"Act 52 Amends the Pennsylvania Mechanics' Lien Law of 1963," by Stephan L. Cutler, 2006

Act 52 Amends the Pennsylvania
Mechanics’ Lien Law of 1963

By Stephan L. Cutler

On June 29, 2006, Governor Rendell signed Pennsylvania General Assembly House Bill 1637, Printers No. 4229, also known as Act 52 (hereinafter “Act 52”), which amends the Pennsylvania Mechanics’ Lien Law of 1963, 49 P.S. 1101 et seq. (“PMLL”). The primary purpose of Act 52 is to protect contractors and subcontractors, by limiting the circumstances in which an owner may obtain a waiver of mechanics’ liens from a contractor or subcontractor prior to the time the contractor or subcontractor is actually paid. The impact of Act 52 (the enactment of which was opposed by the Philadelphia Bar Association) is significant to owners, contractors, subcontractors and mortgage lenders.

Prior to Act 52, a contractor or subcontractor could waive his right to file a claim by a written instrument signed by him or by any conduct that operated equitably to estop the contractor or subcontractor from filing a claim. The waiver was effective even if it was executed before the contractor or subcontractor was paid. Furthermore, prior to Act 52, a mechanic’s lien waiver that was executed by a contractor that provided that a claim could not be filed by a subcontractor, was binding on the subcontractor if: (1) the subcontractor had actual notice of the waiver before any labor or materials were furnished by the subcontractor; or (2) the contract or a separate written instrument was filed in the office of the prothonotary prior to the commencement of the work on the ground or within ten (10) days after execution of the principal contract or not less than ten (10) days prior to the contract with the subcontractor, indexed in the name of contractor as defendant and the owner as plaintiff and also in the name of the contractor as plaintiff and the owner as defendant. If the contract or separate written instrument is indexed electronically by means of a computer or similar system such that the names of the contractor and owner are electronically retrievable regardless of whether the parties are indexed as plaintiff or defendant, then the contractor can be listed as defendant and the owner as plaintiff or contractor can listed as plaintiff and the owner as defendant.

However, after January 1, 2007 (the effective date of Act 52), a waiver by a contractor or subcontractor is binding only in the following circumstances:

1. In the case of a residential building where the total contract price between the owner and the contractor is less than $1,000,000, a contractor or subcontractor or both may waive their respective rights to file claims against property for the erection, construction, alteration or repair by signing a written instrument or by any conduct which operates equitably to estop the contractor or subcontractor (as the case may be) from filing a claim. So, for residential construction contracts under $1,000,000, the rules are largely the same.

2. In the case of a residential building, a subcontractor also may waive his right to file a claim against the property (irrespective of the contract price between the owner and contractor) by signing a written instrument or by any conduct which operates equitably to estop the subcontractor from filing a claim, provided the contractor has posted a bond guaranteeing payment for labor and materials provided by subcontractors. For residential construction contracts of $1,000,000 or more, the contractor is held to a higher standard, and the surety market will be enriched by the need for labor and material bonds.

3. Except as provide in the first 2 rules: (a) a waiver executed by a contractor is only valid if it is given in consideration for payment for work, services, materials or equipment provided and only to the extent payment is actually received; and (b) a waiver executed by a subcontractor is only valid if: (i) it is given in consideration for payment for work, services, materials or equipment provided and only to the extent payment is actually received; or (ii) the contractor has posted a bond guaranteeing payment for labor and materials provided by subcontractors. Any other waiver is against public policy, unlawful and void.

