Mechanic’s Lien Claims: How Recent Changes May Affect Your Right to Assert a Mechanic's Lien

KAPLIN STEWART

Presented by:

Robert A. Korn, Esq. & Joshua C. Quinter, Esq.

September 23, 2016

SCOPE OF THE LIEN

• Applies to labor and material provided in the

“erection or construction” or “alteration or

repair” of an improvement to real estate.

WHO CAN FILE A LIEN?

• Lien may only be filed by a “Contractor” or

“Subcontractor”

• “Contractor” supplies labor or material under a contract

directly with Owner or tenant of the Owner.

• “Subcontractor” supplies labor or material under a

contract with a Contractor or supplies labor or material

under a contract with a Subcontractor to a Contractor.

BARRED FROM FILING LIEN

• Design professional (such as Architect or Engineer) may

be a “Contractor” only if its contract with an Owner

includes construction supervision or superintendance in

addition to design services.

• A party who has a contract with a material supplier.

BARRED FROM FILING LIEN

• Design Professional which contracts with

anyone other than Owner or Tenant.

• Employees of the owner, regardless of the

nature of the work performed.

PROPERTY PROTECTEDFROM LIENS

• Publicly owned real estate is not subject to

a mechanics’ lien.

• Property subject to a valid waiver of lien is

also immune from a mechanics’ lien.

CAN THE RIGHT TO FILE A LIEN BE WAIVED?

• Lien rights can be waived if the property is “residential”

(not “residential” if the construction is more than three

stories in height, not including basement level).

• Upfront lien waivers are against public policy, unlawful,

and void for non-residential buildings.

• Upfront waivers are permissible if contractor posts a

bond guaranteeing payment.

EFFECT OF THE LIEN

• A mechanics’ lien is a lien against real property and will

encumber the real property itself.

• The lien attaches to the owner’s interest in the property

but not against personal or other assets of the Owner.

• Lien attaches to a fee or leasehold interest in real

estate.

PRIORITY OF LIENS

• The Lien Law provides that [t]he lien of a claim filed under

this act shall take effect and have priority “as of the date of

the visible commencement upon the ground of the work of

erecting or constructing the improvement…”.

• If the work is alteration and repair, Section 1508(b) provides

that the lien shall take effect and have priority “as of the

date of the filing of the claim”.

• Many disputes center on establishing the date on which work

commenced.

IS SITE WORK LIENABLE?

• “Erection, construction, alteration or repair”

includes traditional site work (e.g. utility

work, excavation, grading, paving in order to

supply services to the improvement or when

such work is incidental to the erection,

construction, alteration or repair of a

building).

NOTICE REQUIREMENTS

• Presently, a subcontractor must provide “formal notice”

of intention to file lien at least 30 days before the

mechanics’ lien is filed.

• The owner of the property subject to the lien must be

served by first class, certified mail or personal service.

• The coming changes to the law significantly impact the

notice requirements by adding another layer (more on

that later)

TIME LIMITATION FOR FILING THE LIEN

• Claim must be filed within six (6) months after last date

labor or material was provided by claimant.

• Returning to the project to perform punchlist work will

not extend the six month rule.

• Since the work must be continuous, returning to the

project to perform minor work or delivering material to

the project, after a hiatus, will usually be construed as

an attempt to circumvent the six month rule.

PROSECUTING THE LIEN CLAIM

• One cannot execute on a lien claim without securing a judgment.

• The action to obtain judgment on the lien claim must be

commenced within 2 years from the date of filing, unless the

owner of the project extends the time in writing.

• A verdict must be recovered or judgment entered within 5 years

from the date of filing of the claim and final judgment must be

entered on the verdict within 5 years.

• The claim will be lost unless prosecuted within these time

limitations.

Can an Owner/Tenant Limit its Liability to the Lien and Contract Price?

• Yes, if the Subcontractor has actual notice of

the contract price and payment terms of the

Owner/Tenant contract with the contractor, or

if the contract or pertinent provisions are filed

with the Prothonotary, an Owner or Tenant can

limit their liability to the unpaid contract

balance.

Domb Case (Superior Court of Pennsylvania)

• Appellant sent a preliminary notice of intent to lien

• Appellant walked off the job because of non-payment

• Act required the giving of preliminary notice on or before completing work

• Because Appellant did not complete work, the preliminary notice was ineffective and the lien itself could not be perfected

Changes Are Coming

• In October 2014, Governor Corbett signed into law changes to the Mechanic’s Lien statute that are scheduled to take effect on December 31, 2016

• The changes relate to the manner in which notice is given on projects and add another level of notice

• The Department of General Services will play a large role in large lien claims as a result

The Basics to the Changes to the Mechanic’s Lien Law

• Creates a state wide electronic “State Construction Notices Directory” to be operated by DGS for purposes of providing notice

