One of our most frequent topics here at the Lien blog is changes in lien law.  Whenever state legislatures pass or even consider  bills that propose changes to a state’s mechanics lien law, we want our readers and clients to be the first to know so that they understand how the amendment will affect their business.  Currently, one of those amendments is working its way through the Pennsylvania Senate, where it will be up for a vote shortly. Nate recently discussed the potential changes as related to subcontractor’s rights, and Pennsylvania’s potential change from a full-price lien state to an unpaid-balance lien state. This post will examine the potential changes to how Pennsylvania defines construction costs, and open-ended mortgages.

What Changes to Mechanics Lien Law Are Being Considered?

Unlike some changes in law which don’t really have any substantive effects, the amendment to the state’s mechanics lien law that the Pennsylvania would actually be quite significant.  Specifically, the amendment, Senate Bill 145, would add more than fifty lines of new text to the current mechanics lien statutes.

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First, the amendment to the state’s mechanics lien law would greatly expand and clarify the definition of “construction costs.”  As the bill states, construction costs would now include:

all costs, expenses, and reimbursements pertaining to erection, construction, alteration, repair, mandaged off-site improvements, government impact fees and other costs, including, but not limited to, costs, expenses, and reimbursements in the nature of taxes, insurance, bonding, inspections, surveys, testing, permits, legal fees [this is important], architect fees, engineering fees, consulting fees, accounting fees, management fees, utility fees, tenant improvements, leasing commission, [and] payment of prior filed mechanics’ liens or mortgages [. . .]

Implicit in the amendment is that lien claimants would be able to include all of the above in the mechanics lien itself, but please note that the statute does not specifically grant this right.  Rather, we may see litigation as to whether lienors can include all of these construction costs in the lien or if they must sue for them instead.

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Also, the amendment changes Pennsylvania mechanics lien law surrounding open-end mortgages by requiring that such mortgages can be used to pay construction costs only when “at least [ ] 60% of the proceeds are intended to pay or are used to pay all or part of the costs of construction.”  The Senate Bill also makes some other changes to open-end mortgage law which aren’t relevant for our purposes in this post.

Why is the Senate Considering These Changes to Mechanics Lien Law?

Paul Peirce from Trib Total Media (Westmoreland Tribune) wrote an article about the context behind the amendment.  As is often the case with state legislatures, the Pennsylvania senator who proposed the bill was reacting an unfortunate series of recent events and is trying to prevent them from happening again with new law.

In 2011, a Wisconsin roofing company,  received contracts from many homeowners in Westmoreland County whose roofs suffered tornado damage.

Even though the homeowners paid the Wisconsin company, which served as prime contractor on the job, the company then failed to pay its Pennsylvania-based suppliers.  After the prime contractor left town the property owners and suppliers were left to litigate the issues themselves after the suppliers filed mechanics liens.

As the bill’s sponsor noted:

“Even with proper documentation showing they paid the primary contractor, the subcontractor still filed the lien in accordance with existing Pennsylvania law. When the main contractor left town and disconnected their contact sources, they left these residents to fight the subcontractor on their own . This is unacceptable and unfair to those homeowners, who now have to pay twice because a contractor has skipped out on the job. This legislation will protect homeowners from that nightmare.”

Some other states have laws protecting property owners from double payment.  The Pennsylvania amendment to the state’s mechanics lien law would grant this protection to property owners who have paid the full contract price and live on the property – although as mentioned by Nate previously, the wording of the proposed amendment is unclear.  The amendment would negatively affect unpaid subcontractors, who would have to go after the potentially out-of-town primary contractor instead of being able to file a mechanics lien, but would be beneficial to homeowners and protect them from double payment.

Next Steps

Senate Bill 145 was up for second consideration by the Senate on April 17, 2013.  It’s hard to say if and when the bill will pass but it certainly has been picking up steam; Senate Bill 145 now has 18 sponsors.