Construction Law Survival Manual
Ch 12 - Mechanic's Liens in Pennsylvania
- EXECUTIVE SUMMARY
- TIME LIMITS FOR THE LIEN CLAIM
- FORMAL NOTICE OF INTENT: ALL SUBCONTRACTORS
- LIEN CLAIM: ALL CLAIMANTS
- AMOUNT OF CLAIM AND ALLOCATION
- ENFORCEMENT OF MECHANIC’S LIEN CLAIM
- DEFENSE OF PAYMENT: OWNER’S RESPONSIBILITY FOR PAYMENT TO SUBCONTRACTORS
- Priority between Mechanic’s Liens and Other Liens
- Sale or Foreclosure of Property
- MECHANIC’S LIEN WAIVERS
- RIGHTS AND OPTIONS OF OWNERS AND LENDERS
Pennsylvania has a fairly powerful mechanic's lien statute. The mechanic's lien has a high priority compared to many other liens on the property because it usually "relates back" to the time when work visibly commences. Generally, the mechanic's lien for new construction will have priority over all liens on the property, except an acquisition loan or construction loan. In addition, lien rights will survive any foreclosure or sale of the property, also except foreclosure on an acquisition loan or construction loan.
The owner does not have an automatic "defense of payment" against mechanic's liens in Pennsylvania. However, in most owner occupied residential projects, the owner will have a defense of payment to a subcontractor lien if the owner has paid the general contractor in full. Any owner can also protect itself from paying for the project twice by recording a copy of the general contract with the court before any work is performed on the project.
In Pennsylvania, lien rights extend to general contractors, subcontractors, and sub-subcontractors (contractors and suppliers who have a direct contract with subcontractors).
The first notice to an owner is due 30 days before the lien claim is filed for subcontractors and sub-subcontractors. For all claimants, the lien claim must be filed in court within six months of the claimant's last work. Within one month after the initial claim filing, written notice of the filing of the lien must be served on the owner. An affidavit of service then must be filed with the court within twenty days after service of the written notice to the owner. After these requirements are met, however, no further action is necessary for two years. This usually means a contractor can inexpensively preserve rights.
Prefiling before Construction. No prefiling requirement
Lien Filing and/or Service after Labor or Materials Supplied. Formal Notice—All subcontractors and sub-subcontractors must serve a Formal Notice of their intention to file a lien on the owner at least 30 days before filing lien claim.
Lien Claim—All claimants must file a Lien Claim in the prothonotary's (court clerk's) office within six months of last work and serve notice of the lien claim on owner within one month after that. An affidavit of service then must be filed with the court within twenty days after service of the written notice on the owner.
Enforcement. All claimants must enforce by filing a lawsuit within two years of Lien Claim filing.
There is no automatic defense of payment for Pennsylvania commercial project owners. That is, most commercial project owners can be required to pay for the project twice. Even if the owner has paid the general contractor in full, a subcontractor will be able to establish a lien and eventually foreclose on the property. The burden is on the owner to make sure that all subcontractors are paid.
Any owner can create a defense of payment by filing a copy of the general contract or a stipulation in the prothonotary's (clerk's) office before commencing construction.1 This will limit each subcontractor to a pro-rata share of money still owed the general contractor.2
In most owner occupied residential projects, the owner will have an automatic defense of payment to a subcontractor lien. Any subcontractor lien will fail if the owner or tenant has paid the full contract price to the general contractor and the project was a single townhouse or a one or two dwelling unit residential building intended to be used as the residence of the owner or a tenant of the owner.2a
Mechanic's lien rights are restricted to the general contractor, the subcontractors, and those with a direct contract with subcontractors. Nobody below this level of sub-subcontractors has lien rights. This will leave some suppliers without lien rights, unless they deal directly with the owner, the general contractor, or a subcontractor.
The general rule for liens is they are given priority in the order in which they are filed. The first in time filed in the land records will be the "first mortgage," with the first priority to any proceeds from a foreclosure or sale of the property. If another mortgage is filed in the land records later in time, it will be a "second mortgage." If the property is foreclosed, this second mortgage will not receive any proceeds until after the first mortgage has been paid in full.
There are very few exceptions to this "first in time, first in right" general rule. One exception is county real estate tax liens, which will always have priority over other liens no matter when they are filed. Another exception is mechanics' liens that are "inchoate," such as liens in Pennsylvania. The inchoate Pennsylvania mechanics' lien "relates back" to and exists from the moment labor or material is visibly supplied to the property, as long as the claimant eventually perfects the lien. Most liens recorded after work visibly began on the property will be inferior to the mechanic's lien. However, purchase money mortgages and open-ended construction loans will normally have priority over mechanic's liens.
