PENNSYLVANIA MECHANIC S LIEN LAW 2017

Transcription

1 PENNSYLVANIA MECHANIC S LIEN LAW 2017 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 21

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. Proposed Mechanic s Lien Law Changes for Pennsylvania (Effective December 31, 2016 The legislature in the Commonwealth has been quite busy of late. The Commonwealth is now setting up a website which will be known as the State Construction Notices Directory. This will serve as the statewide system for filing various construction notices and is under new Sections and This is Page 2 of 21

3 to be implement from and after December 31, Although it is not yet in effect, contractors and suppliers should be on the alert. Here is an outline of the proposed changes: State Construction Notices Directory: This will be similar to what has been enacted in Utah. The state will design an Internet site where various notices (including the notice of Commencement and Notice of Furnishing) will be filed online and available for everyone to view. Reasonable fees will be charged. Once a document is filed, there will be a hardcopy printed as a receipt. Especially if you are a sub or supplier, pay attention to this registry because if a Notice of Commencement has been filed, you will be required to file a Notice of Furnishing within 20 days of first furnishing labor or materials. Fortunately, there will be an index by county and searchable by owner s name, general contractor s name, and property address. Notice of Commencement: The owner (or the general contractor if so, authorized) will be filing a Notice of Commencement with the registry. This will be done pursuant to a standardized form. It gives all relevant information so a sub or supplier can file his or her Notice of Furnishing. Additionally, the Notice must be posted at the site and the owner must take reasonable steps during construction to make sure it remains posted and available for view. New Notice of Furnishing: As many may recall, in 2007 the Pennsylvania legislature dispensed with the preliminary notice called Subcontractor s Preliminary Notice. It is now back as a requirement. It is now called a Notice of Furnishing. This Notice will also be filed with the Directory and is required only if a Notice of Commencement is filed with that same registry. Make sure you search the registry on a regular basis to see whether not the Notice of Commencement was filed. It is our recommendation, regardless, that you go ahead and serve automatically the Notice just to be safe. The Notice must be filed with the Directory within 20 days of first furnishing your labor or materials. In addition, it must be served by certified mail on the owner within that time period. It will be in the form prescribed on the Internet. You may serve in late, but you can only file a mechanic s lien for the unpaid services within 20 days of service and thereafter. Note that you must also follow existing law and serve a notice of intent to lien within 30 days before the recording your mechanic s lien. Page 3 of 21

4 New Notice of Completion: The owner also has the option of recording with the Directory a Notice of Completion within 45 days of the actual completion of the project. Once filed, all subcontractors who have submitted their Notices of Furnishing will automatically be notified. This notice is for informational purposes only and does not affect in any way mechanic s lien time deadlines. Pennsylvania Mechanics Lien: There will also be a change in the timing of recording a mechanic s lien. It must be recorded within four months, not six months, of completion of your portion of the work. It will not be recorded with the registry but will be filed with clerk of the county Court of Common Pleas. 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. Subcontractor s/supplier s notice of nonpayment: Subcontractors and suppliers have the option, but are not required, to file with the directory a Notice of Nonpayment. This is more for informational purposes, and the failure to do so does not affect one s lien rights. Frankly, this will rarely be used by subcontractors henceforth. Existing Pennsylvania Mechanic s Lien Law PRELIEN NOTICE This state requires a Notice be sent out before the mechanic s lien is filed/recorded. For simplicity, this notice will be referred to as a Prelien Notice. The basic information on this Notice is as follows: Name of Notice: Notice of Furnishing Page 4 of 21

5 Who Must Use These Notices: 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 Notice of Furnishing is required only if a Notice of Commencement is filed with the State Directory and before any work begins. That Notice of Commencement has all the information required for completing the pre-lien notice, including the legal description of the property and the name as well as the address of the owner of record. That Notice of Commencement will be especially easy to secure after the State Directory is put into place after December 31, 2016, because the owner or agent for the owner must file it with that Directory. When: How to Serve: Verified or Notarized?: See Time Deadlines table. Within 45 days of first furnishing work, materials, or equipment. Serve by certified mail, return receipt requested. 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. --o-- Name of Notice: Subcontractor s Formal Notice of Intention to File a Lien Who Must Use These Notices: 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. 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 Page 5 of 21

