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A Quick Reference Guide to Pennsylvania Mechanics’ Lien Laws

by HDlawblog Posted: Thursday, 1/17/2013

Disclaimer: This fact sheet pertains only to the Mechanics’ Lien Law of Pennsylvania. Other states, including Maryland, New Jersey, and Delaware have dramatically different Mechanics’ Lien Laws.

What is a mechanics’ lien? A security interest in the title to a property for the benefit of those who have supplied labor or materials to the property. In other words, it’s a tool to help contractors, subcontractors, and suppliers ensure payment.

Obviously subs/suppliers care about mechanics’ lien rights, but what about GCs? Most contracts with owners require GCs to defend and bond off mechanics’ lien claims. Therefore, on a basic level you need to know: (1) what mechanics’ liens are; (2) how to avoid them (get a list of all subs/suppliers and make sure everyone is getting paid for the labor and material they supply); (3) how to defend against them (did the claimant follow all the procedures for perfecting a lien within the allotted time?); and (4) how to bond them off.

On rare occasions, a GC might need to file a mechanics’ lien claim to secure its right to payment. In this event, you need to know how to preserve your claim.

Who can file a lien? General contractors, subcontractors and sub-subcontractors (i.e. contractors and suppliers who have a direct contract with subcontractors). No one below the level of a sub-subcontractor has lien rights.

When to file a lien? Subcontractors (but not general contractors) must provide the owner with what is referred to as a formal notice of intent to lien. This formal written notice must be provided to the owner at least 30 days before the lien claim is filed by a subcontractor or supplier.

All claimants must file their lien claim within six months of the claimant’s last date of work.

How do I determine the last date of work? Time limits to file a claim or serve a formal notice of intent to lien are based on the date of completion of the claimant’s work, not from the date of completion of the entire project. The work is complete when the claimant has performed the last of the labor or delivered the last of the materials required by the terms of the claimant’s contract. [Note: claimants cannot tack on additional material or labor to a contract for the purpose of extending the time to file a claim. It is prudent to count deadlines from the last substantial new work. Warranty work and repair work may not extend the filing deadlines.]

What must a subcontractor include in its formal notice of intent to lien?

Name of claimant
Name of the person with whom claimant contracted;
The amount claimed;
The general nature and character of the labor or materials furnished;
The date of completion of claimant’s work; and
A description of the property.

What happens after a lien claim is filed? Within one month after the initial claim filing, written notice of the filing of the lien must be served on the owner, typically by the sheriff. Thereafter, the claimant has 20 days to serve an affidavit of service with the court.

After the above steps have been taken, no further action is immediately necessary. However, within two years of filing the claim, the claimant must file a complaint to enforce its claim.

Does a mechanics’ lien require any pre-filing before construction? No.

Can a public project be liened? No. Liens are not allowed for labor or material furnished for a purely public purpose.

What is the minimum amount for a lien claim? $500.00.

Can lien rights be waived? Yes, but certain procedures need to be followed as Pennsylvania has declared lien waivers to be void as against public policy.

On all projects, a subcontractor can waive its rights to file a lien only if the general contractor provides a bond guaranteeing payment to subcontractors, i.e. a payment bond. As long as a payment bond is in place, a general contractor may file a stipulation against liens with the prothonotary’s office in the county where the project is located. To be effective, a stipulation against liens should be filed: (1) prior to commencement of work on the ground; (2) within 10 days after execution of the principal contract; or (3) not less than 10 days before the contract with the subcontractor. Moreover, the lien stip must be indexed in the name of the general contractor and owner of the property. Although the GC does not have to provide its subs/suppliers with a copy of the Stipulation Against Liens, it is a good practice to do so because this way the GC ensures that its subs/suppliers actually receive notice.

A subcontractor can also waive lien rights in exchange for progress payments received on a project.

Is there a way to remove a lien? Yes. A lien against the property may be removed by petitioning the court to discharge the lien by depositing the amount of the lien with the court or by posting a bond in double the amount of the lien.

Is payment a defense to a mechanics’ lien claim? There is no automatic “defense of payment” for the owner. The owner can be required to pay for a project twice. But the owner can protect itself by recording a copy of the general contract or stipulation in the prothonotary’s office before commencing construction. This will limit each subcontractor to a pro-rata share of money still owed to the general contractor.

Why might a mechanics’ lien be preferred over filing a breach of contract complaint in court? A mechanics’ lien creates a better security interest. In the event of the owner’s bankruptcy, the automatic stay of the United States Bankruptcy Code does not stay perfection of the mechanics’ lien claim for new construction. This is because a lien claim “relates back” to the time when work visibly commenced on the project. Moreover a mechanics’ lien has priority over all liens on a property (except an acquisition or construction loan). Additionally, lien rights survive any foreclosure or sale of property (except foreclosure on an acquisition or construction loan).

Accordingly, if the owner’s finances appear to be precarious and a contractor is not getting paid, a mechanics’ lien might be the best mechanism for protecting the contractor.

This article is authored by attorney Shannon O. Young and is intended for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice. Any particular questions should be directed to your legal counsel or, if you do not have one, please feel free to contact us.