Lenders can essentially "hold their place" by recording construction loan that states a maximum future amount. If a construction loan is properly filed and at least sixty per cent (60%) of the mortgage proceeds are intended for or used to pay construction costs, the lender can advance future funds up to the maximum amount of the construction loan without checking for visible commencement of work on the security property.3 Mortgages held by construction lenders will usually be open ended. "Purchase money mortgages" are used to purchase property. A lender can advance funds to purchase property without checking for visible commencement of work on the security property.
With the exception of purchase money mortgages and construction loans, the Pennsylvania mechanic's lien has priority over all other liens filed with the court after the date of "visible commencement" of work on the property in the case of new construction.4 Where the improvement made is an alteration or repair, the lien is not inchoate and the priority of the mechanic's lien begins as of the date of the filing of the claim.5
The priority of various liens on real property also determines whether or not the liens survive foreclosure or other sale of the property. Upon foreclosure by any lien holder, all inferior liens are eliminated. The inferior lien holders have no security interest in the property after foreclosure. When any lien holder forecloses on real property, all liens that are prior will survive the foreclosure. The foreclosure purchaser now owns the property "subject to" the prior liens.
Since Pennsylvania mechanic's liens are inchoate and prior to many other liens, they survive some foreclosures and can actually be filed after foreclosure.6 A first trust lender could foreclose on a piece of real estate only to see a mechanic's lien filed after they have taken title. The mechanic's lien claimant must be certain to name the new property owner in the mechanic's lien, but lien rights otherwise still exist. Since purchase money mortgages and construction loans are superior to mechanics' liens, however, foreclosure on these types of mortgages would cut off lien rights.
Mechanic's lien rights for the construction of new improvements survive any other type of sale of the property. Any real estate purchaser must be aware that mechanics liens might be filed after they purchase the property, for labor and materials supplied to the prior owner. A lien claim against alterations or repairs is not as strong as a claim against new construction.If property is conveyed in good faith and for valuable consideration prior to filing a claim for alterations or repairs, the lien is lost.7
The "automatic stay" of the United States Bankruptcy Code does not stay the perfection of the mechanic's lien claim for new construction. This is because the lien is inchoate. The claimant already had the lien, so the filing does not change anything and is not a preference. In fact, it is important to keep in mind that the Formal Notice of Intent must still be served on the owner within the normal time limits.
The bankruptcy of an owner or upstream contractor should delay enforcement of a mechanic's lien (by filing a lawsuit), however. It is not permissible to enforce a mechanic's lien without permission of the Bankruptcy Court, but the claimant is provided additional time later to enforce the mechanic's lien.
In the case of alteration or repair contracts in Pennsylvania, however, the claimant has no lien until the lien claim is filed and filing a lien claim after a bankruptcy petition would violate the automatic stay.8 In other words, a bankruptcy by the owner or an upstream contractor would probably eliminate lien rights for alteration or repair contracts.
A claimant who does tenant improvements can obtain a lien on the leasehold interest.9 The end result would be a foreclosure on the leasehold. If the lease ends due to default or expiration, the lien will continue, at least as to fixtures, machinery or other similar properties.10 Work for a tenant does not result in lien rights against the owner, however, unless the owner authorized the construction or improvements.11
Pennsylvania mechanic's lien law is somewhat unique in that some general contractors can waive a subcontractor's right to a mechanic's lien. Contractors can waive lien rights for lower tier subcontractors on most residential projects and on all projects if the general contractor posts a payment bond to cover the value of the labor and materials provided. Lien waivers by a general contractor are made by filing a “Stipulation Against Liens” (“Stipulation”), often referred to as a “Stip,” with the prothonotary’s office in the county where the project is located. The Stipulation must be in proper form and must be filed and properly indexed to be valid.
The time limits to file a claim or to serve notice are based on the date of completion of the claimant's work, not from the date of completion of the entire project.12 The work is complete when the claimant has performed the last of the labor or delivered the last of the materials required by the terms of the claimant's contract.13
Claimants cannot tack on additional material or labor to a contract for the purpose of extending the time to file a claim.14 There is no strict test in Pennsylvania to determine whether mechanic's lien rights will be extended by supplying small amounts of labor or materials, especially punchlist or repair work. The courts seem to use a case by case analysis to determine whether work was performed solely for the purpose of extending the time limitation, or was provided to complete work provided by the contract. It is prudent to count deadlines from the last substantial new work. Warranty work and repair work may not extend the filing deadlines. It can also be problematic if long periods of time pass without any work.
If a claimant has multiple contracts to supply labor and materials on a single project, the claimant can "consolidate" the contracts into a single claim.15 In this situation, the work is completed when the last contract is completed.16 This means that an open account supplier can generally count their deadline from their last delivery. If long periods of time pass between deliveries, it is safest to count deadlines separately for each delivery and file accordingly.
