As frequently mentioned on this blog, mechanics liens serve one purpose – to provide security to parties furnishing labor and/or material to a construction project for the improvement of real estate. This security is important; a business’s knowledge that payment will be forthcoming for work performed is crucial to keeping the wheels of industry turning smoothly. When companies worry about receiving payment, they extend less credit – and when too little credit is extended, the pace and health of the industry declines. To balance the protection of parties to a construction project with the interests of the property owner, states have made decisions regarding the party best suited to manage the distribution of funds throughout a project, and accordingly, which party is best suited to bear the burden of non-payment to a sub-contractor (at least originally). To this end, states are either “Full Price” lien states, or “Unpaid Balance” lien states.
Difference Between “Full Price” and “Unpaid Balance” Mechanics Lien States
States have different ways to apportion risk between parties in a construction project related to concepts of fairness, and the parties’ relative positions in the project. States have different ways to apportion risk between parties in a construction project related to concepts of fairness, and the parties’ relative positions in the project. Many states are “full-price” lien states, which means that if the state-specific notice and lien law requirements are met an unpaid subcontractor is entitled to a lien for the full price of the labor and/or materials furnished to the project – whether or not the property owner has already paid the general contractor. Some states, on the other hand, are “unpaid balance” lien states, in which an unpaid subcontractor is limited in his lien claim to the amount left unpaid to the general contractor at a statutorily determined time (either when notice was given, or when the lien was filed).
In full-price mechanics lien states, the state has made a determination that either, 1) the property owner is in the best position to allocate funds on the project and has the most knowledge of the parties involved, and, therefore, is the party best suited to bear the initial burden of non-payment to subcontractors, or 2) the state’s economic interest in making sure parties to a construction contract get paid outweighs the potential for double-payment by a property owner. If a subcontractor in one of these states in unpaid, that subcontractor is entitled to a mechanics lien for the full amount of the labor and/or materials he furnished to the project. Therefore, if the property owner has already paid the general contractor the full contract price, this will result in the property owner potentially being required to pay twice for the same work – once to the general contractor, and once to satisfy the subcontractor’s lien. There are valid reasons for either approach, but once a state has decided which approach to take, neither is necessarily more “fair” nor “unfair”, or, if you want to be contrarian, each approach is equally unfair to different parties.
In an unpaid-balance mechanics lien state, the determination has been made that, at least to a certain extent, either 1) the unpaid subcontractor is in the best position to bear the burden of non-payment, or 2) that the state’s interest in protecting property owners from double-payment exceeds the interest in ensuring payment for all parties on a construction project. A subcontractor in an unpaid-balance state is entitled to a mechanics lien for only the amount still due to the general contractor at a statutorily defined time – generally either the time a notice was given, or a the time the mechanics lien was filed.
There are valid reasons for either approach, but once a state has decided which approach to take, neither is necessarily more “fair” nor “unfair”, or, if you want to be contrarian, each approach is equally unfair to different parties.
Pennsylvania May Change Law to Limit Mechanics Lien to Unpaid Balance
Senate Bill 145 has passed the Pennsylvania Senate Labor and Industry Committee, and is on the way to the full Senate for a vote. The bill, introduced by Sen. Kim Ward, seeks to eliminate lien rights for subcontractors if a residential property owner (or tenant) has paid the full contract price to the general contractor.
That language leaves open the possibility that an unpaid subcontractor could send the required notice, and file a valid lien, (all while the general contractor is unpaid), and then have that validly filed lien extinguished without ever receiving payment. It is unfortunate, but the wording of the statute is unclear as to when payment to the general contractor works to prohibit the mechanics lien of a subcontractor. As stated above, the lien rights of a subcontractor in unpaid-balance states are generally limited to the amount not yet paid to the general contractor at one of two times: 1) the date on which notice is given, or 2) the date on which the lien is filed. Poor drafting of the proposed amendments in Pennsylvania seems to leave that determination open, and, in fact, may be potentially even more confusing, and potentially disastrous for unpaid subcontractors.
Section 510(f)(1) of the proposed amendments states that:
A claim filed under this act with respect to an improvement to a residential property subject to section 310 (b) shall, upon petition or motion to the court by the owner or a party in interest, be discharged as a lien against the property when the owner or tenant has paid the full contract price to the contractor.
That language leaves open the possibility that an unpaid subcontractor could send the required notice, and file a valid lien, (all while the general contractor is unpaid), and then have that validly filed lien extinguished without ever receiving payment. It appears that a property owner could pay the general contractor after a subcontractor’s lien has been filed, and then have the lien removed based on that subsequent payment. This is, at the very least, confusingly drafted – or at the worst, an enormous blow to subcontractors’ ability to secure their work extended on credit.
The proposed amendments have not yet passed, but if they do subcontractors in Pennsylvania may lose much of their security – potentially even more than being limited to filing a lien for the unpaid balance on the project.