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Pennsylvania Becomes a Notice to Owner State

More Changes to Pennsylvania Mechanic’s Lien Code

 

There were two changes to the Pennsylvania Mechanic’s Lien Code that became effective September 2014.  First, residential properties built by an owner for their own residence now have a defense of payment to subcontractor mechanic’s liens.  This protects homeowners from mechanic’s liens, if they have paid their general contractors in full. Second, construction loan open end mortgages now have priority over mechanic’s liens, as long as at least sixty per cent (60%) of the loan proceeds are used for construction costs.  See this Newsletter here

Pennsylvania has now amended its Mechanic’s Lien Code for the second time in 2014.  Effective December 2016, Pennsylvania will become a “Notice to Owner” state for any project over one and a half million dollars ($1,500,000), defined as a “Searchable Project.”  Pennsylvania will create a central internet based State Construction Notices Directory for (1) Notices of Commencement; (2) Notices of Furnishing; (3) Notices of Completion; and, (4) Notices of Nonpayment.

Lien claimants will have at least one more administrative procedure and cost to preserve lien rights on construction projects over $1,500,000 (Searchable Projects) and this will be one more opportunity to lose lien security rights.  However, lien claimants that do post a Notice of Furnishing on the Notices Directory are more likely to be paid and less likely to need lien claims or lawyers.

Owners, general contractors, lenders and title insurance companies, who were in favor of these revisions, will probably always post Notices of Commencement on Searchable Projects.  This will lower the risk of mechanic’s liens.  They will also continue to record general contracts in order to create a defense of payment against subcontractor liens once an owner has paid a general contractor in full.  They may also require stipulations against lien to eliminate lien rights altogether, although this option requires the additional cost of a payment bond on nonresidential projects.  See more about these options in the Construction Law Survival Manual chapter on Pennsylvania Mechanic’s Liens here

The Pennsylvania Department of General Services is ordered to create the State Construction Notices Directory to serve as a standardized statewide system for filing construction notices by December 31, 2016.  The Department can request an extension of time for this Directory or could advertise an earlier date.  In any event, the revisions to the code requiring construction notices will be effective on the publication in the Pennsylvania Bulletin of the operational date of the State Construction Notices Directory.  Hopefully, the industry will receive advance notice of the effective date if it is not December 31, 2016.[1]

Construction projects over one and a half million dollars ($1,500,000) will be “Searchable Projects.”[2] This will apply to any new erection or construction, or the alteration or repair of an existing improvement. The defined cost minimum of $1,500,000 will probably include all hard and soft “costs of construction” included in the other 2014 amendment to the Pennsylvania Mechanic’s Lien Code.[3] Owners of Searchable Projects will have the option to file a “Notice of Commencement” with the Directory prior to the commencement of labor, work or the furnishing of materials.[4] IF the Searchable Project owner files a Notice of Commencement, then any subcontractor or sub-subcontractor (“potential lien claimant”) must file a “Notice of Furnishing” with the Directory within forty five (45) days after first performing work or services at the job site or providing materials to the job site.[5] Any potential lien claimant that fails to file a Notice of Furnishing forfeits the right to file a mechanic’s lien claim.[6] General contractors do NOT need to file a Notice of Furnishing to preserve lien rights.

The Notice of Commencement filed by the owner must include the following:[7]
(i) Full name, address and e-mail address of the contractor. 
(ii) Full name and location of the searchable project.
(iii) The county in which the searchable project is located.

(iv) The legal description of the property, including tax identification number(s).
(v) Full name, address and e-mail address of the searchable project owner. 
(vi) If applicable, the full name, address and e-mail address of any surety providing performance and payment bonds and the bond numbers.
(vii) The unique identifying number assigned to the Notice of Commencement.

(viii) The number of the building permit for the searchable project.[8]

 

A contractor may act as agent for the Searchable Project owner to file a Notice of Commencement, if specifically authorized by contract and the owner assumes responsibility for the contractor's actions. There will be an administrative fee to Searchable Project owners to file a Notice of Commencement.

