Legal Update

Singificant changes to the PA Mechanic's Lien Law to take effect on Jan. 1, 2007

By: Construction Law Group

The Pennsylvania Mechanic’s Lien Law that has been in effect since 1963 was rewritten by the Pennsylvania Legislature this year and will take effect on January 1, 2007. The new statute modifies the existing law in significant ways that will force changes to the usual lien practices for commercial construction projects.

The most important change will prohibit blanket lien waivers for commercial projects. In addition, the time period for filing a claim has been extended and claims filed by mortgage holders will now take priority over liens filed by subcontractors and contractors.

Waiver of lien by claimant

The most important changes to the statute are new provisions regarding waiver of liens by a contractor or subcontractor on commercial projects. The former statute allowed a contractor or subcontractor to waive its right to file a claim either by a signed written instrument or by conduct that would stop the contractor from filing a claim based on past practice. Previously, “blanket” lien waivers contained in “no-lien agreements” were common on commercial projects, and were typically filed with the court system of the county in which the project occurred.

Here are the new the procedures according to the revised law.

Commercial buildings

With the new statute, a contractor may not waive its lien rights, unless the waiver is given in exchange for payment for the work, services, materials or equipment, and payment for the work in question is actually made. The language of the new law is powerful - indicating that “[a] waiver by a contractor of lien rights is against public policy, unlawful, and void…” unless the conditions outlined in the first sentence of this paragraph are met.

A subcontractor follows the same rule as the contractor, with one major exception: a subcontractor may still sign a “blanket” lien waiver if the contractor has posted a bond guaranteeing payment for labor and materials provided by the subcontractor. It is important to note, however, that actual notice to subcontractors must now be demonstrated. Accordingly, past practice of simply filing the lien waiver may not be enough under the new law; parties will now be required to demonstrate that actual notice was given, perhaps by having subcontractors execute lien waivers.

Residential buildings

For residential projects, the new statute considers the nature of the property as well as the contract price. In these situations, a contractor may waive its right to file a lien only when the total contract price between the owner and contractor is less than $1 million.1 However, similar to the provision involving commercial projects, a subcontractor may waive its right irrespective of the contract price as long as the contractor has posted a bond that guarantees payment for labor and materials provided by the subcontractor.

Time period for filing a claim

The new law extends the time for filing claims. Currently, the statute allows for a party to file a claim within four (4) months of completing work. This is a short timeframe that frequently allowed owners to escape lien problems simply by pointing out that the claim was filed beyond the permissible period. The new statute would allow a claimant six (6) months to file a claim upon completion of the work, which should work to reduce untimely claims.

Priority of liens

The new statute gives priority to claims filed by mortgage holders over liens filed by subcontractors and contractors. Specifically, contractor and subcontractor liens shall be subordinate to purchase money mortgages (defined in 42 Pa.C.S. § 8141(1)), as well as open-ended mortgages (defined in 42 Pa.C.S. § 8143(f)).

Conclusion

In short, contracts, specifications and other governing documents requiring or containing references to blanket lien waivers will have to be amended to make lien waivers an ongoing part of the pay application process. Additionally, look for owners to strengthen their indemnification provisions for general contractors in the event that liens are filed on a project. Depending on the situation, bonding requirements may be changed as well to allow blanket waivers by subcontractors.

Concerning the ability of design professionals to file liens, the previous requirements stand that design professionals may only file liens if they are involved in superintending or supervising erection, construction, alteration or repair.

For further information, please contact:

John Sieminski, 412-995-3061
Chad Wissinger, 412-995-3130
Michael Cremonese, 412-995-3121
Benjamin Sorisio, 412-995-3122

1 Based on the manner in which the Legislature drafted the section of the statute that addresses commercial projects, an argument can be made that blanket lien waivers may still be permissible on commercial projects valued at less than one million dollars, even without posting a payment bond. Because the statute has yet to take effect, let alone be interpreted by a court, the ultimate legality of this position is unknown at this time.

10/05/06