Pennsylvania Amends Mechanics’ Lien Law to Create New Notice Procedures and Requirements

On October 14, 2014, Governor Tom Corbett signed into law Act No. 142 (the “Act”) amending the Pennsylvania Mechanics’ Lien Law, 49 P.S. 1101 et seq., which brings Pennsylvania in line with several other states by creating a more structured notice procedure for owners and subcontractors to follow, as well as a central repository to file notices under the Mechanics’ Lien Law.  (The Act is not yet published on-line — once it becomes available we will post another blog entry with a link to the Act.)

These amendments were supported by both owners and general contractors in an effort to provide them with a better method to identify all subcontractors and material suppliers with lien rights on a project. Before the amendments, an owner did not have a legally-defined method to identify subcontractors working on a project in order to contact them and ensure they had received payment before making payment in full to the contractor. General contractors had the same issue with respect to second-tier subcontractors with lien rights. In short, the amendments seek to give owners and general contractors a better opportunity to protect against the situation where they may need to pay twice for the same work due to the existence of mechanics’ lien rights. Consequently, general contractors also will reap the benefit of having second-tier subcontractors identified through this new process so they can avoid the double payment problem where a contractor may need to defend and indemnify the owner from a lien claim because a first-tier subcontractor failed to pay a second tier-subcontractor.

As noted, the Act creates an internet-based “Construction Notices Directory” maintained by the Pennsylvania Department of General Services where certain notices required or permitted by the Act must be filed. The Act instructs the Department of General Services to have the Directory operational by December 31, 2016 or sooner. If the Department designates an operational date other than December 31, 2016, it will be published 90 days in advance of the operational date in the Pennsylvania Bulletin.

Importantly, the new notice procedures apply only to a “searchable project,” which is defined as a project consisting of the construction, alteration or repair of an improvement costing at least $1.5 Million. If the project costs are less than $1.5 Million, these amendments will not apply and the existing Mechanics’ Lien Law procedures must be followed. The Act does not specifically state whether “soft costs” (costs related to real estate, marketing, financing, legal, etc.) may be included in determining whether the $1.5 Million threshold is met.

The Act allows for four types of notices to be filed with the Directory: (1) Notice of Commencement; (2) Notice of Furnishing; (3) Notice of Completion; and, (4) Notice of Nonpayment.

First, the Notice of Commencement is filed with the Directory by the Project owner or an agent of the owner, and it must be filed before any labor, work or materials are furnished for the Project. A contractor may serve as an agent of the owner for purposes of filing the Notice of Commencement if specifically authorized by contract and the owner assumes responsibility for the contractor’s actions. The Notice of Commencement must include (1) the full name, address and e-mail address of the contractor; (2) name and location of the project, including the county in which the project is located; (3) the legal description of the property upon which project is being constructed; (4) full name, address and e-mail address of the owner of the project and, if different, owner of record of the property upon which the project is being constructed; (5) if applicable, the name and contact information of a surety for any performance or payment bonds applicable to the project, including the bond numbers; and, (6) the unique identifying number that is assigned to the Notice of Commencement. The owner must then post a copy of the Notice of Commencement in a conspicuous place at the project site before physical work commencements on the project. The owner also has an obligation to take reasonable measures to ensure the Notice of Commencement remains posted until completion of the project.

Second, if the owner properly and timely files and posts the Notice of Commencement in accordance with the Act, it requires subcontractors to timely file a Notice of Furnishing to preserve their lien rights. Indeed, a subcontractor must file a Notice of Furnishing with the Directory within 45 days after first performing work or delivering materials at the project site or it will loses its lien rights. The Notice of Furnishing must include: (1) a general description of the labor or materials furnished; (2) full name and address of person supplying the labor or materials; (3) full name and address of the person that contracted for the labor or materials furnished by the subcontractor; and (4) a description of the project sufficient to identify it based on the description set forth in the Notice of Commencement. The Act also provides a form for the Notice of Furnishing. The Act expressly directs that a subcontractor’s failure to “substantially comply” with these requirements results in the forfeiture of the right to file a lien claim.