The owner must also conspicuously post a copy of the Notice of Commencement at the site of the project before physical work commences, including the unique identifying number assigned to the Searchable Project.  The owner must also take reasonable measures to ensure that the Notice of Commencement remains posted at the Searchable Project site until completion.[9] The owner and the contractor must also make reasonable efforts to ensure that the Notice of Commencement is made part of contract documents provided to all subcontractors on the project.[10]

A potential lien claimant on a Searchable Project has no obligation to file a Notice of Furnishing and will not forfeit lien rights unless a Notice of Commencement has been filed and posted in accordance with the new 49 P.S. §1501.3(b).[11] Future court case law will have to tell us what rules are critical to a valid Notice of Commencement, whether factual errors or failure to include a building permit number are fatal and the extent of reasonable measures necessary to ensure that the Notice of Commencement remains posted at the site.

A contract for a Searchable Project must include written notice that failure to file a Notice of Furnishing will result in the loss of lien rights.[12] The notice must be as follows:

A subcontractor that fails to file a Notice of Furnishing on the Department of General Services publicly accessible Internet website as required by the act of August 24, 1963 (P.L. 1175, No. 497), known as the Mechanics' Lien Law of 1963, may forfeit the right to file a mechanics lien. It is unlawful for a searchable project owner, searchable project owner's agent, contractor or subcontractor to request, suggest, encourage or require that a subcontractor not file the required notice as required by the Mechanics' Lien Law of 1963.

This requirement may apply only to a “contract” with the general contractor, although the intent was probably to include it also in all sub-subcontracts.

It will indeed be a second degree criminal misdemeanor for an owner, the owner’s agent, a contractor, or a subcontractor to request, suggest, encourage or require that a subcontractor not file a Notice of Furnishing as a condition of entering into, continuing, receiving or maintaining a contract for work or furnishing materials on a Searchable Project.[13] If a subcontractor can prove it did not file a Notice of Furnishing as a direct result of such action, the subcontractor retains lien rights and may also obtain actual damages and attorney’s fees.[14] Any person that “abuses” the Directory will be liable for the amount of actual damages or $2,000, whichever is greater.[15] A person abuses the Directory if the person files a Notice in the Directory (1) without a good faith reason to do so, (2) with the intent to exact more payment than is due from the Searchable Project owner or other party, (3) to obtain an unjustified advantage or benefit.[16] These “prohibitions” in the code revisions are effective now, even though the revisions regarding notices will not be effective until the Directory is operational.[17]

IF the Searchable Project owner files a Notice of Commencement, then any potential lien claimant must file a “Notice of Furnishing” with the Directory within forty five (45) days after first performing work or services at the job site or providing materials to the job site.  Any potential lien claimant that fails to file a Notice of Furnishing forfeits the right to file a mechanic’s lien claim. However, filing a Notice of Furnishing does not relieve the potential lien claimant of the need to file an actual lien claim or to comply with the other code requirements for preserving lien rights.

The Notice of Furnishing filed by a potential lien claimant must contain the following:[18]
(i) A general description of the labor or materials furnished.
(ii) Full name and address of the person supplying the services or items (potential lien claimant).
(iii) Full name and address of the person that contracted for the services or items.
(iv) A description sufficient to identify the Searchable Project, based on the description in the Notice of Commencement.

(v) The name of the county in which the Searchable Project located. [19]

(vi) The tax identification number of each parcel included in the Searchable Project.

(viii) The number of the building permit for the Searchable Project.

The Notice of Furnishing must be substantially in the following form:

Notice of Furnishing
To:       (Name of searchable project owner)
(Address of searchable project owner)

(Notice of Commencement Number)

Please take notice that the undersigned is performing certain work or labor or furnishing certain materials ................... to (Name and address of other contracting party) in connection with the improvement to the real property located at .................... The labor, work or materials were performed or furnished first, or will be furnished first on ...... (date).

