PENNSYLVANIA MECHANIC S LIEN LAW

Transcription

1 PENNSYLVANIA MECHANIC S LIEN LAW Go to: Pennsylvania Mechanics Lien Forms More Info: Section Contents Pre-lien Notice(s) Name of Notice Who Must Use This Notice When How to Serve Verified or notarized? Section Contents Pennsylvania Mechanic s Lien Who is Entitled to a Lien? When to File/Record Where to File/Record How to Serve Amount of Lien Property Subject to the Lien Furnishing Information Verified or Notarized Priorities Lien Release Bond Miscellaneous Issues Page 1 of 27

2 Section Contents Lawsuit to Foreclose Lien Introduction When Where to File Arbitration Need a Lawyer? General Notes Be Careful: The courts consider a mechanic s lien to be a privilege and not a right. You receive its benefits only if you strictly adhere to the state law requirements. Bottom line: miss a deadline by one day and you have lost it. Unlike other areas of the law where you can argue equities, find technical exceptions, and lawful excuses, there is no forgiveness here. In this case, knowledge is not only power, it=s a necessity. In Pennsylvania this means you will be writing down dates for at least these documents: a) Subcontractor s Formal Notice of Intention to File a Mechanic s Lien; b) either the general contractor s or subcontractor s mechanic s lien; and c) the lawsuit to foreclose the mechanic s lien. Write down all the deadlines in your calendar. Use a highlighter or red pen. If you have a staff, use a fail safe system by doubling up and putting it in their calendar also. This reminds you twice. The first calendar entry should be two weeks before the due date as a preliminary reminder. On the second calendar entry, do a white lie to yourself. Put the due date as one week before it is actually due as insurance in case you get busy or need legal advice. Time is money. You will waste a lot of valuable time running around and doing it at the last moment, as opposed to doing it early. Mechanic s Lien Law Changes for Pennsylvania (Effective January 1, 2017) Commercial Projects Page 2 of 27

3 The legislature in the Commonwealth has been quite busy of late. The Commonwealth has setup a website known as the State Construction Notices Directory ( Directory ). This serves as the statewide system for filing various construction notices. It applies only to commercial projects costing over $1.5 million. Project cost would obviously include all labor, materials and equipment. Or, a simpler calculation, would be to use the lump sum amount stated in the general contractor s proposal, which by definition would include subcontractor amounts, as well as all contracts with design professionals. Although not spelled out exactly, it is probable that soft costs will also be included, including architectural, engineering, land surveying, and construction management. In the opinion of national lien on other unrelated costs, such as title and escrow fees, or attorneys fees, would not be included. Smaller commercial projects and residential are excluded--their notices continue to be served in the traditional manner. The Directory not only makes it easy to file the various notices, but the forms themselves are built into the Internet site for you to use. Beginning the process is easy-- you simply go to the website and login. Whenever an owner or contractor files a document with the directory, it automatically consists of a request to receive notification of all other notice filings. And, those notices are received by . Fortunately, there will be an index by county and searchable by owner s name, general contractor s name, and property address. All notices must be verified as to their accuracy, so make sure the correct information is inputted. Here is a rundown of the various notices to be filed with the Directory: NOTICE OF COMMENCEMENT Who Must Use These Notices: Under new Section 501.3, the owner of a project or its agent files this Notice. Although the statute indicates owners may file such a Notice, it is highly recommended they do so. A general contractor is authorized to file this Notice if authorized by contract. Another reason for filing the Notice is it then requires all subcontractors and suppliers to serve a Notice of Furnishing. Page 3 of 27

4 If there is no Notice of Commencement, these persons need not send their notices. A Notice of Furnishing is important because it allows the general contractor to issue joint checks and lien releases. Each project is identified by owner name, contractor name, property address, and a unique identifying number. Each property is indexed by county. This form is built into the Directory website. An owner simply logs in, answers of various prompts, and the form is prepared automatically. The common street address of the project must be provided, including the tax notification number. The statute talks in terms of the legal description, but it is uncertain whether a full metes and bounds description is required. The legal description can usually be secured by going on the Internet under the County Assessor s Office. Or, National Lien Law can help you with that description. The owner can also receive a certified hardcopy printing of an electronic receipt showing the date and time of the filing. When: Posting: File with the Directory prior to the furnishing of labor, materials or equipment. In addition, the hardcopy of the Notice must be posted at a conspicuous location at the project before physical work commences. Reasonable steps must be taken for the Notice to remain at the project all the way through completion. For example, many times the Notice is torn, involuntarily taken down, or no longer present because of weather conditions. But the statute imposes a mandatory duty on the owner to make sure it remains on the premises and must be re-posted within 48 hours after becoming aware of the loss of such posting. The general contractor has an affirmative duty to make sure the Notice is included in all subcontracts. How to Serve: The Notice is not really served on anyone--it is filed with the Directory and included within the contract documents (for example, the contract between owner and general contractor as well as between general contractor and subcontractor). In other words, there is no requirement of sending a hard copy certified mail. Page 4 of 27

