Mechanics’ lien laws protect contractors in the event they do not get paid for a job. A mechanic’s lien is a claim created by statute for the purpose of securing payment for labor and materials provided in construction or improvement to buildings or real estate. The lien attaches to buildings that the construction and improvements were made upon as well as the land that they are erected upon. This type of lien covers materialmen, tradesmen, suppliers, and the like who furnish services, labor, and materials for construction upon or improvement of property. A lien is an encumbrance which appears of public record against real estate.
Pennsylvania’s Mechanic’s Lien Law recently underwent considerable change that, among other things, will provide greater protections to contractors and sub-contractors. Governor Ed Rendell signed the new law in June, but it will not become effective until January 1, 2007.
The law presently in effect only allows general contractors and first level subcontractors to file liens; under the new law, however, subcontractors to subcontractors and suppliers will be able to file liens as well. The changes make Pennsylvania’s Mechanic’s Lien Law more comparable with those of other states and offer greater protection to subcontractors, suppliers, title insurance companies and mortgage lenders.
This type of lien is used to ensure that a contractor gets paid for work performed on a specific construction project. If a contractor does not get paid for his or her work, the only recourse that may be available to him or her is to file a lien against the property where the work was done. The lien remains on the property until the contractor who filed the lien is paid.
Mechanics’ liens provide an incentive for an owner-developer of a property to pay the contractor since a lien will hinder him/her from obtaining permanent financing, or a mortgage, for the property. A title insurance company will not insure a tract that has liens, and a mechanic’s lien on a property could prevent an owner from refinancing or selling it.
Under present law, if a property owner and general contractor sign a document called a “waiver of liens,” and that document is recorded in the Prothonotary’s office of the county where the work is being performed, no one associated with that project, not even a subcontractor (even though it has not signed the waiver), can file a lien. The new law changes that; but for a few exceptions, a waiver of liens is no longer permitted. The one instance where a waiver is still permitted under the new law is where the general contractor supplies a payment bond (which typically costs 1% of the project cost); then a lien waiver could be filed.
Another important change to the Mechanic’s Lien Law is that the new law extends the timing for filing liens. Under the old law a lien had to be filed generally within four months of work being completed at a job site. The new law will allow a contractor six months from the date work is completed to file a lien.
One more important difference between the new law and the current one is that under the new law a lender’s lien takes priority over a contractor’s lien; previously, even though a mortgage lien might have predated the filing of a mechanic’s lien, under certain circumstances the lender’s lien was subordinated to the mechanic’s lien.
The changes to the Mechanic’s Lien Law are significant. While greater protections have been provided to contractors and suppliers, there is now a greater burden placed on owner-developers to protect themselves by purchasing bonds or making greater efforts to obtain lien releases from all contractors, subcontractors and suppliers as they are paid upon completion of work.
For help with understanding how the new Mechanic’s Lien Law may affect you as a contractor, owner or developer contact our office.
– J. Kenneth Butera
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