(Name and Address of Lien Claimant)
By
(Name and capacity of party signing for lien claimant) 
(Address of Signing Party) 
(Date)

It seems that a potential lien claimant must also include in the Notice of Furnishing the name of the county, the tax identification number of each parcel included in the Searchable Project and the number of the building permit, although this form does not include this information.[20]

A Searchable Project owner has the option of also filing a “Notice of Completion” within forty-five (45) days of the actual completion of work on the project.[21] This Notice of Completion is optional and has no impact on the lien rights of potential lien claimants.  The Notice of Completion will be transmitted via the Directory to all potential lien claimants who have filed Notices of Furnishing. The term "actual completion of work" means (1) The issuance of an occupancy permit and the acceptance of the work, accompanied by cessation of all work on the Searchable Project; or (2) The cessation of all work for thirty (30) consecutive days, provided that work is not resumed under the same contract.[22] There is no apparent advantage to an owner in filing a Notice of Completion and it may actually incite potential lien claimants to file their lien claim.

A potential lien claimant also has the option of filing a “Notice of Nonpayment” for informational purposes only.[23] This Notice of Nonpayment is optional, apparently can be sent at any time payment has not been received, and also does not impact the lien rights of potential lien claimants. However, filing a Notice of Nonpayment will probably increase the chances of payment to a potential lien claimant without a lien claim filing, especially if the owner has no defense of payment or stipulation against liens in place. Filing a Notice of Furnishing does not relieve the potential lien claimant of the need to file a lien claim or to comply with the other code requirements for preserving lien rights.

Any person has the option of filing a request for notification of any Notice of Commencement, Notice of Furnishing, Notice of Completion, or Notice of Nonpayment filed.[24] Lenders and general contractors may want to do this, since they may not otherwise receive such notices.  Any person that has filed a Notice of Commencement, Notice of Furnishing, or Notice of Completion should automatically receive any further notices filed.[25] However, any owner or potential lien claimant may want to also request further notices, to make sure they promptly receive all notices. Any person requesting further Notices must (1) provide an e-mail address, mailing address or telefax number to which notification may be sent; and (2) be responsible for the accuracy of the e-mail address, mailing address or telefax number.[26] A request for further Notices must probably also contain the name of the county where the Searchable Project is located, the tax ID number(s) of the property involved and the building permit number.[27]

It is up to anyone filing any type of Notice to make sure it has been accurately entered in the State Construction Notices Directory in accordance with the statute.[28] This probably means that owners and potential lien claimants bear the risk of administrative errors entering data in the Directory.

Owners, general contractors, lenders and title insurance companies will probably now always require Notices of Commencement on projects over $1,500,000, in addition to recordation of general contracts in order to create a defense of payment against subcontractor liens and stipulations against lien when possible. Construction lenders and their title insurers will probably always require a Notice of Commencement as a condition of any loan. Owners filing a Notice of Commencement or Notice of Completion will pay the only fees to finance the State Construction Notices Directory.  However, filing a Notice of Commencement will significantly reduce the threat of mechanic’s liens filed on the project. Many potential lien claimants will simply fail to file Notices of Furnishings and forfeit their lien rights as a result. The potential lien claimants that do file Notices of Furnishings will provide owners, general contractors and lenders with a complete list of potential lien claimants from whom the owners, general contractors, lenders and title companies know they must obtain lien waivers as a condition of final payment.

Owners may authorize and require general contractors to file the Notice of Commencement, but owners must make sure that the authorization is in the general contract, along with an explicit assumption of responsibility for the general contractor’s actions in filing the Notice of Commencement.[29] In any event all owners, lenders and general contractors will want to independently confirm that the Notice of Commencement has been accurately entered in the State Construction Notices Directory in accordance with the statute.[30] Even an error by the Directory administration may eliminate the protections from mechanic’s liens.

