Photo of construction equipment with Pennsylvania legal alert graphic

Most states have enacted their own version of prompt payment laws to ensure contractors get paid in a timely fashion on construction projects. In Pennsylvania, most private construction projects are covered under the PA Contractor and Subcontractor Payment Act. One notable exception is any residential project of six or fewer units.

However, a recent Superior Court decision held that a mixed-use project that includes such a property is also covered under the Act.

Scope of Pennsylvania’s Prompt Pay Act (CASPA)

Pennsylvania’s Prompt Payment Act — also referred to as the PA Contractor and Subcontractor Payment Act (CAPSA) — is generally applicable to all private construction projects. It adds an extra layer of protection to those who aren’t paid within the specified deadlines by adding interest penalties and awarding attorney fees.

However, there is one particular type of project that is outside the scope of the CAPSA protection under 73 P.S. §503(a):

Number of residential units – This act shall not apply to improvements to real property which consists of six or fewer residential units which are under construction simultaneously.

So, an interesting dilemma arises when dealing with mixed-use properties — which is exactly the situation tackled in a recent PA Superior Court case.

Prompt payment protection clarified on mixed-use projects

The case in question is Adil El-Gharbaoui dba Adeal General Contractors v. Adebowale Ajayi and Jibola Ajayi

Project Snapshot:

  • Owners
    • Adebowale & Jibola Ajayi (Ajayis)
  • Contractor
    • Adil El-Gharbaoui dba Adeal General Contractors (Adeal)
      • Represented by: Musa A Jan of the Law Offices of Musa Jan

Lien foreclosures and claims under CASPA are separate actions

Adeal was hired as the general contractor on the project, for the demolition and renovation of property owned by the Ajayis. The property in question was a neighborhood commercial, mixed-use property; intended for use as a religious assembly and a day-care facility, as well as two residential units. Eventually, the project was canceled, and Adeal claimed they were still owed $22,000.

Adeal filed a mechanics lien and, subsequently, an action to foreclose. The trial court awarded Adeal a total of $41,500: $22,000 for the unpaid work, $11,000 in interest penalties, and $8,500 in attorney fees and court costs.

The Ajayis appealed, and the Superior Court affirmed the award for the unpaid work, but vacated the award of interest, attorney fees, and court costs — reasoning that the lien enforcement was a separate action from breach of contract claims seeking remedies under the CASPA.

Mixed-use projects fall under the protection of PA’s CASPA

Then, Adeal filed a new complaint alleging a breach of contract claim under CASPA and sought attorney fees, interest, and penalties. However, the court dismissed the claim stating that the construction of a church, child-daycare center, and the two residential apartments did not fall under the protection of the CASPA. This time, Adeal appealed.

Adeal argued that the church and the day-care facility were non-residential units, and that, as a mixed-use property involving both non-residential and residential units, CASPA was applicable and permitted the recovery of attorney’s fees and penalties. The Superior Court agreed.

The Superior Court noted that the purpose of the CASPA: to provide protection to contractors [who] require the greatest protection when the perform work on major construction projects.

The Court continued by stating that Pennsylvania courts have applied CASPA to all construction contracts, with the limited exception of construction contracts involving public works projects and construction contracts for improvements of real property that consists of six or fewer residential units which are under construction simultaneously.

Therefore, the Superior Court reversed the trial court decision by stating:

“The objective of CAPSA would be thwarted if the statute were deemed inapplicable to construction contracts that involved covered commercial structures, including mixed-use development, simply because the construction contract involved improvements on the same land or building to six or fewer residential units.”

Or put in other words, the CASPA applies to construction contracts except those involving public works projects for the improvement of real property consisting solely of six or fewer residential units.

Decision provides some clarity for PA contractors on mixed-used jobs

The holding in Ajayi provides some welcome clarity for contractors working on mixed-use projects, as this specific issue had never been considered by Pennsylvania courts prior to this decision.

The CASPA will still protect the timing of payments on such mixed-use projects — which are typically larger in scale, and inherently riskier.

It’s important to note that, in this case, the majority of the invoices in dispute were related to the foundational work of the entire property, not only to the residential portion of the property.

Thus, if the work performed was solely related to the residential portion of the building, the applicability of the CASPA is still unclear.