• Uses model in place in Utah since 2005

• Adds possible defenses to lien claims for owners and contractors

• Includes a mechanism and accompanying penalty for efforts to prevent filings in directory

New Notice Provisions

For all projects with a value of $1.5 million or more, the following forms of notice are now “in play”:

(1) Notice of Commencement

(2) Notice of Furnishing

(3) Notice of Completion

(4) Notice of Non-Payment

Note: The statute is not clear on how the $1.5 million will be measured, but it seems safe to assume it relates to total project value

Notices of Commencement

• The filing of a Notice of Commencement is optional; but the owner does not have the benefit of the notice defense if it is not filed

• The owner can file the notice or delegate the obligation to file with the directory to the general contractor as part of the contract

• Notice must be filed in the directory before any work commences and be posted at the project site to be effective

• Owner must also make reasonable efforts to make sure the notice is part of the contract documents

What goes in the Notice of Commencement?

The statute is very specific about what must be in the Notice of Commencement. The requirements are:

(1) The full name, address and e-mail address of the contractor.

(2) The full name and location of the “searchable” project.

(3) The county in which the “searchable” project is located.

What goes in the Notice of Commencement?

(4) The legal description of the property upon which the improvements are being made, including the tax ID number of each parcel included in the “searchable” project.

(5) The full name, address, and e-mail address of the “searchable” project owner of record of the property and the “searchable” project being constructed.

What goes in the Notice of Commencement?

(6) If applicable, the full name, address and e-mail address of a surety for the performance and payment bonds and the bond numbers.

(7) The unique identifying number that is assigned to the Notice of Commencement pursuant to section 501.1(e)(1).

Notices of Furnishing

• If the owner or general contractor file a Notice of Commencement with the directory, then subcontractors and suppliers must file a Notice of Furnishing within 45 days of starting work or delivering materials to the project

• The failure to file a Notice of Furnishing after a Notice of Commencement results in the forfeiture of lien rights

• General contractors do not have to file Notices of Furnishing

What goes in the Notice of Furnishing?

The statute is likewise very specific about what goes into a Notice of Furnishing:

(1) A general description of the labor or materials furnished.

(2) Full name and address of the person supplying the services or items.

(3) Full name and address of the person that contracted for the services or items.

(4) A description sufficient to identify the searchable project, based on the description in the Notice of Commencement.

What Does the Notice of Furnishing Look Like?

The statue specifically says the notice should be in “substantially in the following form”:

Notice of Furnishing

To:(Name of searchable project owner)

(Address of searchable project owner)

(Notice of Commencement Number)

Please take notice that the undersigned is performing certain work or labor or furnishing certain materials to (Name and address of other contracting party) …

What Does the Notice of Furnishing Look Like?

… in connection with the improvement to the real property located at (Project location). The labor, work or materials were performed or furnished first, or will be furnished first, on(date).

(Name and Address of Lien Claimant)

(Name and capacity of party signing for lien claimant)

(Address of Signing Party)

(Date)

Notice of Completion

• The filing of a Notice of Completion is optional, for informational purposes only, and has no proscribed form

• Filed by owner or general contractor within 45 days of actual completion of the work measured as issuance of certificate of occupancy and acceptance of work by owner or no work for 30 consecutive days

• May not be used for other purposes, such as place holder to measure last date worked or start of warranty obligations

Notices of Non Payment

• The filing of a Notice of Non Payment is optional, for informational purposes only, and has no proscribed form

• No time limit on the filing of notice and no impact on lien rights; designed to allow for resolution of possible claims

• Filing of Notice of Non-Payment does not excuse failure to file Notice of Furnishing

Basic Logistics of the State Construction Notices Directory

• Directory to be run by DGS, including the operation of the website

• Scheduled to go on-line by December 31, 2016, but it seems unlikely DGS will be ready

• DGS already saying it will do nothing more than “process papers”

• Mechanism provided for parties using the directory to receive notice of filings electronically

Does the State Construction Notices Directory Otherwise Effect Lien

Rights?

• No, with the exception of these new notice provisions, nothing changes.

(1) Parties can still contract to waive liens as before

(2) The time requirements for Formal Notice of Intent and to file a lien itself remain the same

(3) The information that must be included in the lien itself is unchanged

(4) Importantly, the lien law will still be strictly construed

A Few Unanswered Questions About the Amendments

• Does the $1.5 million threshold apply to the entire project or each contract?

• Is a Notice of Commencement effective if filed before work starts if it does not show up in the directory before work starts?

• What happens when something is misfiled in the directory, the Directory goes down, or DGS falls behind in recording notices?

• Can, and how, will parties try to deal with these provisions in their contracts?

Thank you

KAPLIN STEWARTROBERT A. KORN JOSHUA C. QUINTER

(610) 941-2512 (610) 941-2521

rkorn@kaplaw.com jquinter@kaplaw.com

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