|May 19, 2011|
Previously published on Spring 2011
Pennsylvania's Mechanics' Lien Law (Lien Law) has undergone significant revisions twice over the past few years. Some of the most important changes to the Lien Law relate to contractors' ability to waive their lien rights, and the lien rights of their subcontractors, before work on the project even begins. Historically, the Lien Law permitted the pre-construction waiver of lien rights for all contractors and subcontractors by agreement between the owner and contractor. Now, the Lien Law allows contractors and subcontractors to waive their lien rights after they have received payment for the labor and materials furnished to a project, but limits the enforceability of prospective lien waivers, which have been entered into before the work is performed and payment is made. However, unlike neighboring states Delaware and New Jersey, in which all prospective lien waivers are deemed void as against public policy, Pennsylvania's Lien Law still permits prospective lien waivers in certain situations. By following procedures set forth in the Lien Law, contractors may enter into an agreement with the owner to waive their lien rights as well as the lien rights of project subcontractors. This article will identify when, and how, lien rights can be waived under the current Lien Law.
The ability to obtain prospective lien waivers on construction projects in Pennsylvania varies based on whether or not the project is "residential" as currently defined by the Lien Law. Prospective lien waivers issued on residential properties are enforceable, while those on non-residential properties may not be.
The Lien Law defines "residential property" as property that is zoned or otherwise approved for residential development on which a residential building not more than three stories in height, excluding the basement, exists or is being constructed. All liens, including liens of the contractor and all subcontractors, can be prospectively waived on residential projects through an express agreement between the owner and the contractor. Essentially, the Lien Law permits prospective lien waivers on projects to build small residential structures, such as houses, but mandates that prospective lien waivers on large residential structures, such as high rise apartment buildings, be deemed unenforceable. This definition represents a change in approach from the prior version of the Lien Law, which restricted the applicability of prospective lien waivers to residential projects based on the dollar value of the project. Under the old law, prospective lien waivers were not enforceable on any residential project in which the contract between the owner and the contractor exceeded $1 million. Owners on large residential projects would attempt to circumvent the purpose of this provision by breaking up the scope of work on the project and issuing multiple contracts, each of which had a value of less than $1 million. The Pennsylvania legislature has attempted to put a stop to this practice by refining the definition of "residential property."
For properties that do not fall within the Lien Law's definition of residential property, a contractor's lien rights cannot be prospectively waived under any circumstances, and any agreement to that effect will be deemed unenforceable as against public policy. However, an agreement between an owner and a contractor can act as a waiver of subcontractors' lien rights on non-residential projects, provided that the contractor obtains a bond to secure payments to the subcontractors.
Accordingly, lien rights can be prospectively waived: (1) by contractors and subcontractors on "residential projects," and (2) by contractors on behalf of their subcontractors on nonresidential projects, provided that a payment bond is in place.
In both of these scenarios, the Lien Law sets forth procedures that a contractor must follow in order for the prospective lien waivers to prevent subcontractors' lien claims. These procedures are unchanged from the 1964 version of the Lien Law. In order to waive the lien rights of their subcontractors, the contractor must expressly agree to do so in a contract with the owner or other written instrument, such as a Stipulation of Waiver of Liens, and must establish that it:
1. Provided actual notice to the subcontractors of the waiver prior to the time that the subcontractors furnish any labor or materials for the project (while the Lien Law does not require that this notice be in writing, it is good practice for a contractor to send the notice so it can definitively prove that the subcontractors had notice of the waiver); or
2. Filed a copy of the contract or other written instrument that contains the lien waiver with the office of the prothonotary in the county where the project is taking place either:
a. before commencement of work upon the ground;
b. within 10 days after execution of the contract between owner and contractor; or
c. at least 10 days before the claimant's subcontract was executed.
By filing the contract or other written instrument with the prothonotary, the lien waiver becomes public information and all subcontractors are deemed to be on notice that they are forfeiting their lien rights. However, for large residential projects, and all non-residential projects, the Lien Law ensures that security will exist for all contractors and subcontractors, either in the form of a mechanics' lien or payment bond.