on the Lancaster Law Blog for updates.