K&LNG
NOVEMBER 2006
Alert
Construction Law
Pennsylvania Enacts Major Changes to the
Mechanics’ Lien Law of 1963
Important changes were made to the
Pennsylvania Mechanics' Lien Law of 1963
("Mechanics' Lien Law")1 when Governor
Edward G. Rendell signed House Bill No. 1637
("Bill 1637").2 These changes will substantially
affect the rights of all parties involved in the
construction process, including: (i) severely
limiting the ability to obtain lien waivers for nonresidential work;3 (ii) expanding the class
of protected parties to include parties who
contract with a subcontractor;4 (iii) eliminating
subcontractors’ "preliminary notice"
requirements;5 (iv) extending the claim period
from 4 to 6 months;6 and (v) altering the priority
of a mechanics’ lien compared to mortgage liens.7
The changes will take effect on January 1, 2007.8
Significant Changes to the Mechanics'
Lien Law
(i) Limitations on lien waivers
The amendments to the Mechanics' Lien Law
will significantly limit the ability of contractors
and subcontractors to waive their rights to file a
mechanics' lien. Previously, contractors and
subcontractors could waive their lien rights by
written waiver or conduct.9 As a result of the
changes, the majority of such waivers will be
prohibited as against public policy.
As an initial matter, for contracts involving
residential construction (as newly defined by the
amendments) under $1 million, a contractor or
subcontractor may still waive its lien rights by
written instrument or conduct.10 Moreover, a
subcontractor may waive its lien rights for any
residential building contract, regardless of the
value, where the contractor has posted a bond
guaranteeing payment.11
For contracts involving commercial construction,
the amendments provide that a waiver of lien
rights by either a contractor or a subcontractor:
is against public policy, unlawful and void, unless
given in consideration for payment for the work,
services, materials or equipment provided and only to
the extent that such payment is actually received.12
This language appears to permit the customary
monthly and final lien waivers on commercial
projects where payment is made to the contractor
or subcontractor. A lien waiver in this
circumstance is tantamount to a mere "payment
receipt." Note, however, where a contractor has
posted a payment bond, a subcontractor and subsubcontractor may validly waive its rights to file
a lien.13 In such a circumstance where a bond is
posted, only the subcontractor can waive its lien
rights; the contractor itself may not waive its
lien rights.
(ii) Protections extended to parties who have
contracts with a subcontractor in direct privity
with a contractor
Coupled with the limitations on lien waiver
agreements, another significant change to the
Mechanics' Lien Law is the creation of an
additional layer of parties who will be afforded the
right to file a mechanics' lien. Previously, the
Mechanics' Lien Law expressly limited this right
to contractors and subcontractors.14 The changes
made by Bill 1637 expand the group of protected
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persons to include sub-subcontractors and
materialmen who supply goods to
subcontractors.15 As a result of this change,
the class of potential lien holders will increase
dramatically.
(iii) Elimination of "Preliminary Notice" for
subcontractors
In the past, a subcontractor had to provide
"preliminary notice" to the owner in cases of
alteration or repair on or before the date of
completion of the subcontractor's work. The
notice had to include a description of the
property, the amount due, and intention to
file a lien if such amounts were not paid. The
contractor was not required to provide any notice
prior to filing a lien.
Under the amendments to the Mechanics' Lien
Law, a contractor continues to have no notice
requirement prior to filing its lien. However,
even with the new amendments, a subcontractor
(or sub-subcontractor) will still have to file a
formal notice of its intention to file a lien thirty
days before actually filing its lien. In other
words, the amendments simply eliminate the
"preliminary notice" requirement for alteration
and repair work prior to the subcontractor’s
completion of the work. Thus, under the new
law, there is one uniform pre-filing thirty-day
notice requirement for all subcontractors and
sub-subcontractors.
Such an approach will ease the prescriptive
requirements on subcontractors to perfect their
liens. On the other hand, owners will not receive
the protections afforded by the preliminary notice
before completion of the work, namely the
identification of a party (that the owner may not
have been aware was doing work) who could
bring a claim for nonpayment. Instead, the
owner will be limited to a thirty-day notice prior
to the subcontractor filing the lien.
(iv) Additional time to file lien
A simple change to Section 1502, Filing and
Notice of Filing of Claim, could have a major
2
impact on the number of liens filed. The
deadline for filing a claim with the prothonotary
has been extended from four months to six
months.16 By increasing the amount of time that
contractors and subcontractors have to file a claim
by 50%, the statute now affords a greater
opportunity for liens to be filed.
