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In the Babich case, the claimant had its lien dismissed on preliminary objections because it failed to strictly comply with the service requirements in section 502(c) of the Pennsylvania’s Mechanics’ Lien Law (the “Lien Law”). That section states:
Manner of service. Service of the notice of filing of claim shall be made by an adult in the same manner as a writ of summons in assumpsit, or if service cannot be so made then by posting upon a conspicuous part of the improvement.
Interpreting this requirement, the court commented that the language of section 502(c) means service of notice of filing a claim must be made “in person by the sheriff to the extent practicable” and “[o]nce the claimant establishes that personal service has not been successful, the statute permits posting as an alternative method of service.”
Notably, the project owner was Buffalo Wild Wings – an entity whose corporate headquarters are outside the Commonwealth. Thus, one might expect the claimant could have argued its service complied with Rules 403 and 404. However the opinion makes no mention of this argument and contains no discussion of the interplay, if any, between section 502(c) of the Lien Law and the service rules. Thus, one could read the Babich decision to implicitly prohibit service of a lien claim outside the Commonwealth via mail as contemplated by Rules 403 and 404, and instead, require service of a lien claim by sheriff, and if the sheriff is unable to effectuate service, then by posting.
Also notable from the Babich decision, the Superior Court reaffirmed its position that statutory requirements dealing with notice and service (i.e. procedural requirements) are subject to strict interpretation while statutory requirements dealing with the form of notice or claim (i.e. the substantive information contained within a notice or claim) is subject to a more liberal substantial compliance standard.
The attorneys’ in Babst Calland’s Construction Group are available to answer any questions you may have about Pennsylvania’s Lien Law.
Specifically, Act 142 establishes a structured notice procedure for owners, contractors, and subcontractors to follow, as well as a central repository to file notices under the Mechanics’ Lien Law. The specific notices established by Act 142 must be filed on an internet-based directory that will be maintained by the Pennsylvania Department of General Services. These amendments apply only to “searchable projects,” or projects consisting of the construction, alternation or repair of an improvement costing at least $1.5 million.
Before the amendments set forth in Act 142 become effective on December 31, 2016, owners, contractors and first-tier subcontractors should evaluate their form contracts to ensure compliance with a number of new requirements for applicable projects. Notably, all contracts for searchable projects must include a written notice stating that a subcontractor’s failure to comply with the Act’s notice requirements will result in the loss of lien rights. Act 142 sets forth the exact language that must be included in the contract. Furthermore, the owner and general contractor on a searchable project must now make reasonable efforts to ensure the “Notice of Commencement” – a new type of notice filed by the owner or its agent – is made a part of the contract documents provided to all subcontractors awarded work on the project. Failure to comply with these requirements could potentially constitute a violation of the amended Mechanics’ Lien Law. Owners and contractors should also consider adding flowdown clauses in their contracts that impose requirements on contracting parties to include the necessary written notice in subcontracts and include the Notice of Commencement as a contract document for any subcontract.
Any person who requests, encourages or requires a subcontractor not to comply with the Act’s notice provisions may face civil and criminal penalties, including payment of attorneys’ fees and court costs. The person may also be liable for actual damages resulting from the subcontractor’s resulting failure to comply with the new notice provisions.
With the effective date of the amendments to the Lien Law fast approaching, Babst Calland recommends that owners, contractors, and subcontractors review the amendments and update their standard form contracts to ensure compliance with the Act. Failure to comply with Act 142 could have significant consequences and create exposure to unanticipated liabilities.
Babst Calland is offering a seminar to help those in the construction industry navigate these new obligations and begin using the new notice directory website. This seminar will provide a more comprehensive overview of the Lien Law amendments.
For more information on the changes to the Lien Law or modifying your standard contracts to comply with the amendments please contact D. Matthew Jameson III at firstname.lastname@example.org or (412) 395-5491.
