Upcoming Changes To The Pennsylvania Mechanics Lien Law

October 2006

BY: STEVEN E. OSTROW AND JILL S. RAVENSCROFT

The Pennsylvania legislature recently passed amendments significantly changing the Pennsylvania Mechanics Lien Law of 1963. The new law, known as Act 52, was signed by Governor Rendell on June 29, 2006, and becomes effective on January 1, 2007. The amendments will bring Pennsylvania’s mechanics lien law more in line with most other states by declaring advance mechanics lien waivers “against public policy, unlawful and void”, except in limited situations (discussed below). The current law, in contrast, permits the filing of advance lien waivers for general contractors and subcontractors prior to the commencement of work on the property.

Though Act 52 will benefit contractors by outlawing most advance lien waivers, at the same time it will also protect purchase money and construction lenders from the risk of a mechanics’ lien priming their mortgages. Under the current law, once a mechanic’s lien claim is filed for new construction, the claim takes priority as of the date of visible commencement of construction which may occur before the recording of a lender’s mortgage. Consequently, lenders typically require advance mechanic’s lien waivers before any work begins on a project. Act 52 will ban this practice in most instances. Significantly, however, the new law provides that all mechanics’ liens are subordinate to purchase money mortgages as well as to open-end construction mortgages regardless of the timing of the beginning of construction.

Advance Lien Waivers Permitted in Limited Situations

Under Act 52, advance lien waivers will be effective only in limited circumstances. First, the new law will permit subcontractors (but not general contractors) to sign advance lien waivers for non-residential projects where the general contractor has “posted a bond guaranteeing payment for labor and materials provided by subcontractors.” Act 52, however, does not provide any guidance regarding the bond. For example, the law is silent with respect to who may issue the bond, what the appropriate amount of the bond must be and how the bond is to be “posted”.

Second, Act 52 allows advance lien waivers in certain situations involving “residential buildings.” Unfortunately, the statute does not clearly define the meaning of “residential building.” The term obviously applies to an individual’s home. However, it also includes property which is “zoned or otherwise approved for residential development, planned development or agricultural use” or “property for which a residential subdivision plan or planned residential development has received preliminary, tentative or final approval under the Municipalities Planning Code.” The scope of these provisions is less than clear and raises many issues. For example, does an unimproved lot approved for mixed commercial and residential development qualify as a “residential building”? This and other questions will likely result in litigation to obtain clarification from the courts.

Under Act 52, advance lien waivers will be permitted in the following three (3) situations involving “residential buildings” by:

1. Contractors in which the total contract price between the owner and contractor is less than $1,000,000;
2. Subcontractors in which the total contract price between the owner and contractor is less than $1,000,000 by a written instrument signed by the subcontractor (not the general contractor); and
3. Subcontractors, if signed by the subcontractor, when the contractor has “posted a bond” guaranteeing the payment for labor and materials provided by the subcontractors (no limit on the amount of contract is stated in Act 52).

No Lien Priority for Take-Out Lenders

The new law does not afford the same lien priority protection to take-out lenders given to the holders of purchase money or open-end construction mortgages. At the same time, Act 52 increases the time period for the filing of mechanic’s liens from four (4) months to six (6) months after the date the claimant’s work is completed. The lien priority of the mechanics lien will continue to relate back to the date of visible commencement of work upon the ground for new construction, regardless of when the claimant performed the work. Act 52 also expands the type of claimants who may lien a project by allowing sub-subcontractors to file mechanics liens. Given that Act 52 prohibits advance lien waivers on most commercial projects and does not subordinate mechanics liens to take-out mortgages, lenders providing take-out financing will have to work closely with their counsel and title insurance company to ensure that their lien priority is protected from mechanic’s liens under the new law.

Conclusion

All parties – property owners, lenders and contractors – should promptly consider the effect of the new amendments on pending transactions and future projects. Each party needs to review and revamp its practices and procedures with respect to advance mechanics’ lien waivers which will be prohibited in most situations. The landscape in this area of the law will change significantly, effective the beginning of the new year. Please contact the authors of this alert or any member of the firm’s Real Estate and Institutional Finance Practice Group if you have any questions regarding the amendments under Act 52.

Steven E. Ostrow is a partner in the Business Department and may be reached at 215-864-6248 or ostrows@whiteandwilliams.com
Jill S. Ravenscroft is an associate in the Business Department. She may be reached at 215-864-6316 or ravenscroftj@whiteandwilliams.com.