All subcontractors, regardless of the type of project, must give the owner Formal Notice of their intent to file a claim 30 days prior to filing a mechanic's lien claim.17 These notice requirements will be strictly construed. If no notice is given, the lien will be stricken. However, substantial compliance is sufficient as to the form of the notice.17a
The formal notice must include:
- The name of the claimant
- The name of the person with whom the claimant contracted
- The amount claimed
- The general nature and character of labor or materials furnished
- The date of completion of claimant's work
- A description of the property
Some or all of this information can be provided by attaching a copy of the claim the subcontractor intends to file, with a statement by the claimant that he intends to file the original of that claim with the court.18
The Formal Notice must be given to the owner at least 30 days before the claim is actually filed with the court.19 As discussed below, the actual claim must be filed within six months of the claimant's last work.20 Accordingly, the Formal Notice should be given to the owner no later than approximately five months after completion of the subcontractor's work. It is impossible to give a Formal Notice too soon. Providing notice to an owner and the construction lender early will freeze money to the owner or general contractor. Filing the Formal Notice early will also allow the subcontractors to file the claim sooner, accelerating the entire process.
Like the Preliminary Notice, the formal notice can be served by first-class, registered or certified mail on the owner or the owner's agent.21 The notice can also be served by the sheriff or private process server.22 If service cannot be made by any of these methods, then the subcontractor can "post" the notice on a conspicuous, public part of the project.23 This will rarely be an acceptable method, since the preferred methods are usually available.
All mechanic's lien claims must be filed in the prothonotary's office within six months of the claimant's last work.24 A lien can be invalid if the prothonotary (clerk) fails to properly enter the lien in the judgment index as well as the mechanics' lien index.24a
This is the first deadline for any "contractor claimant," that is a claimant who has a contract directly with the owner.25
The claim must state:
- The name of the claimant and whether the claimant files as a contractor or a subcontractor
- The name and address of the owner or reputed owner
- The date of completion of the claimant's work
- If filed by a subcontractor, the name of the person with whom the claimant contracted and the dates on which the Formal Notice was given
- A detailed statement of the kind and character of the labor and materials furnished and the prices charged for each,
if the claim is filed by a contractor pursuant to a contract for an agreed sum, an identification of the contract and a general statement of the kind and character of the labor and materials furnished
- The amount claimed to be due
- A description of the improvement constructed and the property subject to the lien26
All claimants must file the claim with the prothonotary (clerk) of the court within six months after the completion of the claimant's work.27 The claim must be filed in the court for the county in which the improvement is located.28
Within one month after filing the claim, the claimant must serve written notice of such filing upon the owner. The notice must state the court term and number and the date of filing the claim.29 This notice cannot be served by mail. It must be served in the same manner as a lawsuit: by the sheriff.30 If notice cannot be served, then the sheriff can post the notice on a conspicuous, public part of the improvement.31 These notice requirements must be strictly observed, as failure to serve the notice will result in loss of the claim.32
Within 20 days after service of this notice on the owner, the claimant must file an affidavit of service or the acceptance of service in the prothonotary's office.33 This affidavit must state the date and method of service.34 This affidavit must state the date and method of service.35 Failure to file the affidavit or acceptance of service within the time limit will result in losing the mechanic's lien claim in its entirety.36
The claim must state the name and the address of the owner or reputed owner.37 To meet these criteria, a claimant should order a title search in the registry of deeds to determine the correct name of the legal owner. It may be possible to later amend a claim to correct a mistake in the name of the owner if the contractor is somehow misled.38
A claimant who completes tenant improvements can obtain a lien on the leasehold interest.39 The end result would be a foreclosure on the leasehold. If the lease ends due to default or expiration, the lien will continue, at least as to fixtures, machinery or other similar properties.40 Work for a tenant does not result in lien rights against the owner, however, unless the owner agrees in writing that the construction or improvements are for the owner's immediate use and benefit.41
If a property has multiple owners and only one owner orders the work, the claimant may obtain a lien only in the partial interest of the one ordering the work.42 Where a husband and wife own property as tenants by the entirety, notice must be served on both.43 However, this may be accomplished by service of two copies of the notice on one spouse at the spouses' residence or place of business.44
A lien will attach, although the owner of the lots upon which the houses are built has only an equitable interest.45 This means that if a contract purchaser has improvements constructed on the property, then a lien will attach to the contract purchaser's interest.