5 Note also that general contractors in their subcontracts must include a written notice that the failure to file a Notice of Furnishing will result in the loss of lien rights. The notice must state the following: A subcontractor that fails to file a Notice of Furnishing on the Department of General Services' publicly accessible Internet website as required by the act of August 24, 1963 (P.L.1175, No.497), known as the Mechanics' Lien Law of 1963, may forfeit the right to file a mechanics lien. It is unlawful for a searchable project owner, searchable project owner's agent, contractor or subcontractor to request, suggest, encourage or require that a subcontractor not file the required notice as required by the Mechanics' Lien Law of NOTICE OF FURNISHING As many may recall, in 2007 the Pennsylvania legislature dispensed with the preliminary notice called Subcontractor s Preliminary Notice. Instead, a form called Notice of Furnishing ( NOF ) is used. Who Must Use These Notices: Also under new Section 501.3, it is used by all subcontractors, laborers, and material/equipment suppliers who do not have a direct contract with the owner and, instead, have a contract (oral or in writing) with the general contractor. For example, if a subcontractor, laborer, or supplier has a direct verbal or written contract with the owner, that person or entity is not required to give the Notice. The NOF is filed online with the Directory as well. It is extremely important to do so, because without it, one cannot subsequently recorded a Pennsylvania mechanic s lien (Section 501.2). The NOF is required only if a Notice of Commencement is filed with the Directory. In fact, one cannot file a NOF even if you wish, as the Directory has a built-in default mechanism not allowing it in the absence of such a Notice of Commencement. That Notice of Commencement has all the information required for completing this pre-lien notice, including the legal description of the property, owner s name, address, Page 5 of 27

6 and identifying the Directory number. So to start the process, simply get ahold of the Notice of Commencement, or copy the information posted at the property, and use that when you log into the Directory. Simply follow the prompts on the Directory, make sure you have identified the property in question, input the information, and the built-in form will be prepared. A sub or supplier can also receive a certified hardcopy printing of an electronic receipt showing the date and time of the filing. Section also makes it a misdemeanor for an owner or general contractor to encourage, suggest or require a sub or supplier not to file a NOF. When: How to Serve: File with the Directory within 45 calendar days after first performing work or services at the jobsite. If you go to the Directory within the 45 days but don t see any Notice of Commencement, you will not be able to file your Notice. So the best idea is to keep your eyes peeled on the job site and record your notice immediately after you see the Notice of Commencement posting. Unlike previous law where you had to serve a copy on the owner and general contractor by certified mail, there is no such service requirement. Filing with the Directory is sufficient because it automatically gives notice to the owner or representative who filed the Notice of Commencement. NOTICE OF COMPLETION Who Must Use These Notices: Under Section 501.4, the owner or agent may file a Notice of Completion with the Directory. A designated general contractor may do so as long as this permission is contained in a contract with the owner. The statute uses the word may, meaning it is permissible but not required to file the Notice of Completion. The statute specifically states that this filing is purely for informational purposes. For example, it does not start the six-month statute of limitations as to when a mechanics lien is to be recorded (Section 501.3(c). Page 6 of 27

7 As usual, follow the prompts on the directory, make sure you have identified the property in question, input the information, and the built-in form will be prepared. A sub or supplier will automatically receive a copy of the Notice of Completion if they have filed their NOF. When: How to Serve: File with the Directory within 45 calendar days of actual completion of the project. Completion shall mean either of the following: a) issuance of an occupancy permit and the acceptance by the project owner or general contractor of the work, together with cessation of all work by the various trades or b) the cessation of all work for 30 consecutive days, provided work is not resumed during that period. As with other notices lodged with the Directory, the filing itself is considered service. NOTICE OF NONPAYMENT Who? Under Section 501.4(b), subcontractors and suppliers who have not received payment may, but are not required, to file a Notice of Nonpayment with the Directory. This is done for informational purposes only. The failure to so file does not prevent a sub from later filing a Pennsylvania mechanic s lien. The new statute does not give any time limit in filing this Notice. However, the earlier the better. Some owners use the defense that they will not pay a subcontractor because they have already made payment for that portion of the work to the general contractor. But by filing this Notice, it can make it difficult to use that defense. However, it has the benefit of alerting the owner you have not been paid. In some cases, the general contractor does not let the owner know of payment issues. This could go a long way in ensuring payment. Page 7 of 27