Black Bear Property and a number of its subsidiaries and/or related entities (collectively “BB”) hired Linde Corporation (“Linde”) to construct a pumping station on three parcels of land in Lycoming County. The pumping station was designed to draw water from the Lycoming Creek for sale to companies involved in hydraulic facturing operations. Electrical wiring providing the completed pumping station with power was routed through an existing structure on a fourth parcel, Parcel 151, which was contiguous to the three parcels on which the pumping station was actually built. Linde sought to impose a Mechanics’ Lien on all four parcels after it completed its work on the pumping station but was only partially paid.
Stewart Dibble was the previous owner of the three parcels on which the pumping station was built, and had apparently agreed to transfer ownership of those parcels to BB for a 25% ownership interest in the BB entities. BB argued at trial that Linde’s Mechanics’ Lien was invalid because Linde’s contract was with BB, a tenant, not the owner, Dibble. See 49 P.S. § 1303 (stating that “[n]o lien shall be allowed against the estate of an owner in fee by reason of any consent given by such owner to a tenant to improve the leased premises unless it shall appear in writing signed by such owner that the erection, construction, alteration or repair was in fact for the immediate use and benefit of the owner”). Dibble never provided such written consent and BB argued that Dibble had an “oral lease” with BB. BB claimed that the final transfer of ownership from Dibble to BB had not occurred (although BB admitted that Dibble did own a 25% interest in the BB entities) because the conveyance was contingent upon the performance of certain occurrences that never transpired. Although a deed memorializing the transfer was executed, it was never recorded or delivered.
The Trial Court ultimately determined that Linde’s Mechanics’ Lien was valid because BB was the constructive owner of the three parcels, but declined to extend the lien to Parcel 151. On appeal, the Superior Court affirmed the Trial Court’s ruling.
Regarding BB’s constructive ownership of the three parcels, the Superior Court confirmed that the Trial Court’s factual findings adequately demonstrated that BB was an owner, not a lessee. Specifically, the Trial Court repeatedly determined that BB’s witnesses lacked credibility and regularly offered contradictory and confusing testimony regarding the terms of Dibble’s supposed “oral lease” to BB. Additionally, the Trial Court noted that, in a companion case filed in Luzerne County, BB specifically asserted that Dibble held no ownership interest in the three parcels. Finding no error of law in the Trial Court’s findings or rationale, the Superior Court affirmed that BB was the constructive owner of the three parcels and that Linde’s Mechanics’ Lien was proper.
Regarding the inclusion of Parcel 151 in the Lien, the Trial Court held that Linde was only entitled to include the value of the work relating to the electrical wiring in the amount of the Lien. Under 49 P.S. § 1201, “improvements” eligible for inclusion in Mechanics’ Liens include work relating to “furnishing, excavating for, laying, relaying, stringing and restringing … wires, whether on the property improved or upon other property, in order to supply services to the improvement.” Yet because the Lien Law draws a distinction between work performed on the property itself and work benefitting “other property,” the wiring was not an improvement to Parcel 151 because the work was performed in order to supply services to the improvement – the pumping station – located on a different parcel.
Furthermore, the wiring work did not rise to the level of an “improvement, substantial additional, or adaptation of an existing improvement” sufficient to justify the inclusion of the entirety of Parcel 151 in the Lien. The wiring providing electricity to the pumping station was run through a junction box that previously existed in the structure on Parcel 151. Therefore, the wiring did not affect a material change to Parcel 151 or the previously existing structure and the work was incidental to the property. After determining that precedent cited by BB did not apply to the instant situation because Parcel 151, while joining the other three parcels, was not directly affected by the improvements at issues and received no demonstrable benefit therefrom, the Superior Court affirmed the Trial Court’s holding.
Points to keep in mind: (1) a party may be deemed the constructive owner of property subject to improvements even in the absence of a recorded or delivered deed; and (2) a parcel of land may only be subjected to a lien if the relevant work and improvements associated convey a demonstrable benefit to that parcel.
