Negative PA Mechanic’s Lien Change Goes into Affect in September

August 11, 2014

With the summer signing by Pennsylvania Gov. Tom Corbett, the mandates within the state's SB 145 will go into effect on Sept. 7 and usher in some fairly significant changes for subcontractors and material suppliers working on residential projects. NACM Secured Transaction Services’ Chris Ring and some prominent Pennsylvania attorneys characterize the new law as a lose-lose for subs and suppliers pretty much all around.

In essence, the change affects the dollar amount of the lien that a subcontractor or material supplier can file, basing it on the amount of the funds owed from the property owner to the general contractor. The subcontractor’s lien rights will now be limited to the amount still owed to the contractor, general contractor. Nicholas Krawec, Esq., of Bernstein-Burkley PC, noted that the amount could, and usually will be, less than the amount owed to the sub or supplier. He added that “it’s a big deal” for subs and suppliers. But it’s even worse if the homeowner has made full payment.

“Essentially, subcontractors and material suppliers have no lien rights if the property is or is intended to be used as the residence of the owner or subsequent to occupation by the owner or a tenant of the owner,” said Ring.

Krawec noted that, historically, Pennsylvania had not been a defense of payment state. That changes next month in a state that more and more seems to demonstrate that developers have a stronger lobby than subcontractors or suppliers. There’s also the matter of this being an election year in Pennsylvania, and homeowners (voters) have long complained that they should not be dragged into disputes between general contractors and subs/suppliers over payments. However, that was one of the only methods of recourse that subs and suppliers could seek in the state against GC’s.

“When it takes effect on Sept. 7, if the owner has paid the contractor in full, it will kill the subcontractor’s lien rights,” Krawec said.

Krawec also drew attention to the statutory change focused on priority in an open-ended mortgage, citing the following passage: “Any lien obtained under this act by a contractor or subcontractor shall be subordinate to the following…an open-end mortgage, the proceeds of which are used to pay all or part of the cost of completing erection, construction, alteration or repair of the mortgaged premises secured by the open-end mortgage where at least sixty percent (60%) of the proceeds are intended to pay or are used to pay all or part of the costs of construction. Previously, the statute stated that all proceeds (not just 60%) had to be used to pay for finishing construction.

Krawec believes these statutory changes represent a loss all-around for contractors and suppliers. Those in the industry in Pennsylvania need to be prepared to address this new issue in very short order.

To read even more on this topic, visit Krawec’s blog article.

 

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