8 OPTIONAL NOTICE OF INTENT TO FILE A LIEN Many general contractors, subcontractors and suppliers, like to give a final warning shot beforre recording a lien. It usually gives 10 days to pay. However, this is not required under the statute for these projects. National Lien Law has this form available for purchase if you wish. MECHANIC S LIEN The mechanic s lien itself is not filed and served through the Directory. It has to be filed and served the old-fashioned way as described below: Who is Entitled to a Lien: A Pennsylvania mechanic s lien is primarily for general contractors, subcontractors, laborers, as well as material/equipment suppliers. Liens are only allowed to generals, subs, and suppliers who are in the first three tiers. All others, even though they contribute in a valuable sense to the improvement, are excluded. Architects and engineers are entitled to a lien if they: 1) have a direct contract with the owner; and 2) in addition to preparing drawings, specifications and contract documents, they also provide additional services such as supervision of construction. In the AIA trade, this is referred to as contract administration. In other words, an architect or engineer who visits the site on a regular basis and reviews matters to see if the plans and specifications are being met. A lien is also available to persons or companies involved with demolition, excavation, grading, filling, paving, landscaping, furnishing and installing fixtures, machinery, appliances, and equipment; and furnishing, excavating for or installing rails, tires, pipes, poles, and wires. When to File/ Record: Under section 502, within six months after completion of your portion of the work. However, if the owner or general contractor files with the court and serves a Rule to File Claim, the lien must be recorded within 30 days. Page 8 of 27

9 Where to File: How to Serve: Unlike most states in which a mechanic s lien is filed with the county recorder, Pennsylvania requires the liens to be filed with the court with the Court of Common Pleas or Prothonotary in the county in which the project is located. Make sure you use the standard cover letter supplied by the court (you can find it on their website or get it in person). After filing the mechanic s lien, the claimant must serve the owner with a Notice of Filing of Mechanic s Lien Claim, informing the owner that the mechanic s line has been filed and referring them to the court term, number, and date of filing with the court. This form is included in your purchase of a mechanic s lien. Unlike the preliminary notices, this should not be done by certified mail. Instead, it is recommended it be personally served. This can be done by the Sheriff s office (the clerk, for a fee, will forward the papers to their office if you ask) or a private process server. If service cannot be made, the notice may be posted upon at conspicuous place on the job site. The Notice of Filing of Mechanic s Lien Claim has attached to it a file-endorsed copy of the mechanic s lien. To be safe and to eliminate disputes, the person filing the claim should not personally serve it look in the Yellow Pages of your telephone book under Process Servers so an independent third party can serve same. The notice on the owner that a mechanic s lien has been filed must be served within one month of the filing. An Affidavit of Service of this notice must be filed with the court within 20 days after that service. Failure to serve the Notice of Filing Mechanic s Lien or the affidavit with the court within these time limitations can be grounds for voiding the lien. Steps to take: To eliminate confusion, here is a step-by-step guide to follow: Step 1: Within the time and parameters, file the Mechanic s Lien Claim in the clerk s office of the court of common pleas in which the project is located. Be prepared: Pennsylvania is the most expensive state for filing. Also enclose an official court cover sheet (you can get this from the clerk s internet site or by going in person).this can be done either in person or by mailing the original form with an additional copy and a self-addressed return envelope. Call before and make sure you include a check for the exact fee. Step 2: Personally serve both the attached Notice of Claim and the file stamped Mechanics Lien Claim on the owner (if a sub, you may but are not required to serve the general Page 9 of 27

10 contractor) within one month of filing. This can be done by the Sheriff s office, but it is traditionally slow and expensive. It is recommended you use a process server (look in the yellow pages). Make sure the copy of the mechanics lien you serve has the court file stamp on the top right hand side. Step 3: File with the clerk of common pleas the Affidavit of Service of Notice of Filing of Mechanic s Lien Claim with a copy of that Notice attached. In other words, you will be filing both the Mechanics Lien and Notice which shows the clerk you not only recorded the lien but gave the owner a formal notice. This must be done within twenty days of the service by the process server. Amount of Lien: Property Subject to the Lien: Primarily for unpaid labor, material, and equipment supplied. Also includes the lost profits on the work performed. In other words, the claimant gets not only the actual cost of the labor and materials conferred, but also the profit and overhead. Change order work can also be included in the lien. However, the lien is not available for lost profits on other jobs, impact damages, or delay damages caused by breach of contract. Examples of these damaged would be increased interest on lines of credit, overtime, and the like. The lien is allowed only for claims exceeding $ A mechanic s lien applies only to private projects. No lien is allowed on public projects against government property. Obviously, the lien applies to the structure being improved, together with fixtures, appliances, and equipment installed on the property. Thus, the property subject to a lien covers the improvement, the land directly underneath it, as well as the lot or acreage adjacent to it and belonging to the same owner. However, the acreage around the improvement is subject to a lien only if it is reasonably needed for the general purposes of the improvement. Thus, a parking lot adjacent to the structure, a road or a bridge which is needed for the beneficial use of the improvement would be covered. That acreage must also be a part of the business or the residential area being improved. If you are doing tenant improvement work, the lien only applies to the tenant s interest and not the owner s. However, if the owner, by written contract, states that the work being performed is for the immediate use and benefit of Page 10 of 27