6 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 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. Page 6 of 21

7 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 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. Page 7 of 21

8 As of January 01, 2007, subcontractors no longer need to serve the Sub s Preliminary Notice. In Pennsylvania the Sub s Formal Notice of Intention, still required to be served, is more serious and 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: Verified or Notarized?: See Time Deadlines table. 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 whereabouts of the person is not known, then you can post the notice in a conspicuous public part of the job site. 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. Page 8 of 21

9 PENNSYLVANIA MECHANIC S LIENS Who is Entitled to a Lien: A Pennsylvania mechanic s lien is primarily for general contractors, subcontractors, laborers, as well as material/equipment suppliers. However, as described in the above section titled, Who Must Use These Notices?, 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: Where to File: How to Serve: See Time Deadlines table. 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). 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 Page 9 of 21

10 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. 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. Page 10 of 21

11 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. Furnishing Information: Upon request, the general should furnish others with information about the owner so the required notices and lien can be filled out properly. 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 mechanic s lien is not required to be verified or notarized. It can simply be signed by the claimant or his or her attorney. Page 11 of 21

12 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, 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 Page 12 of 21

13 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. 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. Page 13 of 21

14 Selling the Property Before the Filing of a Lien: Preliminary Objection: Owner s Right To Withhold or Deduct Payment: 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 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. 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. 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 Page 14 of 21

15 New Owner s Defense: 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 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 Page 15 of 21

16 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 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. Page 16 of 21

17 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 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. Page 17 of 21

18 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 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: With the Court of Common Pleas of the county in which the project is located. Arbitration: 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 Page 18 of 21

19 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 case. In so doing, the court considers you to be acting either in pro se or pro per. Before making this decision, consider the following factors: 1. You are a professional and thoroughly know the ins and outs of not only the construction industry but of the project itself. The best lawyer on his or her best day will probably not know more than 50% of what you know. 2. How is your public speaking abilities? If you are uncomfortable speaking to a group, you will even more uncomfortable in court or arbitration. You could be the sharpest wit in town but may not be able to present your arguments. Remember, appearing uncomfortable is perceived as having deficiencies in your case. People usually think that if you are not comfortable about your own facts, then they must not be that strong. 3. If the other side has a lawyer, you might want to think twice about representing yourself. You will certainly know the facts quite well, but you may be blindsided by legal technicalities. 4. You may also want to think twice if this is a really nasty and emotional case. In other words, if the other Page 19 of 21

20 side is going for blood. Having a lawyer can shelter you from this emotional trauma. No matter how strong you are, lawsuits are taxing not only on your time, but on your physical and emotional energies. 5. If you have a good case in which you have complied with technicalities and performed good work, you are essentially engaging in a collection action. These actions are typically very simple because there are few defenses or defects alleged by the other side. It makes it easier for you to represent yourself because it is more a question of when and how much they will pay as opposed to whether you will win at all. 6. If you have a binding arbitration provision, you may consider representing yourself. These proceedings are much more informal and the arbitrator tends to give you more leeway. There are also fewer rules and not they are usually not quite as strict. 7. You could consider representing yourself but get advice along the way from a lawyer. It is much cheaper that way. On the other hand, the lawyer cannot watch over every move and you might slip up. Many times lawyers can also help you with preparing the forms, simply putting your name on the pleading. You can also bring in your lawyer at the end to actually try the case. 8. Judges and courts do not give legal advice. They only help you with what forms to use. However, clerks can be invaluable in steering you in the right direction as far as where to file, time limitations, the nature of the form or pleading, etc. But, remember when it comes right down to the ultimate advice, they cannot help you. 9. Judges usually treat you the same as an attorney which means they expect strict compliance with the rules. Although some judges give you more slack, don t count on it. 10. The biggest dilemma is whether you should hire an attorney for a smaller case, typically in the $5,000 to $10,000 range. You have to watch this because you may eat up that amount in attorney s fees. You never make money on lawsuits, only lawyers do. Try to settle for the best price you can get and move on. Page 20 of 21

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