Subcontractors and suppliers in Pennsylvania must check the State Construction Notices Directory for a Notice of Commencement before or soon after starting work. Subcontractors and suppliers should already be checking the local prothonotary (court clerk) offices for stipulations against liens before signing subcontracts, especially on residential projects. Checking the Directory for Notices of Commencement will be easier, since it can be done anywhere the internet is available. We believe that the best practice will be for subcontractors and suppliers in Pennsylvania to require or obtain copies of Notices of Commencement and the building permit in connection with signing a subcontract. The Notices of Commencement should be available on the internet and should be included in all potential lien claimants’ contract documents. The building permit number may not be on the Notice of Commencement and will be harder to get, but will be needed to file a Notice of Furnishing.

If a Notice of Commencement has been filed, subcontractors and suppliers in Pennsylvania must file a Notice of Furnishing. Otherwise they will be without mechanic’s lien rights, which is an important security to obtain payment and protect against customer bankruptcy. Perhaps more important, filing a Notice of Furnishing will generally result in payment to subcontractors and suppliers in Pennsylvania, without the need to hire lawyers or file lien claims. Apparently, there will be no fee to potential lien claimants to file a Notice of Furnishing or Notice of Nonpayment. Potential lien claimants should be able to file Notices of Furnishing without legal assistance and must commit the resources to train personnel to perform this function.

In short, owners and general contractors will make use of the new Notice system in Pennsylvania. Subcontractors and suppliers must also engage in the new system if they wish to make sure they are paid for their labor or material after December 31, 2016.

 

Readers are welcome to reprint or republish this article with the following attribution to the individual article author and their law firm.

© (2014) James D. Fullerton, Fullerton & Knowles, P.C. Clifton, VA (703) 818-2600         Use the Free Construction Law Survival Manual at www.FullertonLaw.com

 

 


[1] There is no apparent requirement of advance notice in the code revisions if it is not December 31, 2016.

[2] 49 P.S. §1201(17).

[3] 49 P.S. §1201(15)[Costs of construction" means 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. For purposes of this definition, reimbursement includes any such disbursements made to the borrower, any person acting for the benefit or on behalf of the borrower or to an affiliate of the borrower].

[4] 49 P.S. §1501.3(a)(1).

[5] 49 P.S. §1501.3(b)(1).

[6] 49 P.S. §1501.3(c).

[7] 49 P.S. §1501.3(a)(3).

[8] 49 P.S. §1501.5(f)(3). It is not clear whether a failure to include the building permit number invalidates the Notice of Commencement and means that there is no loss of lien rights to potential claimants.

[9] 49 P.S. §1501.3(a)(4)[The term "reasonable measures" means the reposting of notice by the searchable project owner within 48 hours after becoming aware of or being notified verbally, in writing or by e-mail that the notice is not posted].

[10] 49 P.S. §1501.3(a)(5).

[11] 49 P.S. §1501.3(b).

[12] 49 P.S. §1501.2.

[13] 49 P.S. §1501.6(a).

[14] 49 P.S. §1501.6(b) & (c).

[15] 49 P.S. §1501.6(d) & (e).

[16] It is not clear whether a person must be guilty of all three abusive activities or any of the three to be liable for damages.

[17] The Definitions in 49 P.S. §1201 and instructions for the creation of the Directory in 49 P.S. §1501.1 are also now in effect.

[18] 49 P.S. §1501.3(b).

[19] 49 P.S. §1501.5(f).

[20] 49 P.S. §1501.5(f).

[21] 49 P.S. §1501.4(a).

[22] 49 P.S. §1501.4(c)[A Notice of Completion shall not be considered by a court in determining compliance with timing requirements under this Act or in determining the completion date for a timing  purpose, including limitation periods or warranty obligations.  The filing of a Notice of Completion is purely precatory (advisory) and is not dispositive of any relationship among the parties].

[23] 49 P.S. §1501.4(b).

[24] 49 P.S. §1501.5.

[25] 49 P.S. §1501.5(c).

[26] 49 P.S. §1501.5(b).

[27] 49 P.S. §1501.5(f).

[28] 49 P.S. §1501.5(e).

[29] 49 P.S. §1501.3(a)(2).

[30] 49 P.S. §1501.5(e).

 

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