While the issue seems minor and a mere technicality on its face, it posed a significant problem across the Commonwealth because a customary practice is to file the complaint at the same docket as the lien claim to save the client from paying an additional filing fee and to confine the entire case record to a single docket. The lower courts in this case, however, held that this practice was improper and warranted dismissing the mechanics’ lien complaint. This decision came as a surprise to many construction law practitioners. Although dismissal in many instances would just lead to the filing of the complaint at a different docket, it would prove fatal to the mechanics’ lien claim if the two-year period for filing a complaint for judgment on the mechanics’ lien claim, 49 P.S. 1701(b), had passed prior to the dismissal.
The Pennsylvania Supreme Court avoided this potentially significant procedural dilemma when it reversed the lower court’s order, holding that neither the Pennsylvania Mechanics’ Lien Law nor Pennsylvania Rules of Civil Procedure 1651–1661 related to mechanics’ lien actions require filing a complaint for judgment on a mechanics’ lien claim at a separate docket number than the mechanics’ lien claim. Specifically, the Court stated “we conclude there is no support for the proposition that because actions upon mechanics’ liens are comprised of two separate phases it follows that [the Lien Claimant’s] claims and its subsequent actions to obtain judgment upon them must have been entered at separate dockets, maintained in separate files, and identified with separate court terms and numbers.”
Under the Lien Law, a mechanics’ lien may only be maintained for payment of debts due by the owner to a “contractor” or by a “contractor” to any of his “subcontractors”. 49 P.S. § 1301. As of the date of this blog post, the definitions section of the Lien Law defines “contractor” to include “an architect or engineer who, by contract with the owner, express or implied, in addition to the preparation of drawings, specifications and contract documents also superintends or supervises any such erection, construction, alteration or repair.” 49 P.S. § 1201. The definitions section also states that the term “subcontractor” does not include “an architect or engineer who contracts with a contractor or subcontractor….” Id.
Thus, under the current law, architects only have mechanics’ lien rights if they supervise or “superintend” onsite work for the construction project. By amending the definitions of “contractor” and “subcontractor” to expressly include architects, engineers and other design professionals, House Bill 430 stands to remove the requirement that design professionals must perform onsite work to have mechanics’ lien rights, thereby significantly expanding what were previously very limited mechanics’ lien rights for design professionals.
House Bill 430 is currently before the House’s Labor and Industry committee. Babst Calland will continue to monitor the Bill’s status and will post updates on this blog when applicable, so check back often.
Although this new law will likely be viewed as good public policy for owners, it potentially hurts the subcontractor or supplier who did not contract with the owner. Typically, subcontractors and material suppliers do not know if or when an owner makes payment to a general contractor. As such, mechanics’ liens can be effective tools for subcontractors and suppliers to obtain payment on a project when a general contractor absconds with the owner’s payment.
Now, subcontractors and suppliers must manage their projects and accounting more closely than ever before. Failure to do so could leave the subcontractor or supplier with no legal recourse after it financed a project to completion.
The amendments also clarify and significantly expand the definition of “costs of construction” as the term is used in the Mechanics’ Lien Law. Specifically, the amendments define “costs of construction” as
all costs, expenses, and reimbursements pertaining to erection, construction, alteration, repair, mandated off-site improvements, government impact fees and other construction-related costs, including but not limited to, costs, expenses, and reimbursements in the nature of taxes, insurance, bonding, inspections, surveys, testing, permits, legal fees, architect fees, engineering fees, consulting fees, accounting fees, management fees, utility fees, tenant improvements, leasing commissions, payment of prior filed or recorded liens or mortgages, including mechanics liens, municipal claims, mortgage origination fees and commissions, finance costs, closing fees, recording fees, title insurance or escrow fees, or any similar or comparable costs, expenses or reimbursements related to an improvement, made or intended to be made, to the property.
The definition is especially notable because it brings legal fees, accounting fees, and other “soft costs” that are typically not considered recoverable as part of a mechanics’ lien within the definition of “costs of construction.” Unfortunately, however, this expanded definition may have little or no impact for contractors and subcontractors performing work within the Commonwealth because the term “costs of construction” only appears in the the section of the Mechanics’ Lien Law related to the priorities given to mortgages on the property being improved.