11 the owner, then the lien will also be against that owner s interest. This is a gray area and you should consult competent legal counsel for more details. Furnishing Information: Verified or Notarized?: Upon request, the general should furnish others with information about the owner so the required notices and lien can be filled out properly. A verified notice simply means you sign it and are representing the contents are true and accurate. A notarized notice is signed in front of a Notary Public or other official. The mechanic s lien is not required to be verified or notarized. It can simply be signed by the claimant or his or her attorney. Residential Projects and Small Commercial For residential projects and commercial projects with a cost of less than 1.5 million, the Directory process is not used. Therefore, you use the same procedure as done in the past. PRELIEN NOTICE This state requires a Notice be sent out before the mechanic s lien is filed/recorded. Name of Notice: Notice of Furnishing (No longer required for these projects) This notice, used by subcontractors and suppliers, is only required for larger commercial properties of the cost of $1.5 million or more. That notice is now filed with the Directory as above-described. It is not required for residential or smaller commercial projects. Name of Notice: Subcontractor s Formal Notice of Intention to File a Lien Who Must Use These Notices: Under Pennsylvania statutes, section 1501, all subcontractors, laborers, and material/equipment suppliers who do not have a direct contract with the owner and, Page 11 of 27

12 instead, have a contract (oral or in writing) with the general contractor. For example, if a subcontractor, laborer, or supplier has a direct verbal or written contract with the owner, that person or entity is not required to give the Notice. In most states, a mechanic s lien is allowed for any claimant who confers labor, materials, or equipment to the job site, regardless of where they are on the hierarchy or tier. For example, in those states, it is allowable for a sub-sub-sub to have a mechanic s lien. However, Pennsylvania is different and allows liens only for persons that are in the first, second, and third tier. This means a lien is allowed for: general contractors, subcontractors, and sub-subcontractors only, defined as follows: First Tier (General): The person that has a contract with the owner (written or verbal) which can be a general contractor, subcontractor, supplier of material or equipment. Second Tier (Sub): A person that has a contract with the first tier company, which can be either a subcontractor or material/equipment supplier. Third Tier (Sub-Sub): A person that has a contract with the second tier company, which can be either a subcontractor or material/equipment supplier. Prior to the new laws enacted in 2007, a sub-sub (a subcontractor having a contract with another subcontractor) or the material supplier to a sub (a supplier having a contract with a subcontractor), and all other persons in lower tiers, could not file a mechanic s lien. In 2007 that was changed as described above. But be careful in not ruling yourself out. On the other hand, Pennsylvania is very liberal in defining who can be in each of the tier groups. The term contractor is defined (Pennsylvania Consolidated Statutes, Section 1201(4)) as general contractors, subcontractors, laborers, superintendents, truck companies that haul materials, as Page 12 of 27

13 well as material and equipment suppliers. The only requirement is that these persons or companies have a direct contract with the owner, whether written or verbal. Subcontractor (Section 1201(5)) is newly defined in 2007 as the persons who have a contract with the general or another subcontractor. So, for example, if a homeowner is referred by the general contractor to a supply house to buy finished plumbing fixtures and buys them directly, that supply house would be considered a first tier contractor. The wholesale company that supplies that plumbing fixture firm would be a materialman to a materialman and entitled to a lien because they are both within the second tier. Another example: assume the owner has a direct contract with a subcontractor--pool company ( A ). Because of the direct contract with the owner, the pool company is considered a general contractor or 1 st tier. A then subs the concrete deck work to Company B. In turn, B subs the drainage and retaining walls to Company C. Although C is really a sub-sub-sub, it is still entitled to a lien. In other words, ignore whether a person has a general or subcontractor license and simply think in terms of the two tiers. The Sub s Formal Notice of Intent to File a Lien applies to any kind of project, whether by way of repair, alteration, or new construction residential or commercial. In 2007, a major change occurred as to a form called the Sub s Preliminary Notice. This was a required Prelien notice for all subcontractors who were performing alterations or repairs. This was not clearly defined. It appeared the notice was required for work done to an existing structure, including such examples as: 1) repairs, 2) remodeling a bathroom or kitchen, 3) adding on a room, or 4) the demo and replacement of a new HVAC system. What was clear is that new construction would not require the notice. The notice was required for residential and commercial projects. The problem with the Preliminary Notice is that it had to be served before the subcontractor had completed its work. It caused nothing but problems because it was served too early at a time in which the general was still processing payments. It was somewhat embarrassing to send out a notice before the general contractor was to make the final Page 13 of 27

