Recent Amendments to Mechanic’s Lien Law Affect Rights of Subcontractors on Residential Construction Projects

Nicholas D. Krawec, Esq.
07/28/2014

In July 2014, the Pennsylvania Legislature enacted amendments to the Pennsylvania Mechanic’s Lien Law, which significantly, and adversely, affect the mechanic’s lien rights of subcontractors on residential construction projects. The amendments were signed into law by Gov. Corbett on July 9, 2014, and will take effect in 60 days (on September 7, 2014). Previously, subcontractors could file a mechanic’s lien claim for the unpaid balance due to them, even if the property owner had paid the contractor in full. The newly enacted amendments deny subcontractors that right, or limit the lien based on the amount still owed by the property owner to the general contractor.  As a result, the legal actions available to subcontractors seeking compensation for their unpaid work have been significantly reduced.

Although the amendments add a definition of “construction costs” to Section 1201 of the statute, this article will focus on the changes to the mechanic’s lien rights of subcontractors on residential construction projects.  Section 1301 of the Mechanic’s Lien Law, “Right to Lien; amount,” has been amended by addition of the following provision:

b.) Subcontractor. A subcontractor does not have the right to a lien with respect to an improvement to a residential property if:

  1. the owner or tenant paid the full contract price to the contractor;
  2. the property is, or is intended, to be used as the residence of the owner or subsequent to occupation by the owner, a tenant of the owner; and
  3. the residential property is a single townhouse or a building that consists of one or two dwelling units used, intended or designed to be built, used, rented or leased for living purposes. For the purposes of this paragraph, the term “townhouse” shall mean a single-family dwelling unit constructed in a group of three or more attached units in which each unit extends from foundation to roof with a yard or public way on at least two sides.

2014 Pa. Legis. Serv. Act 2014-117 (S.B. 145)

If all three of the above factors are present, a subcontractor is denied the right to file a mechanic’s lien claim against the residential property to which he supplied labor and/or material.  Prior to this amendment, the property owner was at risk of having to pay twice to discharge the mechanic’s lien of a subcontractor who had not been paid by the contractor, even if the owner had paid the contractor in full. However the statute provided (and still does provide, if necessary under the appropriate circumstances) the opportunity for the property owner to pay the subcontractor’s mechanic’s lien claim, and thereafter be subrogated to the rights of the subcontractor against the contractor.

Chances are that, often, a subcontractor will not know whether the residential property owner has made full payment, or any payment, to the contractor, and would (and should) still proceed with the filing of his mechanic’s lien claim.  However, the amendments signed into law also amend section 1510 of the Mechanic’s Lien Law, dealing “Discharge of Lien on Payment into Court or Entry of Security,” by adding a new subsection (f).  New section 1510(f) now reads as follows:

“Section 510 Discharge of Lien or Reduction of Lien
* * *
(f) Residential Property.

  1.  A claim filed under this act with respect to an improvement to a residential property subject to section 301(b) shall, upon a court order issued in response to a petition or motion to the court by the owner or a party in interest, be discharged as a lien against the property when the owner or tenant has paid the full contract price to the contractor.
  2. Where the owner or tenant has paid a sum to the contractor which is less than the sum of the full contract price, a claim filed under this act with respect to an improvement to a residential property subject to section 301(b), shall, upon a court order issued in response to a petition or motion to the court by the owner or a party in interest, cause the lien to be reduced to the amount of the unpaid contract price owed by the owner or tenant to the contractor.”

So, under the amendments, there will be a procedure whereby a residential property owner, tenant or other party in interest (which arguably could also be the contractor) can petition the court for an order discharging the subcontractor’s mechanic’s lien claim, upon a showing that the owner paid the contractor in full.  Alternatively, if the owner has paid the contractor less than the full balance of the owner’s contract with the contractor, the owner still can petition the court for an order reducing the amount of the subcontractor’s mechanic’s lien claim to the amount the owner still owes the contractor.  In such situations, the subcontractor’s mechanic’s lien claim may well be reduced to an amount that is substantially less than what the contractor owes the subcontractor.

Finally, even if the circumstances on a residential construction project are such that subcontractor’s mechanic’s lien rights are fully or partially preserved, the priority of the lien is a factor to consider.  The amendments to the statute also included an amendment to section 1508, dealing with “Priority of lien.”  Section 1508(c)(2) has been amended to provide that the lien obtained by a contractor or subcontractor shall be subordinate to “an open end mortgage as defined in 42 Pa.C.S. §8143(f)(relating to open-end mortgages) where at least sixty percent (60%) of the proceeds are intended to pay or are used to pay all or part of the costs of construction.”  Section 1508(c)(2) previously provided that a mechanic’s lien claim would be subordinate to an open end mortgage “the proceeds of which are used to pay all or part of the cost of completing erection, construction, alteration or repair of the mortgaged premises secured by the open-end mortgage.”  Now, only 60% of the proceeds of such mortgage need to be used for that purpose in order for that open-end mortgage to have priority over a mechanic’s lien claim.

These are amendments that significantly alter the rights of subcontractors to file mechanic’s lien claims on residential construction projects.  If a subcontractor has any doubts or concerns about the creditworthiness of the contractor to which he is supplying labor and/or material, or concerned that his contractor would receive payment from the property owner and then use those funds to pay other obligations that he perceives to be more pressing than that which is owed the subcontractor, vigilance is the key.  If a subcontractor has such concerns, he should consider insisting on a joint check agreement.  And always, when in doubt about your mechanic’s lien rights, consult an attorney.

For more details on this matter, contact Bernstein-Burkley, P.C. Partner, Nicholas D. Krawec, at 412-456-8100 or nkrawec@bernsteinlaw.com

Written by Bernstein- Burkley, P.C. on July 28, 2014

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