Specifically, following the amendments, open-ended mortgages will only receive priority over a mechanics’ lien if at least 60% of the proceeds from the mortgage “are intended to pay or are used to pay all or part of the costs of construction.” Thus, while the amendments define “costs of construction” very broadly, that broadly defined term may have a very limited impact on the substantive rights the Mechanics’ Lien Law provides to contractors and subcontractors performing work within the Commonwealth because the term is not used to describe those things that an contractor or subcontractor may include in its lien.
Nevertheless, the inclusion of such a broad definition of “costs of construction” in the Mechanics’ Lien Law may open the door for parties to argue that their mechanics’ lien claims should include damages that were once thought to be well outside those that could be included in a mechanics’ lien claim.
The amendments took effect September 7, 2014, and will apply to any lien perfected on or after September 7, 2014 regardless of when the construction giving rise to the lien commenced.
The standard conditions in the AIA A201 include Section 15.2.8, which provides, “If a Claim relates to or is the subject of a mechanic’s lien, the party asserting such Claim may proceed in accordance with applicable law to comply with the lien notice or filing deadlines.” Section 15.3.1, however, states, “Claims, disputes, or other matters in controversy arising out of or related to the Contract . . . shall be subject to mediation as a condition precedent to binding dispute resolution.” Another relevant clause is Section 15.3.2, which provides that a request for mediation “may be made concurrently with the filing of binding dispute resolution proceedings but, in such event, mediation shall proceed in advance of binding dispute resolution proceedings, which shall be stayed pending mediation for a period of 60 days from the date of filing.”
The subcontractor filed a mechanics’ lien in state court for nonpayment, and the owner contended that mediation was a condition precedent to the subcontractor prosecuting its lien claim. Distrct Court Judge Deborah K. Chasanow held that Section 15.3.1 is sufficiently broad to include mechanics’ lien claims. The court also rejected the subcontractor’s argument that litigation does not constitute “binding dispute resolution” as that term is used in Section 15.3.1. Therefore, the court concluded that mediation was a condition precedent to the subcontractor’s right to prosecute its mechanics’ lien claim.
Notwithstanding this point, the court declined to dismiss the action. Judge Chasanow noted that Section 15.3.2 expressly contemplated that the subcontractor had the right file the lien claim while concurrently requesting mediation, and have the litigation stayed pending mediation. The court reasoned that staying the litigation, rather than dismissing it, was appropriate.
The practical takeaway from this case is the reminder that if parties do not wish to subject a mechanics’ lien claim (or other specific types of claims) to mediation or another form of alternative dispute resolution provided for in the contract, the parties should expressly exclude lien claims from the mediation or ADR provisions. Otherwise, the parties are at the mercy of the court to determine whether the claim falls within or outside of the ADR requirement, and awaiting the decision of the court on this matter will only serve to delay the ultimate resolution of the underlying dispute.
Advanced Construction constructed a restaurant for Cumberland Dining Group in a mall in Cranberry, Pennsylvania. The mall was owned by J.J. Gumberg of Pittsburgh. Section 1502 of the Mechanics’ Lien Law requires that the owner is directly served at the owner’s residence or that the owner’s authorized agent in charge is served at any of the owner’s offices or usual place of business. In this instance, the court ruled that the contractor failed to properly serve the owner when it directed the sheriff to serve the mall owner at the address of the restaturant in the mall as opposed to at the owner’s headquarters in Pittsburgh. Directing the sheriff to serve the manager of the restaurant who did not have any connection to the mall owner was insufficient because the contractor failed to serve the mall owner or its authorized agent. Furthermore, the contractor did not demonstrate that the place of service was the mall owner’s office or usual place of business. The deed in question listed the mall owner’s address as its offices in Pittsburgh.
This case is noteworthy as it relates the 2012 ruling from the Superior Court in Bricklayers of Western Pennsylvania Combined Funds, Inc. v. Scott’s Development Co., where the court ruled that the substantive provisions, as opposed to procedural aspects, of the Mechanics’ Lien Law must be liberally construed to affect Lien Law’s remedial purpose. The Advanced Construction Services decision suggests that Pennsylvania court will still strictly enforce the procedural aspects of the Lien Law. Therefore, before filing a mechanic’s lien, claimants must be sure to completely comply with all of the many procedural requirements of the statute including the service requirements.