14 payment. As a result, many subs simply did not serve the Notice of all and later got in trouble when they attempted to perfect their lien. The legislature finally wised-up and realized this was an ill-advised and unnecessary form. As of January 01, 2007, subcontractors no longer need to serve the old notice called Sub s Preliminary Notice. This was a notice if the subcontractor was performing alterations or repairs to an existing structure, as opposed to new improvements. It was sent out before the date of completion. It can now be ignored. In Pennsylvania the Sub s Formal Notice of Intention is given 30 days before actually filing the mechanic s lien. It is usually later in the project when it becomes apparent you are not going to be paid and are giving a warning shot to the owner that a mechanic s lien is coming. This form is required before filing a mechanic s lien. In turn, the Sub s Formal Notices of Intention are in two formats: 1) at a time in which your mechanic s lien has not yet been prepared; and 2) at a time in which you mechanic s lien has actually been prepared. In other words, the first form tells the owner that you may in the future prepare and file a mechanic s lien. The second form tells the owner that you have already prepared it, are attaching a copy, and plan to file that very same copy if payment is not made. In lieu of serving a Notice of Intention, you can send out a copy of the mechanic s lien itself, but it must be filed with a statement that you intend to file it in the future. It is much easier and safer to use the formal Notice of Intention form with a copy of the mechanic s lien because of the danger of not using the right language if you were simply to send the mechanic s lien form by itself. Remember, if you do not do things strictly by the book, you will lose your mechanic s lien rights. When: How to Serve: Serve at least 30 days before recording the mechanic s lien. Exception: if you receive a Rule to File Claim requiring you to record a mechanic s lien within 30 days, you can dispense with this Notice because there would not be enough time. Serve by certified mail, return receipt requested. Only an adult may serve these notices by mail. It is recommended that you have a process server deliver the preliminary notice, and if the Page 14 of 27

15 whereabouts of the person is not known, then you can post the notice in a conspicuous public part of the job site. Verified or Notarized?: A verified notice simply means you sign it and are representing the contents are true and accurate. A notarized notice is signed in front of a Notary Public or other official. The forms do not have to be verified or notarized. Merely signing them is sufficient. MECHANIC S LIEN Who is Entitled to a Lien: A Pennsylvania mechanic s lien is primarily for general contractors, subcontractors, laborers, as well as material/equipment suppliers. All others, even though they contribute in a valuable sense to the improvement, are excluded. Architects and engineers are entitled to a lien if they: 1) have a direct contract with the owner; and 2) in addition to preparing drawings, specifications and contract documents, they also provide additional services such as supervision of construction. In the AIA trade, this is referred to as contract administration. In other words, an architect or engineer who visits the site on a regular basis and reviews matters to see if the plans and specifications are being met. A lien is also available to persons or companies involved with demolition, excavation, grading, filling, paving, landscaping, furnishing and installing fixtures, machinery, appliances, and equipment; and furnishing, excavating for or installing rails, tires, pipes, poles, and wires. When to File/ Record: Where to File: Within six months of completion of your portion of the work. Unlike most states in which a mechanic s lien is filed with the county recorder, Pennsylvania requires the liens to be filed with the court with the Court of Common Pleas in the county in which the project is located. Make sure you use the standard cover letter supplied by the court (you can find it on their website or get it in person). Page 15 of 27

16 How to Serve: After filing the mechanic s lien, the claimant must serve the owner with a Notice of Filing of Mechanic s Lien Claim, informing the owner that the mechanic s line has been filed and referring them to the court term, number, and date of filing with the court. This form is included in your purchase of a mechanic s lien. Unlike the preliminary notices, this should not be done by certified mail. Instead, it is recommended it be personally served. This can be done by the Sheriff s office (the clerk, for a fee, will forward the papers to their office if you ask) or a private process server. If service cannot be made, the notice may be posted upon at conspicuous place on the job site. The Notice of Filing of Mechanic s Lien Claim has attached to it a file-endorsed copy of the mechanic s lien. To be safe and toeliminate disputes, the person filing the claim should not personally serve it look in the Yellow Pages of your telephone book under Process Servers so an independent third party can serve same. The notice on the owner that a mechanic s lien has been filed must be served within one month of the filing. An Affidavit of Service of this notice must be filed with the court within 20 days after that service. Failure to serve the Notice of Filing Mechanic s Lien or the affidavit with the court within these time limitations can be grounds for voiding the lien. Steps to take: To eliminate confusion, here is a step-by-step guide to follow: Step 1: Within the time and parameters, file the Mechanic s Lien Claim in the clerk s office of the court of common pleas in which the project is located. Be prepared: Pennsylvania is the most expensive state for filing. Also enclose an official court cover sheet (you can get this from the clerk s internet site or by going in person).this can be done either in person or by mailing the original form with an additional copy and a self-addressed return envelope. Call before and make sure you include a check for the exact fee. Step 2: Personally serve both the attached Notice of Claim and the file stamped Mechanics Lien Claim on the owner (if a sub, you may but are not required to serve the general contractor) within one month of filing. This can be done by the Sheriff s office, but it is traditionally slow and expensive. It is recommended you use a process server (look in the yellow pages). Make sure the copy of the mechanics lien you serve has the court file stamp on the top right hand side. Page 16 of 27