A lien claimant should perform a title search to properly identify the lien property46 and property owner.47 If multiple properties are involved, the claimant must file separate claims for each project and must allocate the debt between the various projects.48 Some of the individual claims can be less than $500 if the total debt meets the $500 minimum.49 The lien extends to the structure constructed or improved and to as much of the surrounding land as may be reasonably necessary to maintain the economic value of the building.50 No lien is allowed for labor or materials furnished for a purely public purpose,51 although it is apparently possible for a municipality to consent to subjecting public property to a mechanic's lien claim.52
To have lien rights, the claimant must provide labor and materials for the "improvement" of a building, structure or other improvement that is erected or constructed on land.53 The mere fact that products have been supplied under a contract that includes material for construction of a building does not entitle the supplier to a lien for the material.54 For example, a tennis court, standing alone, is not a structure and a claimant would have no lien rights for supplying such labor and materials.55 The labor and material might, however, be lienable if the tennis court adjoined a home or other structure.56 A swimming pool is also a structure.57 Seeding and mulching, or excavation and grading alone do not provide lien rights.58 A basement foundation is not a sufficient structure for lien rights if the house is not otherwise completed.59
Fixtures and personal property can provide lien rights if they are permanent and become part of the real estate.60 However, equipment and fixtures used in supermarkets that are not of a kind that commonly adds value to the realty are not lienable.61
Only three classes of persons are entitled to a mechanic's lien: general contractors, subcontractors, and those with a direct contract with subcontractors.62 It doesn't matter whether a claimant usually considers itself a supplier or a labor and materials subcontractor. Anyone who has a contract, express or implied, with the owner of the property is a contractor, provided they supply labor and materials for the erection, construction, alteration or repair of an improvement on the property.63
A subcontractor has an express or implied contract with a contractor for the supply of labor or materials to the property.64
Architects or engineers who contract with a contractor are not subcontractors within the definition provided by the code.65 They can only be contractors and have lien rights only if they contract directly with the owner.66
All entities below sub-subcontractors have no lien rights.67 This effectively cuts off lien rights for any material supplier dealing with a sub-subcontractor.
A claimant must provide either a detailed statement of the kind and character of the labor and materials furnished and the prices charged for each, or if the claimant had a contract for an agreed sum, the claimant must identify the contract and provide a general statement of the kind and character of the labor or materials furnished.68 If a claimant is filing a single claim for labor or materials provided under multiple contracts, the claimant should sufficiently identify all of the contracts.69
Suppliers of rental equipment appear to have lien rights.72 Demolition work, excavation, grading, filling, paving and landscaping are expressly given lien rights if "incidental" to the erection of improvements.73 "Initial fitting up and equipping" of necessary fixtures, machinery and equipment for the improvements also give lien rights.74 Supplying fixtures, machinery and equipment after the initial construction apparently does not give lien rights.
Prior to expiration of the time for filing a claim, a claim may be amended without prejudice to intervening rights if both parties agree or if the claimant is granted leave of court.75 A claim may be amended after the time for filing has expired as long as the amendment does not:
- Seek to substitute a different property
- Change the identity of the owner or the contractor with whom a subcontractor dealt
- Increase the amount of the claim.76
A claimant has no lien rights unless the amount of the claim is more than $500.00.77
Allocation concerns getting the correct property liened for the correct dollar amount. A lien is "overinclusive" or "overbroad" if it liens property to which the contractor supplied no labor or materials. A lien is "overburdening" if it liens a property for more than the value of the labor and materials supplied to that property. These are obviously related concepts.
Allocation issues involve multiple pieces of property. A townhouse building, for example, includes multiple townhouse units. Each townhouse unit is a separate parcel of real estate. The claimant must file a separate lien claim for each property.78
Materials that are actually delivered to the owner or placed on or near the property are presumed to have been used in the improvement, although "proof to the contrary can be shown."79 However, a property owner cannot defeat lien rights by moving materials to another site.80
If a claimant has multiple contracts to supply labor and materials on a single project, the claimant can "consolidate" the contracts into a single claim.81 As discussed above, this means an open account supplier can count their deadline from when the last delivery is completed.82 This also means that a supplier can make a single lien claim for multiple contracts on one property. If more than one property is involved, however, it is still necessary to allocate the claim between properties.
To enforce a claim, the claimant must eventually obtain a judgment upon the claim filed.83 This is done by filing a complaint to enforce, similar to a lawsuit seeking judgment on a contract.The action is commenced by filing a complaint with the prothonotary (clerk of the court). The procedure to obtain a judgment upon a claim is essentially the same as the procedure for any civil court action.84 The complaint must identify:
- The name and address of each party to the action. If the action is commenced by a subcontractor, the complaint must include the name and the address of the contractor
- The court, term and number
- The date of filing the claim. A copy of the claim must be included as an exhibit
- A demand for judgment85
The claim must be enforced by filing a complaint within two years of the date the claim was filed, unless the time is extended by the owner in writing.86 A judgment must be entered within five years from the date the original claim is filed or it will be entirely lost.87
A defendant cannot bring a counterclaim but may seek a set-off that is limited to the amount of the lien claim.88 The set-off must arise from the same transaction or occurrence as the claim.89 This means that while a defendant/owner or contractor can raise direct defenses to the claim, such as defective work or delays, they cannot raise problems arising from another project or different contract.
