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As of the first of this year, a new Pennsylvania mechanics’ lien law has kicked in, and owners will have to develop new strategies to deal with construction contractors and suppliers. Amendments to the old law now make it easier for unpaid claimants in a construction project to file liens against the property. Essentially, the law has done this with two major changes. First, the changes have extended the right to file liens to other claimants than contractors and subcontractors. Second, in most cases it has limited the major protections that owners traditionally used to head off mechanics’ liens; that is, obtaining contractors’ general lien waivers, which were enforceable against the contractor and its subcontractors, and which were generally filed before construction was started. ‘Sub-Subs’ Under the existing Pennsylvania Mechanic’s Lien Law of 1963, only contractors dealing directly with the owner or their immediate subcontractors could file mechanics’ liens. Therefore, any person who contracted with a subcontractor was barred from filing. Under the new law, claimants who have a contract even with a subcontractor of the contractor have a right to file a lien under certain circumstances. Because of the broadened definition in the law of a “subcontractor,” this could be a broad class of potential claimants. It includes parties who have “express or implied” contracts in connection with a construction project, who furnish “labor, skill or superintendence,” or who supply or haul materials or equipment, among other things, in connection with the construction project. Therefore, liens may now be filed by lumber suppliers who deal with the carpenters on the job, and by stores, which supply pipes or spigots to the plumber. It also could include delivery people or workers who work for the carpenter and plumber, and delivery people who deliver or haul things for them. Waivers The other major change relates to the traditional practice for owners to protect themselves by requiring contractors, and sometimes subcontractors, to file waivers of mechanics’ liens. With a limited exception, these waivers have now become unlawful and void. Therefore, the General Assembly in its infinite wisdom has nixed these arrangements even though sophisticated parties represented by attorneys may have agreed in arms-length negotiations to give up their rights to file mechanics’ liens. Remember in a construction context if no waiver had been filed, claimants had been given this special weapon, which was not available to other unpaid creditors who supplied goods or services in other types of business transactions. The new law makes exceptions to this new public policy now imposed on waivers. It still permits the traditional waivers if the project involves a residential building with a contract price of less than $1 million. Also, a waiver against a subcontractor is valid if the contractor has posted a bond guaranteeing payment to the subcontractor. Where does all of this leave owners who are involved in construction? To understand this question it should be added that the new law also extended the deadline by which a contractor may file a lien from four months to six months after completion of the work. The law remains unchanged that a contractor must provide the owner with a notice of the lien filing within one month after filing, and a subcontractor must still provide an owner with written notice of its intention to file a lien at least 30 days before filing. Let’s first deal with the contractor, as contrasted with the subcontractor. The owner may think that he has paid off the contractor, only to find that seven months later he receives a notice that the contractor had filed a lien against the property. Let’s look at the subcontractor. The owner may have paid the contractor everything owed to him, but if the contractor has not paid off all of his subcontractors, and the subcontractors have not paid off all of their material suppliers and sub-subcontractors, the owner may receive a notice five months after completion of the project that one of those plumbers or plumbing supply houses that supplied pipes to the plumber intends to file a lien against the owner’s property in another month. The new law obviously changes the whole dynamics of how owners must protect themselves. Mortgage Lenders Mechanics’ liens still retain a priority against other liens, which dates back to the date work commences on the site in the case of “erection or construction,” as contrasted with mere “alternations or repairs.” Traditionally, this has been of great concern to mortgage lenders because if a search of title is done at the time the mortgage is recorded, the search may not show any mechanics’ liens that could later be filed. Those later filed liens could then date back in priority before the mortgage, and create problems not only for the original lender, but also for any investors that purchased these mortgages either directly or as investors in mortgage pools. In order to compensate for this problem, which was legally handled in the past by use of what then constituted valid lien waivers, the new law gives a “super-priority” to purchase money mortgages and certain open-end mortgages over the backdated priority of mechanics’ liens claims. Unfortunately, those changes don’t protect other kinds of mortgages, for example, mortgages given for refinancing, even of a purchase money mortgage or an open-end mortgage. In addition, there seems to be an unintended glitch in the protection given to open-end mortgages. The priority to these mortgages is given to proceeds, which have been advanced towards “the cost of completing, erection, construction, authorization or repair of the mortgaged premises.” Unfortunately, construction lenders are sometimes required to make advances for the payment of taxes, assessments, maintenance charges, insurance premiums or costs needed to protect the mortgaged property or the lien of the mortgage, or expenses incurred because of the default by the borrower. It’s unclear whether the super-priority is afforded to those types of advances. If it is not, construction lenders are now more exposed to mechanics’ liens in Pennsylvania than they were last year. Additional Cautions Owners and construction lenders must now be more skeptical in making payments to a contractor without substantial evidence that the contractor has been making the required payments to the various subcontractors and materialmen who might be potential claimants. Since the construction lenders’ super priority may only apply to advances made toward erection, construction, alterations or repair, it is more important than ever for owners and lenders to obtain a complete list of parties projected to be paid on a project and keep track that payments conform to budgeted project breakdowns as construction progresses. Also, it is now more important to hold out a substantial payment under the contract until satisfactory evidence is presented showing receipts of payments and releases of liens from all of the applicable parties. This procedure can be time consuming and create obvious red tape and delays in a way never as important before this year. Even with nonresidential buildings, waivers are still valid if given in consideration for payment, but only to the extent that the contractor actually received payment for the work. Therefore, owners may still want to require waivers. In addition, they may want to insist on agreements or indemnities from contractors and subs that obligate them to liability for attorney fees, costs and other losses that are triggered by an improper or unjustified filing of a mechanics’ lien. Nothing in the amended act invalidates those types of agreements. In addition, a waiver by a sub is enforceable if “given in consideration for work, services, material or equipment . . . to the extent that such payment is received.” The act doesn’t state, however, “received” by whom. Therefore, if the owner pays the contractor who doesn’t pay its sub, would a sub’s waiver be enforceable against the sub? That seems to be an open question, although the implied meaning seems to be that the subs are not barred merely because the contractor received payment. In addition, the new amendments � and the act itself � point to other potential strategies. Section 405 of the act gives owners a right to limit claims to unpaid balances of the contract price. In those situations where the claims of subcontractors exceed the unpaid balance of the contract price a subcontractor may be limited to its pro-rata share of the remaining part of the contract price which is unpaid, or “which should have remained unpaid.” However, to avail itself of this limit, the owner must file the contract (or the applicable provisions of it) in the prothonotary’s office before start of the work on the ground or at other alternative times set forth in the act. Also, the owner should insist that the contractor post a bond guaranteeing payment for labor and materials provided by potential claimants, which will enable them to provide a prospective valid waiver. Perhaps, one of the unintended legislative consequences of the act’s changes is that these requirements will increase the cost of construction projects. It is disappointing that the act doesn’t provide guidance about standards for the bond; For example, who may issue it, and are there minimum financial requirements for the issuer? So far as construction lenders are concerned, as occurs in many other jurisdictions, these lenders may now want to require contractors, subcontractors and sub-subcontractors to sign releases for work performed to the date of each funding draw, as a part of such draw. In addition, they may now want to work with title companies to obtain a “bring-down” endorsement from these title companies at each such draw. Nothing in the act prohibits contractors and subs from subordinating their prospective liens to a construction mortgage. Therefore, lenders may now want to consider requiring subordination forms as part of their loan documents. Our new lien law has created many new issues, but this article has focused on just some of them from owners’ and lenders’ perspectives. HARRIS OMINSKY is with the law firm ofBlank Rome and is a former president of the board of the Pennsylvania Bar Institute.

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