Last summer, I posted here about a bill pending in the Pennsylvania legislature that would change that state’s mechanic lien laws. That bill – House Bill 1602 – is still pending in that state, and heating up. Last week, Schnader, Harrison, Segal & Lewis LLP posted an article on JDSupra about the pending legislation, and this reminded me that my previous mention of the bill was too pithy, and lacked discussion of some key features of the potential law change.
Pennsylvania To Become A Preliminary Notice State
Right now, subcontractors and suppliers in Pennslyvania are not required to deliver a preliminary notice to preserve their mechanic lien rights. This will change, however, if HB 1602 becomes law.
Under the proposed regulation, property owners will have the option of filing a “Notice of Commencement” at the start of construction. If the notice is filed, all subcontractors and suppliers will be mandated to send a preliminary notice to preserve the right to file a mechanics lien. This preliminary notice would be due within 20 days of first furnishing labor and/or materials to the project.
This preliminary notice framework is very similiar to what exists in other states. For practical purpsoes, while the preliminary notice would not be due unless a Notice of Commencement was filed, this is really a legislative fiction. In reality, property owners rarely file the notice of commencement, but subcontractors and suppliers rarely have that information and the cost of acquiring it is too high. As a result, subcontractors and suppliers wind up simply delivering the preliminary notices on every project (or at least this would be a good practice).
Mechanics Lien Period Shortened From 6 to 4 Months
Another effect of HB 1602 if it becomes law is that the mechanic’s lien period in Pennsylvania would become shortened from 6 months to just 4 months. This is a small change compared to the complete redesign of the state’s notice framework, and in fact, the change is pretty easy to overlook when scanning the full text of the bill because it involves the change of just a single word!
Nevertheless, the mechanics lien period would be shortened under the proposed legislation, and thus, potential lien claimants in Pennsylvania would be further burdened to get their claims in 2 months earlier.
Residential Mechanic Liens Weakened Substantially
At the end of 2011, while in committee, HB 1602 was amended to provide as follows:
A subcontractor shall lose the right to lien with respect to an improvement to a residential property when the owner has paid the full contract price to the contractor.
This is a very significant provision, and would seriously injure the usefulness of mechanic lien claims against residential projects. I recently wrote a post here about some mechanics lien claims filed by ABC Supply against homes in Pittsburgh as a demonstration on why liens work. If HB 1602 becomes law, ABC Supply would not be able to file these liens.
What I Think & What Others Think
Whenever mechanic lien laws are proposed, folks line up on both sides of the aisle to make their case for and against the bill.
On the one hand, you have those sympathetic to the homeowners and property owners interested in reducing the effectiveness of the mechanics lien and increasing the burden on subcontractors and suppliers before availing themselves of the remedy. The Pennsylvania Association of Realtors (PAR) are one such group, and they testified in favor of the bill. In that testimony, the PAR states:
It has come to our attention that unsuspecting homeowners have mechanics’ liens placed on their homes by subcontractors who have not been paid by the general contractor. This has become prevalent throughout the commonwealth.
Without any evidence to suggest that mechanic lien laws are not working after hundreds of years of use, PAR asserts that this is a “growing problem.”
On the other hand are folks in the construction industry and construction industry trade groups, and folks like me, who see the value in mechanic lien claims and understand that while there are some horror stories, mechanic lien instruments provide security to subcontractors and suppliers across the country, which helps the economy work and things to get built.
The construction industry is riddled with payment delays and complexities that leave laborers, materialmen and others without payment. The mechanics lien claim maintains a balance of power between all the parties at the jobsite, and usually, results in things going much smoother.
Consider this comment from Stanley B. Edelstein, who testified to the Pennsylvania house on behalf of the Mechanical Contractors Association, which echoes some of the points in our Short History of the Mechanics Lien post from a while back:
Mechanics liens are not some sort of evil conjured up to hurt people; to the contrary, they date back to the earliest days of our nation to induce builders-back then they were generally individual craftsmen, and they were called mechanics-to provide their skills and material on credit to someone who wanted something built. The lien was a statutory security for payment of the debt created by the work furnished by the mechanic.