There is no automatic defense of payment for the Pennsylvania project owner. That is, the owner can be required to pay for the project twice. Even if the owner has paid the general contractor in full, a subcontractor will be able to establish a lien and eventually foreclose on the property. The burden is on the owner to make sure that all subcontractors are paid.
Accordingly, the Formal Notice is for the protection of the owner, who, upon receipt of notice, can withhold funds from the contractor in order to pay the subcontractor's claim.90 For this reason, it is also to a claimant's benefit to send a notice as soon as possible. If an owner can withhold payment from the contractor, it is more likely the claimant will be paid without the time and expense of filing suit to enforce the lien claim. An owner will fight a lien claim much harder if the owner faces the possibility of paying for the project a second time.
As previously stated, once an owner has been served with a notice of intention to file a claim, the owner is allowed to withhold funds from the contractor.91 The owner can require the contractor to promptly settle or discharge the claim.92 This is discussed in greater detail in the section below titled Rights and Options of Owners and Lenders.
An owner can create a defense of payment by filing a copy of the general contract or a stipulation in the prothonotary's (clerk's) office before commencing construction.93 This will limit each subcontractor to a pro-rata share of money still owed the general contractor.94
Various types of liens can be placed on a piece of real estate. Some liens are "consensual," such as a deed of trust or mortgage. These are placed on the property purposefully by the property owner. Other liens are "involuntary" or "judicial," including judgment liens and mechanics liens.
The general rule is that all liens have priority in the order that they are filed in the land records. The term "first trust" or "first mortgage" means that this was the first trust filed in the land records on that property. A "second trust" is the second trust to be recorded in the land records on that property. If the property is foreclosed upon, the first trust holder receives all of the proceeds of sale, until the first trust holder has been paid in full. If there are any sales proceeds left, they go to the second trust holder, until the second trust holder is paid in full, and so on. The priority of any type of lien is extremely important. Priority will determine whether or not the lienholder gets paid upon foreclosure. A lien with low priority can easily be worthless.
There are very few exceptions to this "first in time, first in right" general rule. One exception is a mechanic's lien that is inchoate, as are mechanics' liens in Pennsylvania, Virginia and the District of Columbia. If a mechanic's lien is inchoate, this means that the lien relates back to the time when work began on the property even if the lien claim is not filed with the court until a later time. The lien exists from the moment labor and material are supplied to the property, as long as the claimant eventually perfects the lien by filing.95
In erection and construction (new construction) projects, the Pennsylvania mechanic's lien has priority over most other liens filed with the court after the date of "visible commencement upon the grounds" of the project.96 One exception to this general rule is that purchase money mortgages and construction loans have priority over mechanic's liens, regardless of when these mortgages are filed in the land records. Given the broad language in the statute, purchase money mortgages and construction loans filed even after a lien claim appear to have priority over the lien claim.97
Where the improvement is an alteration or repair, the priority of the mechanic's lien is as of the date of the filing of the claim.98 This is another exception to the general rule that Pennsylvania mechanics liens have priority over other liens filed with the court after the date of "visible commencement upon the grounds" of the project. For this reason, it is all the more important for alteration and repair contractors to promptly file their lien claim.
Before settling on any real estate loan, a lender without a properly drafted purchase money mortgage or construction loan should investigate whether any construction activity has recently occurred on the security property. Any mechanic's lien filed as a result of new construction may have priority over the new mortgage lien, even though the mechanic's lien claim may not be filed until much later.99
With each of these types of mortgages, the lender may advance additional funds days, months or even years after the mortgage has been filed in the land records. Lenders can essentially "hold their place" by recording an "open-end mortgage" that states a maximum future amount. If an open-end mortgage is properly filed, the lender can advance future funds up to the maximum amount of the open-end mortgage without checking for visible commencement of work on the security property.100
In addition, the lender may have priority for advances made for the payment of taxes, assessments, maintenance charges, insurance premiums or costs incurred for the protection of the mortgaged premises, or expenses incurred by a construction lender because of default or advances made under a construction loan to enable completion of the improvements for which the construction loan was originally made, if such mortgage states that it shall secure such unpaid balances.101 A construction loan (open-end mortgage used to pay for the cost of completing erection, construction, alteration or repair of the property) will also have priority over any type of mechanic's lien.102
Given the broad language in the statute, open-ended mortgages filed even after a lien claim appear to have priority over the lien claim.103 A mechanic's lien claimant will want to give notice of a lien claim to a lender as soon as possible. Although not required by any statute, this may freeze construction draws.104 If the lender is not obligated to make additional advances under the construction loan, the mechanic's lien may have priority over any future advances after notice.105
A purchase money loan is used to acquire real estate. Purchase money mortgages, like construction loans have priority over mechanic's liens, regardless of when these mortgages are filed in the land records. Given the broad language in the statute, purchase money mortgages filed even after a lien claim appear to have priority over the lien claim.106 Accordingly, even though the inchoate Pennsylvania mechanic's lien will survive a sale of the property, the priority of a purchase money lender for their mortgage can dramatically affect the priority of the mechanic's lien and could mean that a mechanic's lien claimant is undersecured or entirely unsecured.