17 Step 3: File with the clerk of common pleas the Affidavit of Service of Notice of Filing of Mechanic s Lien Claim with a copy of that Notice attached. In other words, you will be filing both the Mechanics Lien and Notice which shows the clerk you not only recorded the lien but gave the owner a formal notice. This must be done within twenty days of the service by the process server. Amount of Lien: Property Subject to the Lien: Primarily for unpaid labor, material, and equipment supplied. Also includes the lost profits on the work performed. In other words, the claimant gets not only the actual cost of the labor and materials conferred, but also the profit and overhead. Change order work can also be included in the lien. However, the lien is not available for lost profits on other jobs, impact damages, or delay damages caused by breach of contract. Examples of these damaged would be increased interest on lines of credit, overtime, and the like. The lien is allowed only for claims exceeding $ A mechanic s lien applies only to private projects. No lien is allowed on public projects against government property. Obviously, the lien applies to the structure being improved, together with fixtures, appliances, and equipment installed on the property. Thus, the property subject to a lien covers the improvement, the land directly underneath it, as well as the lot or acreage adjacent to it and belonging to the same owner. However, the acreage around the improvement is subject to a lien only if it is reasonably needed for the general purposes of the improvement. Thus, a parking lot adjacent to the structure, a road or a bridge which is needed for the beneficial use of the improvement would be covered. That acreage must also be a part of the business or the residential area being improved. If you are doing tenant improvement work, the lien only applies to the tenant s interest and not the owner s. However, if the owner, by written contract, states that the work being performed is for the immediate use and benefit of the owner, then the lien will also be against that owner s interest. This is a gray area and you should consult competent legal counsel for more details. Page 17 of 27

18 Furnishing Information: Verified or Notarized?: Upon request, the general should furnish others with information about the owner so the required notices and lien can be filled out properly. A verified notice simply means you sign it and are representing the contents are true and accurate. A notarized notice is signed in front of a Notary Public or other official. The mechanic s lien is not required to be verified or notarized. It can simply be signed by the claimant or his or her attorney. Priorities: In the case of new construction or additions, all Pennsylvania mechanic s liens (the claimants are treated equally) become effective as of the date of visible commencement of the work, which would include such matters as grading, grubbing, staking, trenching, etc. In the case of alteration or repair of existing structures, the lien takes effect separately as to each claimant as soon as they file their individual liens. As to the latter, it would appear that the first persons to file their liens would take priority over other contractors or suppliers. If there are mortgages, encumbrances, or judgments already on record prior to starting the work or the date on which a mechanic s lien was filed, they would take preference over the contractor. As to construction lenders on and after 1/1/07, they would take preference over a mechanic s lien claimant. On July 10, 2014, the Pennsylvania mechanic s lien law was amended as to these priorities. It has to do with what are called open ended mortgages. These are mortgages taken out by the owner which provide for financing at the inception but also, almost like a line of credit, allows the owner to borrow more monies in the future, classically for additional improvements. Under the new law, even if the mortgage is recorded after construction has commenced, it will be given priority over a possible lien, if at least 60% of the proceeds are used to pay for the cost of construction. Cost of construction is broadly defined to include the following: mandated off-site improvements, government impact fees, taxes, insurance, bonding, inspections, surveys, testing, permits, legal fees, architect and engineering fees, consulting fees, accounting fees, management fees, utility fees, tenant improvements, leasing commissions, the satisfaction of prior liens or mortgages, municipal claims, Page 18 of 27

19 mortgage origination fees and commissions, finance and closing fees, recording costs, title insurance or escrow fees, or any similar or comparable costs, expenses or reimbursements related to an improvement, made or intended to be made, to the property. This is significant because under prior law, if a mechanic s lien related to work done prior to the recording of the mortgage, that lien was not subordinate to the mortgage to the extent that any of the proceeds of the loan was used to pay for anything other than the cost of completing the work. Because there were a number of items that can be used from the mortgage proceeds that were not related to actual construction, it meant the lender had a reduced chance for priority and therefore less incentive not to make the loan. What difference does this make to a Pennsylvania mechanics lien claimant? If the owner defaults and the mortgage forecloses, there is always the danger your lien will be wiped out. Lien Release Bond: The owner can go to court and have the mechanic s lien released by either: (1) depositing in cash with the court the amount of the lien claim(s); or (2) purchasing a surety release bond from a licensed bonding company for double the amount of the mechanic s lien claim(s) or a lesser amount, as the court may approve. This then takes the lien off the property, but the parties must still litigate the action in court to determine how much is owed. If the contractor later prevails in court, he/she will collect against the bond. Miscellaneous Issues: Speeding up the Lien Filing: There is a way for an owner or general contractor to speed up the time in which a subcontractor must file it s Pennsylvania lien. The owner or general contractor can file a rule (like a court order) notifying and requiring that a subcontractor file it s mechanic s lien within 30 days. If this is not done, the lien claim is barred. However, this can only be done after completion of the work by the subcontractor. Page 19 of 27