4. If lien rights may be waived as set forth above, then a mechanic’s lien waiver that is executed by a contractor that provides that a claim cannot be filed by a subcontractor is binding on the subcontractor if: (a) the subcontractor has actual notice of the waiver before any labor or materials are furnished by the subcontractor; or (b) the contract or a separate written instrument is filed in the office of the prothonotary prior to the commencement of the work on the ground or within ten (10) days after execution of the principal contract or not less than ten (10) days prior to the contract with the subcontractor, indexed in the name of contractor as defendant and the owner as plaintiff and also in the name of the contractor as plaintiff and the owner as defendant (subject to the same electronic indexing exception mentioned above). This last rule just brings us full circle to the traditional requirements of mechanics’ lien waivers, which we’ve come to expect under the PMLL prior to the enactment of Act 52. However, it is only applicable in the case of residential construction contracts under $1,000,000.

Act 52 defines a residential building to be property on which there is a residential building, or which is zoned of otherwise approved for residential development, planned development or agricultural use, or for which a residential subdivision plan or planned residential development plan has received preliminary, tentative or final approval pursuant the Pennsylvania Municipalities Planning Code.

Act 52 also includes a change to the definition of “subcontractor.” Prior to Act 52, the definition was limited to a person (other than an architect or engineer), who by express or implied contract with the contractor, erects, constructs, alters or repairs of an improvement or any part thereof, or who furnish labor, skill or superintendence thereto, or supplies or hauls materials, fixtures, machinery or equipment reasonably necessary for and actually used therein, or any of the foregoing, whether as superintendent, builder, or materialman. Act 52 expands the definition of subcontractor to include a person that enters into a contract with a subcontractor that is in direct privity with the contractor (i.e. a second tier subcontractor).

The time within which a claimant is required to file a claim following completion of the work has also been extended from four (4) months to six (6) months. And Act 52 eliminates the requirement that subcontractors provide owners (in the case of alterations or repairs) with a preliminary notice of intention to file a claim prior to completion of their work.

Lenders will be pleased to learn that Act 52 amends the lien priority rules afforded mechanic’s liens by making them subordinate to: (1) purchase money mortgages (as defined in 42 Pa.C.S. §8141(1)); and (2) open-end mortgages (as defined in 41 Pa.C.S. §8143(f)), the proceeds of which are used to pay all or a portion of the cost of completing erection, construction, alteration or repair of the property secured by the open-end mortgage. This change provides purchase money mortgage lenders and construction lenders with additional protection, knowing that they cannot be primed by a disgruntled contractor; though non-purchase money mortgage lenders and lenders that are not advancing funds for construction still need to be anxious when construction is already underway.

As is often the case with new legislation, Act 52 raises some interesting issues. For instance:

• What qualifies as a statutorily sufficient bond guaranteeing payment for labor and materials provided by subcontractors?
• If an open-end mortgage qualifies for the super-priority afforded by Act 52, will Act 52 also protect the mortgagee with respect to advances for taxes, assessments, maintenance charges, insurance premiums or costs incurred for the protection of the mortgaged premises or the lien of the mortgage or by reason of a default of the mortgagor under the mortgage?
• The statute does not prohibit contractors or subcontractors from subordinating their mechanics lien rights.
• Will an owner (and its mortgage lender) be tempting fate if the owner sets-off against payments due the contractor to cure defective work previously paid for?
• The definition of “residential building” is somewhat circuitous.
• Is there any inconsistency between the rights now afforded second tier sub-subcontractors under Act 52, and the release provisions of the Pennsylvania Contractor and Subcontractor Payment Act (73 P.S. 501 et seq)?
• Even though the up-front mechanics’ lien waiver is of limited use post-Act 52, an owner should make sure subcontractors are provided with actual notice of the total amount of the contract between the owner and contractor in order to avail itself of the protection afforded by 49 P.S. §1405 (which was not amended by Act 52).

Only time, litigation, further amendments or new legislation will answer these and other questions that will undoubtedly arise. In fact, we may not have to wait very long for answers. On June 13, 2006, Representative Bob Allen introduced House Bill No. 2756 (Printers No. 4207), which repeals the PMLL and replaces it with an entirely new mechanics’ lien statute.

As previously noted, Act 52 takes effect January 1, 2007.