In general, all mechanic's liens on the same tier of the payment chain have equal priority. It does not matter which mechanic's lien is filed first, so long as all mechanics liens are valid.107
The most obvious difference in priority will come from validity. If a mechanic's lien is invalid because it was not filed in a timely manner or named the wrong owner, then it has no priority at all. This contractor has no mechanic's lien and is just another unsecured creditor.
Lower tier contractors with valid liens are preferred over upper tier contractors with valid liens under the mechanic's lien statute. The lien of a subcontractor will be preferred to the lien of the general contractor.108
The priority of various liens on real property also determines whether or not the liens survive foreclosure or other sale of the property. Upon foreclosure by any lien holder, all inferior liens are eliminated. The inferior lien holders have no security interest in the property after foreclosure. When any lien holder forecloses on real property, all liens that are prior will survive the foreclosure. The foreclosure purchaser now owns the property "subject to" the prior liens.
Since mechanic's liens are prior to some other liens, they survive some foreclosures. Since mechanic's liens are inchoate, they can actually be filed after foreclosure.109 A first trust lender that does not have an open ended or purchase money mortgage may foreclose on a piece of real estate only to see a mechanic's lien filed after they have taken title. The mechanic's lien claimant must be certain to name the new property owner in the mechanic's lien, but lien rights otherwise still exist. Since purchase money mortgages and open-ended mortgages are superior to mechanics liens, however, foreclosure on these types of mortgages would cut off lien rights.
Mechanic's lien rights for the erection or construction of improvements (new construction) survive any other type of sale of the property. Any real estate purchaser must be aware that mechanics liens might be filed after they purchase the property for labor and materials supplied to the prior owner. For this reason, real estate purchasers and title insurance companies always insist that the real estate seller sign an affidavit stating that no labor and materials have been supplied to the property or that payment has been made for all such labor and materials. This may not be enough protection if the real estate seller is insolvent. Real estate purchasers, therefore, may want to make independent inquiry whether labor and materials have been recently supplied to the property and whether all persons supplying labor and materials have been paid.
If property is conveyed in good faith and for valuable consideration prior to filing a claim for alterations or repairs (not new construction), the lien is lost.110
Because the lien is inchoate, the "automatic stay" of the United States Bankruptcy Code should not stay the perfection of the mechanic's lien claim for new construction. The lien is not a "preference" because the claimant always had the mechanic's lien from the moment of visible commencement of the work. The perfection of the lien just gives public notice of this fact. In the case of new construction, the claimant is a secured creditor from the moment labor and material are supplied to the property and retains secured status even though lien enforcement proceedings are filed long after bankruptcy.111 In the case of alteration or repair contracts in Pennsylvania, however, the claimant has no lien until the lien claim is filed and filing a lien claim after a bankruptcy petition would violate the automatic stay.112 In other words, a bankruptcy by the owner or an upstream contractor would probably eliminate lien rights for alteration or repair contracts.
It is clear that a claimant can serve the initial Notice of Intent on the Owner after the general contractor files bankruptcy without seeking the permission of the United States Bankruptcy Court.113 If a general contractor files bankruptcy, a subcontractor can still send its Notice of Intent on the owner. In fact, it is important to keep in mind that the Notice must still be served within the normal time limits. It is still possible, but unlikely, that a bankruptcy by an owner would stay service of a Notice of Intent. It is also not clear whether a bankruptcy by the owner or an upstream contractor would stay the filing of the Lien Claim with the court clerk. The safest course would be to obtain relief from the stay and file the Claim before the time limit expires.
It is probable that the bankruptcy of the project owner,114 or the general contractor,115 or any other upstream contractor will delay the time for filing the lawsuit.116 The "automatic stay" of the Bankruptcy Code means that any mechanic's lien claimant would need "relief from the stay" from the Bankruptcy Court to file their Complaint to Enforce a Mechanic's Lien Claim. The mechanic's lien claimant is probably also provided additional time, however, to file later. The Complaint to Enforce Mechanic's Lien must be filed within 30 days after the Automatic Stay terminates.117
A unique feature of Pennsylvania Mechanic's Lien Law is that a general contractor can waive a subcontractor's right to a mechanic's lien in certain situations.118 Lien waivers are always permitted in exchange for payments received.119 Contractors will also be able to waive lien rights for lower tier subcontractors on residential projects if the contract between the owner and the general contractor is less than one million dollars. Subcontractors will be able to waive lien rights on all projects if the general contractor posts a payment bond to cover the value of the labor and materials provided. Subcontractors should also be careful to review waivers signed for progress payments. It is still possible to inadvertently waive lien rights for future deliveries.
