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The Legal Intelligencer - August 16, 2016
While use of the term "groundbreaking" in a construction law article may want for originality, it is an accurate description for recent amendments to the Pennsylvania Mechanics' Lien Law. The amendments—signed into law on Oct. 14, 2014—will change the way liens are obtained. The law is set to go into effect in 2017, provided a state-operated website is operational by the end of this year.
As most members of the construction industry know, the lien statute permits contractors, subcontractors, and suppliers to secure payment for labor and materials they have supplied to a construction project with a lien on the property they improved. Because subcontractors and suppliers do not contract directly with the property owner and the owner is often not aware of all those performing work on the property, the current lien statute contains many strict filing requirements that serve to protect owners' rights.
One such requirement is that subcontractors and suppliers must provide the owner with written notice of their intention to file a lien claim at least 30 days before a court filing. Parties who fail to comply with this requirement forfeit their lien rights.
When the amendments to the lien statute take effect, subcontractors and suppliers that work on projects registered with the state directory (described below) will be subject to a new pre-filing requirement that will require them to take action to preserve their lien rights at the beginning of the project.
The amendments require the state's Department of General Services (DGS) to create an internet website called the State Construction Notices Directory. The directory will serve as a standardized statewide system for filing notices for construction projects costing in excess of $1.5 million (searchable project). If an owner chooses to register a searchable project with the directory, notices will be searchable by owner, contractor, property address, and a unique identifying number.
There are four types of notices defined in the amended lien statute: notice of commencement, notice of furnishing, notice of completion, and notice of nonpayment. None of these notices or associated filing requirements will take effect until the directory is operational. By statute, the directory must be operational by Dec. 31, unless the DGS provides sufficient reasons for a delay in the directory's implementation.
This notice is optional and allows project owners or agents to require notice from subcontractors who want to preserve lien rights. The notice of commencement must be filed before work begins. A contractor may file the notice of commencement as an agent if it is authorized to do so by contract. The notice of commencement must contain certain information that includes, but is not limited to:
• Name, address, and email address of the contractor;
• Name, location, and county in which the searchable project is located;
• Legal description of the property, including tax identification number;
• Name, address, and email address of the searchable project owner; and
• If a bonded project, name, address, and email address of a surety that has issued performance and payment bonds (and bond numbers).
The notice of commencement is the key to the amendments because if an owner elects to file one, the filing triggers an obligation for subcontractors and suppliers to file a notice of furnishing in order to preserve their rights.
If a notice of commencement is filed, a subcontractor or supplier performing work must file a notice of furnishing within 45 days of commencing work or first providing materials to the job site. The notice will provide information about a subcontractor's scope of work and who hired them to perform the work.
The lien statute makes clear that a subcontractor who fails to comply substantially with the notice of furnishing requirement forfeits the right to file a mechanics' lien claim. It also requires a contract for a searchable project to include written notice that a failure to file the notice of furnishing will result in the loss of lien rights.
This front-end notice requirement is interesting because it is in addition to the existing back-end notice requirement whereby subcontractors and suppliers must provide owners with a written notice of intention to file a claim at least 30 days before filing. The notice of furnishing must contain certain information that includes:
• A general description of labor or materials furnished;
• Name and address of the person providing the labor or materials;
• Name and address of person who contracted for the labor or materials; and
• A description of the searchable project based on the description in the notice of commencement.
To protect subcontractors and suppliers from attempts to discourage use of the directory for the notice of furnishing, the lien statute makes it a violation of the statute to suggest, request, encourage, or require a subcontractor not to file a notice of furnishing.
This type of violation is considered a second-degree misdemeanor and creates a civil cause of action against the violating entity. To that end, an aggrieved subcontractor may sue to recover actual damages caused by the violation, and the court may award reasonable attorney fees and court costs, which certainly gives the provision some teeth and may actually lead to more litigation because of the ability to recover these fees and costs.
If a subcontractor fails to comply with the notice of furnishing requirements, they may still file a mechanics' lien claim if it proves that an owner, owner's agent, or contractor committed this type of violation and that the violation directly caused the subcontractor's noncompliance with the notice requirement.
The owner of a searchable project may also file a notice of completion within 45 days of the actual completion of work, which is further defined in the lien statute. Owners are not required to file this notice, and the lien statute limits a court's ability to use the notice of completion to determine whether a party has complied with certain timing requirements of the lien statute.
Subcontractors who have not been paid in full for their work on a searchable project may also (but are not required to) file a notice of nonpayment on the directory. This notice is considered informational only and cannot be used to affect or limit the subcontractor's rights under the lien statute. The lien statute also makes clear that filing a notice of nonpayment does not satisfy other written notice requirements (e.g., notice of furnishing or a 30-day notice to the owner of intent to file a lien).
When filed, these notices may help owners and their agents to confirm the payment status of lower-tiered contractors and the risk of prospective liens, and may even help facilitate payment to those that have not been paid. The notices may also help lower-tiered contractors and suppliers to monitor the status of the project and its completion.
While it is unclear exactly how the directory will affect industry behavior, it is reasonable to expect certain changes.
First, we expect many owners and contractors on searchable projects to file notices of commencement. While doing so will provide subcontractors and suppliers with easy access to important information that will help them protect their payment rights (e.g., payment bond numbers and a property's legal description), it will also help owners and contractors identify all subcontractors and suppliers working on a searchable project, control the flow of money, and trigger a front-end notice requirement with which subcontractors and suppliers must comply to preserve their lien rights.
To further control the flow of money, owners and agents may increase their use of joint check payments at the end of projects to obtain proof of payment and what they can then expect to be a project insulated from all liens.
Second, we foresee changes to construction contracts, some of which the lien statute now mandates. For example, contracts for searchable projects must include written notice that failure to file a notice of furnishing will result in the loss of lien rights. Despite the required contract provision, subcontractors and suppliers who are unfamiliar with the amendments are at risk of missing notice of furnishing filing deadlines (thereby forfeiting their lien rights).
Third, bond claim activity may increase. Because owners must include payment bond information in the notice of commencement for bonded projects, that information will then be more accessible to subcontractors and suppliers at the beginning of a project who may be more inclined to pursue a bond claim.
Regardless of the net impact, it is critically important for members of the Pennsylvania construction industry to familiarize themselves with the new changes to the lien statute and modify their business practices accordingly. Until the directory is rolled out, all eyes are on the DGS and the approaching Dec. 31 deadline to roll out the directory. Many in the industry will be watching closely as the year gets set to come to a conclusion. •
Reprinted with permission from the “August 16, 2016 edition of the “The Legal Intelligencer”© “2016” ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or firstname.lastname@example.org.