20 Subcontractor s/supplier s Lien on Residential Property: Probably the most significant change in Pennsylvania is the ability of owners to cut off completely the right of a subcontractor or supplier to record the mechanics lien. Most construction attorneys, and National Lien Law, find this to be ill-advised, but we still have to deal with this reality. Thus, as to residential property either owner-occupied or intended to be owner-occupied, once the owner pays the general contractor in full, a sub/supplier is not entitled a file mechanic s lien, even though those monies do not filter down to them. For more details, see the discussion below under Owner s Defense. Subdivisions: Assume that a painting contractor has a contract to paint interior and exterior portions of 50 homes in a subdivision under one contract. Can a contractor file a single lien? No. The contractor must file separate claims for each separate residential unit. The amount of each claim is determined by dividing the total debt by the number of residences in the subdivision, unless the contractor has specific records as to how much is owed for each unit. For example, if $30,000 is owned on six of the remaining residential units, unless specific accounting is available, you would file a lien for $5,000 on each of the six units. Selling the Property Before the Filing of a Lien: Preliminary Objection: If the owner sells his or her property to a new owner before the filing of a mechanic s lien, that lien can be later filed against the new owner if there was new construction or an addition. If, instead, there was merely alteration or repair, the contractor cannot file the lien after the property is sold to the new owner. Any party, whether owner, general, or subcontractor, may go to court and object to the filing of a mechanic s lien. A common objection is that the lien claimant has not complied with all the legal formalities. Examples would be: (1) a lien filed by a third- or fourth-tier contractor or supplier; (2) a new owner who received a lien after taking title which related to previous alterations or repairs: (3) the late filing of a mechanic s lien; (4) the failure to file with the court an Page 20 of 27

21 Affidavit of Service of the mechanic s lien upon the owner; (5) the failure of a subcontractor to serve the owner with a written notice of intention to file the mechanic s lien at least 30 days before the claim is filed; and (6) any other technical imperfections. The court them makes a preliminary ruling and if the facts are contested, may take evidence by deposition or otherwise. The court may also give the lien claimant the right to correct or amend the lien. Owner s Right To Withhold or Deduct Payment: An owner who has been served with a preliminary notice, notice of intention, or mechanic s lien by a subcontractor may withhold from moneys due the general contractor the amount of that lien, or may pay the subcontractor directly. New Owner s Defense: This is how it works. If a subcontractor s lien has been filed, the owner holds back from the general contractor the amount of the subcontractor s lien and then notifies the general, in writing, in a form called a Notice of Retention of Funds. This form is given to the general only for subcontractor liens not if the sub merely serves a preliminary notice or notice of intention. The Notice of Retention of Funds states that unless the general contractor, within 30 days, either: (1) pays off the sub; (2) defends against the lien; or (3) posts a release bond or deposits money with the court, the owner may go ahead and pay the sub and deduct this from the next payment to the general. Or, the owner may decide to defend the case in court and charge the general with attorney s fees and costs in doing so. Remember, Pennsylvania provides that the prevailing party in mechanic s lien disputes is entitled to reasonable attorney s fees and costs. Effective September 8, 2014, there has been a major change as to construction projects relating to residential property. This involves what is called the owner s defense. Namely, the legislature felt it was unfair to a homeowner, assuming full payment has been made to the general contractor, to have Pennsylvania mechanic s liens by subs and suppliers recorded against the property because the general did not pay those persons. In other words, if Page 21 of 27

22 someone is meant to suffer, it would be the subcontractors and suppliers. Although National Lien Law does not agree with this assumption, it is now the reality in this State. The procedures now work as follows: if a summer supplier records a mechanics lien, the owner can bring a petition in court and prove that all monies have already been paid to the general contractor. This will discharge the lien. If the owner has paid most that not all of the monies to the general contractor, the lien can only be for the balance owed (49 P.S. 1510(f)). As an example, assume there is still a balance owed to the general contractor of $60,000. The general has not been paying the sobs so the money has not trickled down. As a result, there are three subcontractor mechanics liens for a total of $75,000 ($25,000 each). Those liens must each be reduced to the proportional amount of $20,000 based upon the remaining funds. The lesson: file your pre-lien notices and Pennsylvania liens early, while there is still money available Major Change as of 2009 Lien Waivers: Old Law: Mechanics Lien Laws have been around for a long time and they usually stay on the books quite a while before major revisions. Pennsylvania was in the same category enacting its mechanics lien laws in 1963 and although there were revisions thereafter, they were not considered that major. Well, Pennsylvania did it in a big way as of January 01, 2007, making a major revision to it s statutes. This change had to do with lien waivers. In most states, a person would waive their right to file a lien only at the time of payment and to the extent that payment was made. In other words, you would hand someone a lien waiver in one hand and receive a payment in another. And in almost all states, it was against public policy for a contractor or subcontractor to waive their lien rights in advance of that payment. Therefore, someone waving their lien rights at the time they initially Page 22 of 27