Contractors on residential projects should check whether lien stipulations have been or will be filed when considering whether to supply labor and materials to the project. Even if an owner has required a stipulation against liens, that stipulation may not be properly filed. A claimant may still be able to establish lien rights if a stipulation was improperly filed. A stipulation against liens may also be ineffective if it is in bad faith or the owner and general contractor are related parties.
Most general contractor waivers are made by filing a "Stipulation against Liens."120 This is a short waiver document separate from the general contract. This Stipulation is filed in the prothonotary's (court clerk's) office in the county where the project is located. The Stipulation must be filed under one of the following circumstances:
- Prior to commencement of work upon the ground, or
- Within ten days after execution of the principal contract, or
- Not less than ten days prior to the contract with the subcontractor121
Accordingly, a subcontractor can check in the prothonotary's office immediately prior to signing a subcontract to make sure that no Stipulations have been filed. Subcontractors must be able to check the clerk's office before signing a subcontract to determine their security rights prior to lending money. For this reason, the law requires owners to make sure that the Stipulation is filed and properly indexed.122
The Stipulation must be indexed in the names of both the general contractor and the owner of the property.123 The prothonotary keeps this index so subcontractors can check for stipulations. If the Stipulation is not properly indexed, the waiver will fail and the subcontractors will have lien rights.124 Additionally, a subcontractor will still have lien rights if the prothonotary has made an indexing mistake. This is one way that lien rights can still exist, even though the owner or lender required a Stipulation against liens. However, if a lien claimant has actual knowledge of a lien waiver by the general contractor before the subcontractor claimant's supplies labor and materials, the claimant will have no lien rights, regardless of whether the lien waiver was properly filed.125
If the project includes land located in more than one county, the waiver must be filed in both county courts.126
Instead of filing a separate stipulation against liens, the owner can simply file the entire general contract.127 If the contract includes a waiver of liens and is properly filed and indexed, lien rights will be effectively waived on projects on which lien waivers are permissible.
Filing the general contract may also create a defense of payment, although it is more effective to have the general contract simply waive lien rights altogether on projects on which lien waivers are permissible. If a general contract is filed, however, the lien claims of subcontractors can be limited to a pro-rata share of the amount still owed to the general contractor at the time the lien claim is filed and served on the owner.128
Subcontractors and suppliers should always be aware of their security rights in determining whether to supply labor and materials to a project, at what price, and whether some form of consensual security should be required. If payment problems arise, however, on a residential project with a lien waiver, claimants may still have lien rights. First, claimants should check whether lien waivers have been properly filed in a timely manner and properly indexed, as discussed in the section above on Filing of Stipulation.
If a general contract is made between the owner and someone not intending, in good faith, to be the contractor, any lien waiver in that general contract is invalid.129 Property can be subject to liens where the general contractor is the agent of the owner or if the owner is actually dealing with himself.130 Bad faith may be imputed, and property subject to lien, when an owner and general contractor are the same or related persons or entities.131 It is possible, however, for a corporation, in good faith, to create one entity to own real estate and a separate related entity to act as general contractor.132
Under Pennsylvania law, a lien waiver is effective in a subcontract on residential projects if the contract between the owner and the general contractor is less than one million dollars or if the general contractor posts a payment bond to cover the value of the labor and materials provided.133 Lien waivers are always permitted in exchange for payments received.134 Contractors will also be able to waive lien rights for lower tier subcontractors on residential projects if the contract between the owner and the general contractor is less than one million dollars. Subcontractors will be able to waive their own lien rights on all projects if the general contractor posts a payment bond to cover the value of the labor and materials provided. Subcontractors should also be careful to review waivers signed for progress payments. It is still possible to inadvertently waive lien rights for future deliveries.
Contractors are usually requested to sign waivers of lien at the time of each progress payment. Waiver forms presented for signature at that time vary greatly in their wording and effect.135 Pennsylvania law still suggests that progress waivers can be effective to completely waive mechanic's lien rights in the future, even if the initial progress payment is very small.136 Contractors often believe that if the waiver form recites a specific dollar amount as received, then mechanic's lien rights are waived only to the extent of that dollar amount. This may not be true and a contractor should be careful to inspect the waiver form to determine the extent of rights waived. If there is an "express intent" to waive lien rights for future deliveries, the waiver will be effective.137 There is no case law yet to tell us what sort of language would show an "express intent" to waive future lien rights, so subcontractors and suppliers should assume the worst. Common lien waiver language is effective to waive future lien rights in other states. This is discussed in greater detail in greater detail in the chapter above in Contracts and Preserving Rights, Contract Administration, Waiver Forms.