Third, the Act also permits an owner to file a Notice of Completion within 45 days of the actual completion of work on the project, which is then transmitted through the Directory to all subcontractors who filed Notices of Furnishing. “Actual completion” means either (1) the issuance of an occupancy permit and the acceptance of work by the owner, in addition to the completion of all work on the project (including punch list work), or (2) the complete termination of all work on the project for 30 days or more if work is never resumed under the same contract. This Notice is filed by the owner only for informational purposes.

Fourth, subcontractors are permitted to file a Notice of Nonpayment with the Directory for informational purposes when they have not received payment in full for their work or materials. The failure to file this Notice does not impair a subcontractor’s lien rights. Similarly, the filing of this Notice does not relieve a subcontractor of its obligation to comply with the Notice of Furnishing requirement or existing notice requirements of the Lien Law.. This Act also does not change or affect an owner’s right to file a blanket lien waiver by requiring a general contractor to post a payment bond for a project.

The Act further specifies that each Notice or other document submitted to the Directory must contain the county in which the project is located, the tax identification number of each parcel included in the project property, and the building permit number for the project. Persons who filed a notice for a project with the Directory will receive notice of any subsequent filings related to the project via the e-mail, mailing address or fax number.

The Act also includes a safeguard against unlawful attempts to force a subcontractor to indirectly waive its lien rights by not filing a Notice of Furnishing. To protect against this, the Act expressly provides that a subcontractor cannot be required to refrain from filing a Notice of Furnishing as a condition of entering into a contract to furnish labor or materials. A person that violates this section by requesting, encouraging or requiring a subcontractor to not file a Notice of Furnishing is subject to criminal sanctions. Furthermore, if a subcontractor proves that it failed to file a Notice of Furnishing as a direct result of an owner or its agent violating this provision, the subcontractor will not lose its lien rights. A subcontractor also is provided with a statutory civil cause of action against a person who causes the subcontractor to not file a Notice of Furnishing as a result of the prohibitive conduct mentioned above. This statutory cause of action permits the subcontractor to recover actual damages, in addition to reasonable attorney fees and court costs.

Another requirement imposed by the Act is that a contract for a project to which this Act applies must contain a notice that expressly warns that a subcontractor’s failure to file a Notice of Furnishing may forfeit the right to file a mechanics’ lien. This contractual notice must also convey that it is unlawful for an owner, owner’s agent, contractor or subcontractor to request, encourage or request that a subcontractor not file a Notice of Furnishing.

Likewise, the Act contains provisions that seek to punish a person who abuses the Directory by filing a notice (1) without a good faith reason to do so, (2) with the intent to obtain payment of an amount greater than that which is due to the person, or (3) to obtain an unjustified advantage or benefit. A person who is determined to have abused the Directory is liable for the amount of actual damages or $2,000, whichever is greater.

The Act was largely supported by owners and general contractors.  Some subcontractor associations, however, appeared before the General Assembly to oppose the proposed amendments. Undoubtedly, the amendments will provide some benefit to subcontractors in the form clear and definitive information about the project owner and property, which may be helpful to resolve nonpayment issues and comply with existing lien notices and procedures. However, the threat of a subcontractor losing lien rights due to forgetting to timely file or by improperly filing a Notice of Furnishing during the hectic mobilization and start-up period of a project is significant. Subcontractors will need to be diligent with preserving their rights at the beginning of a project and should enact protocols that ensure that a Notice of Furnishing is timely filed for projects to which this Act applies. Notably, the notice requirements of the Act will apply only to projects commenced on or after the operational date of the Directory, so those in the construction industry should have a sufficient adequate of time to prepare for the day when they need to begin complying with the provisions of the Act. For general contractors, the Act will eliminate the historic problem of having second-tier subcontractors with lien rights without even knowing the identity of these subcontractors.