(v) Changes to lien priorities
Finally, amendments implemented by Bill 1637
make certain changes to the lien priority granted
to mechanics' liens.17 Put simply, under the new
amendments, mechanics' liens are now expressly
subordinated to purchase money mortgages (as
defined by statute) and open-end mortgages (as
defined by statute, but limited to where the
proceeds of which were used for the erection,
construction, alteration or repair of the property).
That said, with respect to other categories of
liens, mechanics' liens filed on erection or
construction work are still given priority "as of the
date of the visible commencement upon the
ground of the work," and liens filed for alteration
or repair work are still given priority "as of the
date of the filing of the claim."18 Because of the
additional two months to file a lien, the priority
for bankruptcy claims may be affected. In short,
the bankruptcy laws provide protection for
mechanics' lien claims based on the priority given
under the Mechanics' Lien Law. As such, in
cases involving erection and construction, the
"effective date" of the lien is when construction
began, as opposed to when the lien is filed.
To that end, in cases involving erection and
construction, a party can now file a claim up to six
months (as opposed to four) after completing its
work and still have the benefit of the original
construction date for purposes of priority in
bankruptcy.
Recommendations and Conclusion
It is important for owners to understand how the
changes will affect their ability to limit mechanics'
lien claims that may be filed against their
property. As an initial matter, owners should
press for contractual terms that provide for
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month-end lien waiver agreements from
contractors, subcontractors and sub-subcontractors
in return for monthly payments. Moreover,
owners should require contractors to provide a
payment bond. Pursuant to the amendments, on
those projects where a contractor payment bond is
in place, subcontractors and sub-subcontractors
can and should be required to enter into
traditional lien waiver agreements. As an
alternative to payment bonds, owners can require
the contractor to indemnify or defend the owner
against any lien brought by a subcontractor. The
owner can also require terms that allow the owner
to satisfy the lien and consider that payment as a
setoff against amounts owed to the contractor.
Owners should also consider increasing the
retainage fees for contracts to provide available
funds for subcontractors who might have claims for
non-payment. Finally, an owner might consider
requiring the contractor to provide a letter of credit
guaranteeing payment to subcontractors and subsubcontractors. In the end, the owner's options will
likely turn on the size and complexity of the
project. Owners are encouraged to contact counsel
during the contract drafting stage to ensure the
proper protections are in place.
Overall, the amendments to the Mechanics' Lien
Law set forth in Bill 1637 will no doubt change
the landscape of mechanics' lien claims in the
Commonwealth of Pennsylvania. The severe
limitations on lien waiver agreements will require
increased diligence on the part of owners when it
comes to managing contractors and subcontractors
and will likely change the contractual
arrangements between those parties. The
expansion of the protected class to include subsubcontractors will no doubt increase the number
of liens filed on projects. The effect of the
remaining changes to notice requirements, filing
time period and priorities will likely be limited to
specific claims as those changes are driven more
by the facts of a particular case, rather than
application to a broad category of claims. It is
unclear what effect, if any, the changes to the
statute relating to lien waivers will have on the
validity of "pay-if-paid" clauses. As case law
develops on that issue, a further Alert will be
provided by the Construction & Engineering
Practice Group of Kirkpatrick & Lockhart
Nicholson Graham LLP.
By the same token, contractors and subcontractors
should be aware of the increased rights they enjoy
under the amendments to the Mechanics' Lien
Law. Of course, as always, timely payment will
avoid the need for any party to invoke the rights
and duties provided by the Mechanics' Lien Law.
Michael J. Zukowski
mzukowski@klng.com
412-355-6397
Michael T. Duckworth
mduckworth@klng.com
412-355-6728
1 49 Pa. C.S. § 1101 et seq.
2 2005 PA H.B. 1637.
3 Id. at §§ 201(14), 401.
4 Id. at § 201(5).
5 Id. at § 501.
6 Id. at § 502 (A)(1).
7 Id. at § 508.
8 2005 PA H.B. 1637.
9 See 49 Pa. C.S. § 1401.
10 2005 PA H.B. 1637 at § 401(A)(1).
11 Id. at § 401(A)(2)(II).
12 Id. at § 401(B)(1).
13 Id. at § 401(B)(2).
14 Section 1303 states "[n]o lien shall be allowed in favor of any person other than a contractor or subcontractor, as defined herein,
even though such person furnished labor or materials to an improvement." 49 Pa. C.S. § 1303.
15 2005 PA H.B. 1637 at § 201(5).
16 Id. at § 502(A)(1).
17 Id. at § 508(C).
18 Id. at § 508(A)-(B).
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