An owner can make sure no liens are filed on residential projects under one million dollars by requiring a Stipulation against liens from the general contractor and making sure that it is properly filed.138
Alternatively, the owner can create a defense of payment by filing a copy of the general contract.139 In this case, the recovery of all lien claimants will be limited to the amount unpaid under the general contract.140
At any time after completion of work by a subcontractor, an owner or contractor can file a "Rule." After the Rule is filed, the subcontractor named therein must file any claim within thirty days after he receives notice of the filing.141 If the subcontractor does not file its claim within this time, its lien rights are lost.142 By filing a Rule, an owner can create a definite timetable for all mechanic's lien claims to be filed and more quickly make a final payment to the general contractor.
Once an owner has been served with a subcontractor's notice of a claim or intention to file a claim, it may withhold enough money from the amount due the general contractor that is sufficient to "protect the owner from loss until such time as the claim is finally settled, released, defeated, or discharged."143 An owner served with a notice should always elect to retain funds in this manner. To do so, however, the owner must give written notice to the general contractor that contains the following:
- The name of the subcontractor, the amount of the claim, and the amount withheld by the owner
- That unless the contractor settles, defends or secures against the claim within 30 days from service of the notice, the owner may pursue additional remedies144
After the general contractor receives such a notice, he has 30 days to complete one of the following:
- Settle or discharge the subcontractor's claim and give the owner a written copy of the waiver, release or satisfaction signed by the claimant145
- Agree in writing to defend against the claim and furnish the owner security against the claim, if the owner has not already retained sufficient funds to protect against loss if the contractor does not prevail, or146
- Furnish the owner security to protect the owner from the loss on account of the claim.147
If the general contractor does not settle, discharge, defend, or bond off the claim, the owner is permitted to:
- Pay the claim of the subcontractor and assume the subcontractor's rights as against the contractor,148 or
- Defend against the mechanic's lien claim, in which case the general contractor is liable to the owner for all costs of defense, including reasonable attorney's fees, whether the defense is successful or not149
At any time after a lien claim has been filed, the owner or "any party in interest" can petition the court to discharge the lien by paying into court the dollar amount of the lien claim.150 The court will hold the funds deposited as security for the lien claimant, but the real property will no longer be encumbered by the lien.151 Owners and lenders often require this procedure if a lien claim is filed. Owners or general contractors may want to use this procedure instead of paying off a lien claimant if they intend to defend against the lien claim.
Instead of paying cash into court, the petitioner can post a bond for double the amount of the required deposit or in such lesser amount as the court approves.152
James D. Fullerton, Esq.
COPYRIGHT (1997, 2015) James D. Fullerton (703) 818-2600
6 See section, Priority.
47 49 P.S. §1503(2); Delmont Mech. Servs. v. Kenver Corp., 450 Pa. Super. 666, 677 A.2d 1241 (1996); Empire Excavating Co. v. Luzerne County Housing Authority, 303 Pa. Super. 25, 449 A.2d 60 (1982); Carter-jones Lumber Co. v. Northwestern Pa Humane Soc’y Lgl Animal Care Prods., 2006 Pa. Commw. LEXIS 689 (2006).
79 49 P.S. § 1302; Kissinger Structural Sales, Inc. v. Strubinger, 40 Pa. D. & C.3d 43 (1983); Old Fellows Hall v. Masser, Inc., 24 Pa. 507 (1855); Global Church Builders and Suppliers, Inc. v. Bethel Park Christian Church, 32 Som. 349 (1973).
104 See Trustees of C.I. Mortgage Group v. Stagg of Huntingdon, Inc., 247 Pa. Super. 336, 372 A.2d 854 (1977) rev’d on other grounds, 484 Pa. 264, 399 A.2d 386 (1978) for discussion of Construction Loan Advances generally.
109 Collegeville National Bank v. Frehafer, 7 Pa. D. & C.2d 14 91955); Wagner v. Manback, 18 Pa.C. C. 471 (1896); See subsection, Priority Between Mechanics’ Liens and Other Liens.
111 See generally In re Gem Construction Corporation of Virginia, 262 B.R. 638 (2000); M & T Electrical Contractors v. Capital Lighting and Supply, Inc. (In re M & T Electrical Contractors, Inc.), 267 B.R. 434 (Bkcy Ct. D.C. 2001).
113 Yobe Electric v. Graybar Electric Co., 30 Bankr. 114 (Bankr. W.D. Pa. 1983), aff’d 728 F.2d 207 (3d Cir. 1984); H.T. Bowling, Inc. v. Bain, 52 Bankr. 58 (W.D. Va. 1985), aff’d in part and rev’d in part, 64 Bankr. 581 (W.D. Va. 1986).
128 49 P.S. § 1405; See section, Defense of Payment/Owner’s Responsibility for Payment to Subcontractors.