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Court Holds General Contractor’s Mechanics’ Lien Has Priority over Mortgagee’s Lien

by HDlawblog Posted: Thursday, 12/20/2012

In 2012 the Superior Court of Pennsylvania, in the matter of Commerce Bank/Harrisburg, N.A. v. Kessler et al., ruled in favor of a general contractor by finding that the general contractor’s mechanics’ lien had priority over the mortgagee’s lien. For those outside the construction industry this might not be titillating news, but for members of the industry (and their lawyers) who rely on mechanics’ liens to ensure payment, the holding is welcome news.

The story starts in October 2006 when the general contractor contracted with a couple to build them a luxury home in Harrisburg. Shortly thereafter, the GC started excavating. A few months later, in January 2007, the couple got a construction loan from what is now Metro Bank for up to $435,000, which loan was secured by an open-ended mortgage that was recorded that same month.

The home was substantially complete in August 2007. Unfortunately, the couple was unable to make their mortgage payments and Metro Bank filed a mortgage foreclosure action against the couple and obtained a default judgment against them for $403,994.84 in July 2008. The couple also failed to make their payments to the general contractor and the general contractor obtained a default judgment against the couple in the amount of $411,304.14 in February 2009.

Thereafter, Metro Bank and the general contractor became entangled in a legal battle over which judgment took priority, in other words, there was a dispute over which party was first in line to collect the proceeds from the sale of the home. The trial court entered an order holding that the judgment entered in favor of the general contractor took priority over the judgment entered in favor of Metro Bank. Metro Bank appealed.

Under the 2007 amendments to Pennsylvania’s Mechanics’ Lien Law, Section 1508(c) awards priority to a mortgage over a mechanics’ lien where the mortgage constitutes:

(2) An open-end mortgage as defined in 42 Pa.C.S. 8143(f) (relating to open-end mortgages), the proceeds of which are used to pay all or part of the cost of completing erection, construction, alteration or repair of the mortgaged premises secured by the open-end mortgage.

49 Pa.C.S.A. 1508(c)(2) (emphasis added). Metro Bank took the position that this section of the Mechanics’ Lien Law gave its mortgage priority over the general contractor’s mechanics’ lien, but the general contractor argued that the open-end mortgage upon which Metro Bank based its lien did not satisfy the requirements of Section 1508.

Indeed, it was undisputed that a portion of the proceeds of the open-end mortgage in this matter paid for expenses other than “completing erection, construction, alteration or repair of the mortgaged premises.” Rather, some of the proceeds were used to pay costs such as tax claims, closing costs, satisfaction of an existing mortgage on the property, and payment of other judgments and liens. The general contractor argued that to allow use of funds for reasons other than those expressly set forth in Section 1508(c)(2) would, for example, permit a lender and owner to defeat a contractor’s lien rights by using as little as $1.00 out of $1,000,000.00 for the enumerated purposes set forth in Section 1508(c)(2) and therefore Metro Bank could not rely on Section 1508(c)(2) to subordinate the general contractors mechanics’ lien on the property.

The Superior Court of Pennsylvania agreed with the general contractor finding that Section 1508(c)(2) only extends priority to mortgage loans where the proceeds were used to pay the expenses set forth in Section 1508(c)(2). The court interpreted the use of the term “the proceeds” to mean all of the proceeds and agreed with the general contractor that any other interpretation of the statute would permit lenders and owners to improperly manipulate the system to defeat lien rights

In ruling in favor of the general contractor, the court also disagreed with Metro Bank’s contention that the mechanics’ lien was invalid on the basis that it allegedly failed to contain the statutorily mandated statement of the kind and nature of materials furnished. Although the general contractor’s lien claim described the kind and character of the work as “all labor and materials required for the construction of a two story residential dwelling” and referred to the construction contract, Metro Bank argued that because the lien claim failed to attach the drawings and specifications referenced in the contract, the statement of the kind and character of the labor and materials furnished was too vague. As such, Metro Bank asserted that the mechanics’ lien was invalid.

The general contractor argued that his lien was not invalid because he substantially complied with the requirements of the Mechanics’ Lien Law. Again, the court agreed with the general contractor noting that multiple Pennsylvania cases interpreting the “contents of the claim” section of the Mechanics’ Lien Law have long held that “in considering a mechanics’ lien claim, it must be kept in mind that substantial compliance with the Act is sufficient” and that the express terms of Section 1503((5) only required a general statement of the kind and character of the labor and materials furnished. Accordingly the court held that the lien claim sufficiency described the nature of materials furnished.

Lesson Learned: If all the proceeds of a mortgage were not applied to the cost of completing erection, construction, alteration or repair of the mortgaged premises, a contractor’s mechanics’ lien claim should take priority over the lien of a mortgagee. Of course, these things can vary depending on the circumstances of an individual case and it is highly recommended that a general contractor consult with a lawyer to ensure that its lien rights are protected to the maximum extent possible.

This article is authored by attorney Shannon O. Young and is intended for educational purposes and to give you general information and a general understanding of the law only, not to provide specific legal advice. Any particular questions should be directed to your legal counsel or, if you do not have one, please feel free to contact us.