In Hogg Construction, Inc. v. YorkTowne Medical Center, L.P., 2013 Pa. Super. 263 (2013), Hogg Construction, Inc. (“Hogg”) performed work necessary to “fit-out” a condominium unit connected to the building of the YorkTowne Medical Center, L.P. Hogg substantially completed its fit out work on the condominium unit in question in September of 2006 and last billed any work to the unit on September 17, 2006. However, on November 30, 2006, Hogg returned to the unit and installed an electrical receptacle and replacement smoke detector. Hogg billed its November 30, 2006 work to the job number associated with the construction of the core and shell of the complex rather than to the unit in question.
On April 30, 2007, Hogg filed a Mechanics’ Lien Clam against the condominium fit-out. In February of 2008, Hogg subsequently filed a Complaint upon Mechanics’ Lien at the same docket number where it filed its Mechanics’ Lien Claim. In response, the condominium owners filed a motion to strike the mechanics’ lien and a motion for summary judgment. The trial court granted those motions, holding that because Hogg completed its work in 2006, the 2007 amendments to the Mechanics’ Lien Law, which extended the time frame within which one must file a mechanics’ lien claim from four months to six months from the date of contract completion, did not apply to Hogg. Thus, the trial court determined that Hogg did not timely file its mechanics’ lien within the requisite four month period. The trial court further held that Hogg failed to properly file its complaint to enforce its mechanics’ lien claim because the complaint “was not docketed to a docket number separate and distinct from that of the mechanics’ lien claim.”
On appeal, the Superior Court reversed both holdings of the trial court. First, the Superior Court concluded that when assessing whether the amendments to the Mechanics’ Lien Law apply to a lien, the relevant date is the date upon which the lien is filed, and not the dates upon which the work is performed. Thus, the court concluded that because Hogg’s lien was filed after the amendments took effect, Hogg had six months within which to file its claim. The court based its conclusion upon the fact that the Mechanics’ Lien Law provides that it applies to any lien filed “as provided in this act”, and as such, it is the Mechanics’ Lien Law as it exists on the date of filing of a mechanics’ lien claim that should govern the claim filed.
The Superior Court then reached the issue of whether a complaint to enforce a mechanics’ lien claim must be docketed at a separate docket number than the mechanics’ lien claim it seeks to enforce and held that regardless of whether or not filing both pleadings at the same docket number constitutes a procedural defect, it had no negative affect on the substantial rights of any of the litigants, and therefore should not serve as a basis for striking Hogg’s mechanics’ lien claim. Thus, while it remains somewhat unclear whether filing a mechanics’ lien claim and a complaint to enforce the same at the same docket number constitutes a procedural defect, a party seeking to use any such defect as grounds for striking the mechanics’ lien claim has the burden of establishing that the procedural defect negatively affected its rights.
Finally, the Superior Court concluded that although the facts demonstrated that Hogg did not bill any work to the condominium unit in question after September 17, 2006, viewing the evidence in the light most favorable to Hogg as the non-moving party, a genuine issue of material fact existed regarding whether Hogg’s November 30, 2006 work on the unit was a part of the work required by Hogg’s contract to perform fit-out work. Thus, the court also reversed the trial court’s grant of summary judgment.
The Hogg case is important for several reasons. First, there are currently proposals for additional amendments to Pennsylvania’s Mechanics’ Lien Law pending before the Pennsylvania General Assembly. Should those amendments pass, the Hogg decision may provide guidance regarding how to determine whether or not the new amendments apply to a mechanics’ lien claim. Additionally, Hogg confirms that the general practice of filing one’s complaint to enforce a mechanics’ lien at the same docket as the mechanics’ lien claim should not create grounds for striking that mechanics’ lien claim. Finally, Hogg indicates that regardless of billing documents, it is for the finder of fact to determine the date upon which a contractor last performs work on a project for mechanics’ lien purposes.
