United States: How The 2017 Pennsylvania Mechanics' Lien Law Changes May Affect Your Business And Challenges In Its Application

More than two years after passage of the amendments to the Pennsylvania Mechanics' Lien Law known as Act 142, the Pennsylvania State Construction Notices Directory ("the Directory") is now online and ready to accept lien-related construction notices. Act 142 established the Directory, along with four new types of lien-related notices, and made other related amendments, all of which will affect private construction projects in Pennsylvania costing at least $1.5 million. The new provisions and procedures may have a direct impact on your project finance, development and construction activities, and necessitate a review and updating of your contract documents.

The Directory is the central repository for and searchable index of the Act 142 lien notices, and is available at scnd.pa.gov.

In addition to implementing the Directory, the Act 142 amendments provide for four types of mechanics' lien-related notices: (1) a Notice of Commencement; (2) a Notice of Furnishing; (3) a Notice of Completion; and, (4) a Notice of Nonpayment. The amendments also include criminal and civil penalties, such as payment of attorneys' fees, court costs and actual damages, for persons who request, encourage or require a Subcontractor not to comply with the Act's notice provisions; thus, non-compliance can be costly.

Applicability:

The Act 142 amendments and the Directory listing apply to a "searchable project," which is any private improvement project consisting of erection and construction, alteration or repair, costing a minimum of $1.5 million. Notably, the listing of a project by an owner via a Notice of Commencement is not mandatory, but listing can provide important legal protections to a Project Owner.

Summary of the Types of Notices

  • Notice of Commencement: The Notice of Commencement is designed to apprise contractors, subcontractors, and labor and material suppliers of information relevant to any lien rights. The Notice of Commencement must be filed by or on behalf of the Project Owner prior to the commencement of any labor, work or materials being furnished on the project. If timely filed, it acts to limit the pool of potential lien claimants in conjunction with a failure by would-be lien claimants to file a Notice of Furnishing. If a Notice of Commencement is not timely filed, then the Project Owner loses this potential claim-limiting tool, but can continue to defend claims under the pre-existing lien rules. The Notice of Commencement must include certain required information, such as: the name, address and email address of the contractor; the name and location of the project, including the county, a legal description of the property, and the tax identification number of the parcel(s) on which the project is located; the name, address and email address of the Project Owner; surety and bonding information, where applicable; and the unique identifying number that is assigned to the Notice of Commencement. The Project Owner must then post a copy of the Notice of Commencement in a conspicuous place at the property prior to the commencement of work, and ensure that the Notice of Commencement remains posted until the completion of the project. The Project Owner must also make reasonable efforts to ensure that the Notice of Commencement is made part of the contract documents provided to all Subcontractors on the Project.
  • Notice of Furnishing: If the Notice of Commencement is properly filed and posted, then a Subcontractor ("Subcontractor" as defined in the Lien Law to mean first- or second-tier subcontractors and certain suppliers in contractual privity) is required to file a Notice of Furnishing to preserve lien rights. The purpose of this document is to inform the Project Owner of Subcontractors providing labor and materials on its project. A Subcontractor must file the Notice of Furnishing within 45 days after first performing work on, or delivering materials to, the project. The Notice of Furnishing likewise has statutorily required information, including: a general description of the labor or materials furnished; the name and address of the person supplying the labor or materials; the name and address of the contracting party; and the project description. Failure to "substantially comply" with these requirements forfeits the Subcontractor's lien rights according to the amendments.

  • Notice of Completion: This optional notice is for informational purposes. Given the short time frame for filing mechanics' lien claims, this notice is useful for establishing an outside date for possible lien claims. It must be filed by the Project Owner, or its agent, within 45 days of the actual completion of work.

  • Notice of Nonpayment: This optional notice is also for informational purposes and may be filed by Subcontractors when payment is not received. This notice does not relieve a Subcontractor of its other obligations under the Lien Law to perfect its mechanics' lien claim, including the requirement of submitting a timely, formal Notice of Intent to Lien. However, it may be helpful in advising the Project Owner of situations where Subcontractors are not being timely paid.

Relevance of the Changes to Various Project Participants

  • Project Owners/Developers: If Project Owners intend to take advantage of the protections offered by the Act 142 amendments, Project Owners and Developers should review and update their front-end project documents and processes. In addition to considering the use of lien waivers and bonding, Project Owners will need to ensure that Notices of Commencement are timely filed and posted, and that their construction contracts incorporate flow-down clauses that ensure compliance with statutory notice requirements.
  • General Contractors: General Contractors should also make sure that their subcontract agreements incorporate and comply with statutory notice requirements, when applicable, and avoid circumstances where contracting personnel could be accused of engaging in prohibited conduct.

  • Subcontractors/Suppliers: Timely compliance with the Notice of Furnishing requirements of Act 142 will be essential to preserve lien rights, when applicable. However, access to information regarding owner, project and non-payment information for lien filing purposes should be easier. In addition, Subcontractors should make sure that their agreements with their sub-subcontractors and material suppliers incorporate and comply with statutory notice requirements, when applicable.

Uncertainties in Application:

Several uncertainties remain in applying the amendments and using the Directory, including:

  • Is a Notice of Commencement required (or advisable) for a project that was commenced prior to December 31, 2016?
  • Are "soft costs" to be included in the $1.5 million threshold calculation?

  • Does the Act's definition of "Contract" include all purchase orders and other contractual vehicles for purposes of flow-down clauses?

  • How does a Project Owner ensure that prime contractors and Subcontractors incorporate the required statutory notice disclaimers in their lower tier contract documents?

  • Is a Notice of Commencement advisable when a Project Owner has required the posting of a payment bond and timely filed a no-lien agreement?

  • Is it advisable for project financing parties to require a Notice of Commencement when an open-ended mortgage has priority over mechanics' liens on a project?

As this brief Alert indicates, these newly-implemented changes can impact all major private construction projects, and compliance with the legal requirements of Act 142 will be extremely important for all participants on affected projects. Look for email notices regarding a free seminar by Reed Smith construction and real estate development legal professionals in late January 2017 that will provide greater details on Act 142 and how to comply with these new changes.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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