Monday, November 16, 2009

2009 Amendments to Pennsylvania Mechanics Lien Law

The Pennsylvania Mechanics Lien Law was originally enacted in 1963 to give contractors, subcontractors, materialmen and suppliers, and even architects and engineers a statutory remedy, a mechanics lien, for the non-payment of debts due by an owner to the contractor (or by the contractor to any of his subcontractors) for labor or materials furnished in the erection or construction, or the alteration or repair of the improvement to real property. Rather than file a full blown lawsuit, the contractor could follow a relatively simpler and less expensive lien procedure, and if successful, the contractor would obtain a lien on the real estate, and so improve its position vis a vis unsecured creditors, and in the right set of circumstances, the lien claim could slip in front of or "prime" a mortgage or construction loan advances. The 1963 Law permitted a contractor to waive the right to file a lien, for himself and for his subcontractors. In practice, construction lenders naturally preferred to have their position fully protected against any potential mechanics lien claims, and so insisted on having the owner negotiate with the contractor to have lien waivers filed before the project commenced. Lien waivers, when properly executed and recorded ahead of any work on the project, were effective in taking the powerful lien weapon out of the contractor's hands.

The worm turned in 2006, when the Pennsylvania legislature passed Act 52, which made several changes to the 1963 Law. The principle thrust of Act 52 was to limit the situations in which an owner could negotiate with a contractor to waive its lien rights. For residential buildings, contractors and subcontractors were permitted to waive their rights if the contract price was less than $1 million. For commercial projects (anything not "residential property"), the contractor could give a waiver only after he had been paid in full - he could not waive the right in advance. A subcontractor could also give an "after payment" waiver; or could also give a waiver if the contractor had posted a bond guaranteeing payment for labor and materials provided by subcontractors. Any other waiver was essentially declared to be against public policy and unenforceable.

Due to uncertainty as to what was embraced in the definition of "residential building" for purposes of Act 52, the legislature addressed the issue again over the summer of 2009, with the newest changes effective October 13, 2009. The 2009 amendments are limited in number: the main change is some tinkering with the definition of "residential property" in Section 1201, and the waiver of lien section 1401(a). In place of the $1 million contract concept, the Act now defines a "residential property" to be an existing or to-be-constructed "residential building not more than three stories in height, not including any basement level, regardless of whether any portion of that basement is at grade level", or a property zoned residential on which such a building will be built, or a property which has received preliminary, tentative or final approval and on which such a building will be built. The thrust of the change seems to be to limit the right to request waivers from a contractor to those situations involving Single-Family or 1-4 Multi-Family Homes no higher than 3 stories.

Does that clear up the ambiguities in this Act? If your project is clearly within the definition of "residential property", then as an owner you are entitled to ask for a waiver from your contractor, and if it is timely filed in accordance with the Act, it will be effective and enforceable. What about the town center concept - retail on the 1st floor and residential units above? Any other kind of mixed use involving residential in part and some other commercial component - the planned community with a stand alone community center or other community buildings? The Act is silent on those issues. As a practical matter, I don't think a court is going to enforce a filed waiver on just the residential portion of a mixed use project, unless the residential property is separately titled. When you are asking for the contractor or subcontractors to file a waiver in a mixed use situation, you are rolling the dice on whether a court will enforce it or not. And of course, the Act does not require a contactor to waive its rights; but only makes it a negotiable issue between owners and contractors.

For owners, contractors, subcontractors, architects, engineers and others affected by the Act, you need to re-visit your understanding of the Act and the procedures you may currently be following to see that they are in line with what is now permitted.

And when in doubt, ask your friendly neighborhood lawyer!

© 2009  Douglas P. Humes

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