Upon review, the Superior Court reviewed the prior cases that have addressed this issue. After a careful examination, the court rejected those cases that interpreted Sampson-Miller to provide a bright-line rule that a lien rights never exists in the absence of a constructed improvement. The court first observed that “nothing in the Mechanics’ Lien Law requires that a structure actually exist” or that construction of the improvement must be completed. Rather, as the court explained, the Lien Law merely requires that excavation must be performed incidental to the erection or construction of an improvement in order to create lien rights.
Moreover, the court found that Sampson-Miller’s perceived requirement that the actual erection of an improvement must occur for lien rights to exist directly conflicts with Section 1305 of the Lien Law, which provides: “Except in case of destruction by fire or other casualty, where, through no fault of the claimant, the improvement is not completed, the right to lien shall nevertheless exist.” Therefore, the Superior Court concluded that B.N. Excavating’s lien rights must “nevertheless exist” even if no structure was ultimately constructed as contended by the owners.
The B.N. Excavating Court also proclaimed that Sampson-Miller unnecessarily restricted the ordinary meaning of the term “incidental.” If the common definition of “incidental” is employed, as the Court explained, the plain language of the Lien Law “simply requires excavation and preliminary groundwork to be connected to a structure and not merely an independent improvement” of land. Thus, the B.N. Excavating Court reasoned that Sampson-Miller’s limited definition of “incidental” erroneously forced the rule that actual construction of the improvement must occur even though the statute does not contain such a requirement.
Based on this analysis, the B.N. Excavating Court held that it remains true that when grading and excavation work is performed independent of a plan to construct an improvement, the Lien Law does not provide claim rights. However, where “excavation is performed as an integral part of a construction plan, the activity falls within [the scope of the Lien Law] regardless of whether a structure is ever erected.” The court also acknowledged that its holding is consistent with the analysis in Dollar Bank, FSB v. EM2 Development Corp., 716 A.2d 671, 673 (Pa. Super. Ct. 1998) in which the court held that a lien attaches when excavation and related site work is performed as part of a “’continuous scheme to erect’ a structure.”
Interestingly, the Superior Court in dicta also remarked on its recent holding in Bricklayers of Western Pennsylvania Combined Funds, Inc. v. Scott’s Development Co., 41 A.3d 16 (Pa. Super. Ct. 2012) (en banc), which jettisoned the long-established rule for strict construction of the Lien Law and proclaimed that a liberal construction should be employed for non-procedural provisions of the Lien Law. The B.N. Excavating Court expressed that the liberal construction standard proclaimed by the Bricklayers Court did not apply to 49 P.S. § 1202(a)(12) because it was adapted from the Mechanics’ Lien Law of 1901 and, according to the statutory comment to Section 1202, was expressly intended to retain the existing decisional law affecting that section under the Lien Law of 1901. The B.N. Excavating Court’s discussion of Bricklayers, however, had no effect on the outcome of the decision because, as the court explained, the holding would be the same whether a liberal or strict construction of the Lien Law was utilized.
With this decision in mind, the best practice going forward for lien claimants involved in failed constructed projects should be to include an express statement in their lien claim that indicates that the work was performed incidental to a planned improvement and as part of a construction plan. By including this express statement, lien claimants will put themselves in the best position to avoid any uncertainty about the existence of lien rights in cases where the improvement was never constructed or completed for reasons unrelated to the claimant’s work.
These new notice requirements seek to address the longstanding problem in Pennsylvania of owners and contractors not knowing the identity of subcontractors or material suppliers furnishing labor or materials for a project. As a result, an owner or contractor often did not even have knowledge of the identity of a potential lien claimant, let alone the fact that they possessed a claim, until receiving a notice of intent to file a lien. The Bill provides the owner with the right to file a Notice of Commencement with the Directory before work on an improvement begins in order to identify all subcontractors and material suppliers that may have lien rights through their subsequent required filing of a Notice of Furnishing.