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Legal Intelligencer: Henry Donner and David Dean on Practitioners’ Guide to Navigating New Mechanics’ Lien Law Amendments

qtq80-HnVsL4-150x150In the August 21, 2017 edition of The Legal Intelligencer, Henry Donner, Of Counsel at KHF, and David Dean, an associate of the firm, write on the Practitioners’ Guide to Navigating New Mechanics’ Lien Law Amendments.

By: Henry Donner and David Dean

Pennsylvania’s Mechanics Lien Law of 1963 was amended in late 2014 to require the commonwealth’s Department of General Services to create an internet-based State Construction Notices Directory. As required by the law, the directory went live on Dec. 31, 2016, providing a standardized, statewide, internet-based system for construction notices. This statutory scheme imposes new requirements on project owners, contractors, and subcontractors, compliance with which can drastically affect those parties’ rights under the Mechanics Lien Law. Practitioners representing any of the traditional parties in a construction matter should be sure to familiarize themselves with these new provisions, and advise their clients accordingly.

The Basics of the New Provisions

Under the new provisions of the Mechanics’ Lien Law, the directory provides a database for any “searchable project,” defined as “a project consisting of the erection and construction, or alteration or repair, of an improvement costing a minimum of $1,5 million,” 49 P.S. Section 1201(18). Pursuant to the new scheme, the owner of a searchable project (or the contractor on a searchable project, with the owner’s permission) may file a notice of commencement with the directory. The notice of commencement must be filed prior to the commencement of any labor, work or furnishing of materials for the project, and must identify, among other things, the owner, contractor and location of the project. See 49 P.S. Section 1501.3(a). Additionally, if a notice of commencement is filed, the owner must post a copy of the notice at the project site before work begins, and must also (along with the contractor) “make reasonable efforts” to ensure that the notice is a part of the contract documents provided to subcontractors on the project.

The filing of a notice of commencement on a searchable project also triggers certain obligations for any subcontractors performing work or providing material for the project. Within 45 days of first providing labor or materials to a searchable project, each subcontractor must file a notice of furnishing with the directory. The notice of furnishing must identify, among other things, the subcontractor and other contracting party and must provide a general description of the labor or materials furnished for the project. Upon completion of work on a searchable project, the owner may file a notice of completion, and any subcontractors who has not received full payment for their work may file a notice of nonpayment.

These new provisions raise interesting questions for practitioners, and will affect the way they advise their clients, regardless of which side of a construction project they are representing.

Project Owners

For project owners, the creation of the directory provides an additional layer of protection from mechanics’ lien claims. It should be emphasized that, for owners of a “searchable project,” participation in the directory is voluntary, as the statute clearly provides that an owner “may,” rather than “shall,” file a notice of commencement. If the owner of a searchable project faces the possibility of exposure to mechanics’ lien claims, there is no downside for an owner to file a notice of commencement. Once a notice of commencement has been filed, any subcontractor on the project is obligated to file a notice of furnishing, and a subcontractor’s failure to follow those notice requirements forfeits the right to file a lien claim.

The new provisions also contain additional protections for project owners that opt in to the new notice scheme. As discussed above, upon completion of the project the project owner may file a notice of completion. By the very text of the statute, however, this filing (and the filing by subcontractors of notices of nonpayment) are merely for informational purposes. Such a filing is not dispositive of any relationship among the parties. Further, the filing of a notice of completion cannot be considered by a court in determining the completion date of a project as it affects other rights of the owner, such as limitation periods, warranty obligations, or the owner’s compliance with other timing requirements under the Mechanics’ Lien Law.

While the failure by a subcontractor to follow the directory’s notice requirements precludes that subcontractor from filing a lien claim, practitioners representing owners should take care to advise their clients not to take any steps to discourage or otherwise prevent subcontractors from complying with those notice requirements. The new provisions make it unlawful for a project owner to “suggest, request, encourage or require,” as a condition for “entering into, continuing, receiving or maintaining” a contract, that a subcontractor not file the required notice. Doing so excuses any forfeiture of lien rights by the subcontractor on account of the failure, and an owner (or contractor) who violates the provision faces potential criminal and civil liability, including attorney fees to the offended subcontractor.

Finally, practitioners should note that these new provisions do not affect the ability of owners to obtain releases of liens from subcontractors for projects where a payment bond has been posted.

Contractors

The effects of the new notice provisions on contractors are less extensive than those on owners and subcontractors, but practitioners should still ensure that their contractor clients are aware of them. Importantly, contractors are not required to file any notice with the directory upon furnishing (or completing) any labor or materials, and a prime contractor’s lien rights are not affected by the provisions related to the directory.

Contractors, however, share certain obligations with project owners under the new scheme. For example, contractors must take reasonable steps to ensure that any notice of commencement filed by a project owner is included in the contract documents the contractor provides to its subcontractors. The statute itself does not elaborate as to what “reasonable steps” would be, nor does it provide any consequences for a contractor’s failure to do so, and to date no courts have provided an interpretation of this provision. In addition, practitioners should advise that contractors (and subcontractors that bring on their own subcontractor(s), like owners, face potential criminal and civil liability for preventing any of their subcontractors from following the Directory notice requirements.

Subcontractors

The creation of the directory provides small, but important benefits to subcontractors and their counsel. For searchable projects where a notice of commencement has been filed, subcontractors have an easy way to determine the identity of the project owner, which may not be apparent from the subcontractors’ contract documents (particularly for second-tier subcontractors). The directory also provides subcontractors and their counsel with information on all other subcontractors on the project (and others that may have lien claims at the completion of the project).

Mainly, however, the new scheme imposes new obligations on subcontractors, and practitioners representing subcontractors on searchable projects should be sure to advise their clients of those obligations. Unlike owners, for whom the notice scheme is voluntary, subcontractors face must follow the directory notice provisions for any project where an owner has filed a notice of commencement, or risk forfeiting their lien rights. Further, these notice requirements are cumulative of subcontractors’ other notice obligations under the Mechanics’ Lien Law. In other words, a subcontractor’s filing of a notice of furnishing does not excuse the subcontractor from providing the requisite 30-day notice to the project owner, nor does it alter the deadline for filing of a lien.

Conclusion

The creation of the State Construction Notices Directory provides a centralized, easy-to-access database for information on large-scale construction projects. While the availability and accessibility of this information can be beneficial to the various parties to construction contracts and their attorneys, those representing the various parties to construction contracts ensure that they fully advise their clients on the requirements, and potential ramifications, of the new notice scheme.

Henry Donner is of counsel at Kang Haggerty & Fetbroyt, where he recently moved his construction law practice after nearly 40 years at Jacoby Donner. He counsels and represents those in the construction industry. David Dean is an associate at the firm, where he concentrates his practice on commercial litigation matters, including contract disputes, business torts, and shareholder and partnership disputes.

Reprinted with permission from the August 21st edition of The Legal Intelligencer”© 2017 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

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