23 entered into a contract, and before performing their work, was considered too unreasonable and therefore rendered invalid. Not so in Pennsylvania. Such no-lien up front waiver contracts were common. The fact cannot be over-emphasized. It meant that for many projects in Pennsylvania, there was no possibility of recording a lien by the general or subcontractor. As a result, especially as to subs, they didn t bother learning the laws as to pre-lien and mechanic s liens. It got to the point that almost anyone who knew the law, including owners and general contractors, insisted that that these lien waivers be included in their contracts. All this was changed in 2007 when the legislature ended this practice. As of that date, such a no-lien contracts were allowed only in the following cases: 1. Residential projects in which the contract price is less than $1 million. 2. Residential projects, regardless of the price, if the general contractor has taken out a payment bond. 3. Commercial projects, regardless of the price, if the general contractor has taken out a payment bond. 4. Progress and final lien waivers given at the time of receiving a payment. No Lien contracts were not allowed in the following cases: 1. Commercial projects if the general contractor has not taken out a payment bond. Since this is both rare and expensive, in a practical sense, almost all commercial projects prohibit upfront waivers in contracts. Subcontractors and suppliers will be able to file their mechanic s liens. 2. Residential projects over $1 million if the general has not taken out a payment bond. New Pennsylvania Law in 2009: Effective October 2, 2009 the law eliminated the $1 million residential exclusion. Now, upfront waivers are allowed for any residential Page 23 of 27

24 project, large or small, regardless of the dollar amount. Residential projects are defined as: 1) An existing residential building not more than three stories high (for example, the typical single family dwelling), or 2) Property zoned or otherwise approved for residential development on which there will be in the future constructed a residential building not more than three stories high (for example, a lot ready for building a residence), or 3) A planned residential development for which a subdivision or land development plan has received preliminary, tentative, or final approval for the construction of residential projects no more than three stories high (for example, a planned subdivision). In determining the height limitations, you are to ignore the basement level. In other words, you can have a basement plus up to three stories above that. The legislature has also clarified what happens if the general contractor signs a contract with the owner specifying all lien rights by subcontractors are waived. Assuming such waiver is otherwise permissible (see above), there is an extra requirement giving subcontractors notice. Without proof of actual notice before start of the work, the waiver cannot be effective. Hence, the owner or general contractor has to notify the subcontractor, before the lien waiver is valid, as follows: a) before the subcontractor starts work, or b) ten days before the subcontractor signs its contract, or c) in the event the general records its contract before the work of the sub starts, or d) within ten days of the general contractor signing its contract. So watch out. General contractors, suppliers, and subcontractors can all have their lien rights waived if there is such a provision in a residential contract or in any other separate writing. For this reason, be careful what you sign. LAWSUIT TO FORECLOSE LIEN Page 24 of 27

25 Introduction: When: Your Pennsylvania lien is not valid forever. Because it directly affects the owner s title, it has a limited shelf life and must be enforced within a short period of time. That enforcement is done by filing a lawsuit to foreclose. Just like the time deadlines for a Pre-Lien or Mechanic s Lien, the courts strictly construe these time limits which are called statutes of limitation. Again, if you are literally one day late, the lien is ineffectual. Within two years of the date of filing the mechanic s lien. The owner may speed up this time period at any time after the mechanic s lien is filed. The owner can require the lien claimant to file the lawsuit by service of a rule (similar to a court order) entered by the court. If the contractor fails to file the lawsuit within 20 days of service of the rule, the lien is void and judgment will be entered in favor of the owner. Where to File: Arbitration: With the Court of Common Pleas of the county in which the project is located. Many construction contracts state that all disputes will be decided by binding arbitration, as opposed to a court proceeding by judge or jury. In fact, it has long been a tradition to do so in the construction industry. Arbitration is usually quicker and less costly, especially because it cuts down on expensive discovery. The decision is final and binding, with no right to appeal. You lose your right for a jury trial, but few contractors want that in the first place. You usually pick an experienced construction attorney or retired judge to hear the case in their conference room. It is just like a court proceeding with the same general rules of evidence, but more informal. On the other hand, you can only foreclose your lien through a court proceeding, not arbitration. So, how do you keep your arbitration rights and at the same time preserve your lien rights? Simple. You bring a lawsuit to protect the lien and then immediately request the court to stay the court proceedings. When arbitration is done, you go back to court and turn the arbitration award into a judgment. Need a Lawyer? In this country, every individual has the statutory right to represent themselves. This means they can prepare all necessary papers, appear at hearings, and actually try the Page 25 of 27