Mechanics liens provide security for extensions of labor and/or materials to a construction project. That security can sometimes be decreased, however, by the amount paid to the general contractor by the property owner by some certain date. In states where this is the case, the mechanics lien may only attach in an amount equal to or less than the “unpaid balance”, rather than the “full price” of the lien claimant’s contract. With the recent signing of Act 117 (previously Senate Bill 145), Pennsylvania becomes an “unpaid balance” lien state in some instances in an attempt to shield homeowner’s from mechanics liens that were, perhaps inequitably, labeled as “unfair”.

“Unpaid Balance” vs. “Full Price”

states have come to different conclusions as to which parties should bear that risk, with the decisions usually tied to some idea of fairness as related to the parties’ relative positions in the project.
The financial risk on a construction project can be apportioned in different ways. States have come to different conclusions as to which parties should bear that risk, with the decisions usually tied to some idea of fairness as related to the parties’ relative positions in the project. Many states allow “full-price” mechanics liens, such that 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. This can result in double payment by the property owner (who would then be entitled to recover the excess payment from the GC). On the other hand, some states only allow “unpaid balance” mechanics liens states, so that the unpaid subcontractor’s lien is limited to the amount the GC has not yet been paid at a statutorily determined time (either when notice was given, or when the lien was filed).

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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, 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. Whereas, 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.

Legitimate arguments can be made for either approach, at least as long as the decision is sufficiently clear, and subject to appropriate rules and requirements.

New Pennsylvania Law

The new Pennsylvania law, sponsored by Senator Kim Ward, seeks to protect Pennsylvania homeowners from “unscrupulous contractors” and limits the mechanics lien rights of subcontractors and suppliers. Pursuant to the new law, mechanics liens on residential property are not allowed if the property owner has paid the GC in full. Further, if a lien has been filed against residential property, the property owner “or a party in interest” may petition the court for an order discharging the lien when the owner or tenant has paid the full contract price to the contractor.

While the labeling of mechanics liens “unfair” solely because they may require double payment by the property owner is contrary to the purposes and history of the mechanics lien instrument, the decision to become an “unpaid balance” state rather than a “full price” state is fine in and of itself. The problems, though, arise when that decision is poorly conceptualized, drafted in an unclear or confusing manner, or based on an incomplete or incorrect understanding of the mechanics lien instrument and its purpose. It is unfortunate, but the new Pennsylvania law appears to suffer from many of these problems.

To begin, the revised statute does not appear to provide any timing requirements related to the property owners payment to the GC and the subsequent extinction of lower-tiered parties’ lien rights. Note the following language:

A claim filed under this act with respect to an improvement to a residential property subject to section 301(b) shall, upon a court order issued in response to a 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.

The specific language of the above provision does not mandate when the owner or tenant must have paid the GC in order to provide the immunity from mechanics liens, or give the potential lien claimant any way to know whether his or her lien may be discharged. In states where the mechanics liens of subs and suppliers are limited to the unpaid balance of the GC’s contract with the property owner, the unpaid balance at issue is generally determined by 1) the unpaid balance at the time some preliminary notice or notice of intent to lien is provided by the claimant; or 2) the unpaid balance at the time the lien is filed. It is odd for such a provision to declare that payment to the GC eliminates lien rights, but not provide a timeline that a sub/supplier can rely on for protection.

(a) validly filed lien (could be) extinguished without ever receiving payment.
As the new Pennsylvania law is written, the statute is unclear as to when payment to the general contractor works to prohibit the mechanics lien of a subcontractor. The 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. The new statutory 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.

Misunderstanding of Mechanics Liens

According to the Pennsylvania Association of Realtors (“PAR”), that association provided testimony regarding their support for the passage of this legislation, and worked with Sen. Ward to that end. While the realtors’ association has some interest in mechanics liens on residential property, it appears that the association’s testimony was based on an incomplete or incorrect understanding of the mechanics lien instrument and its purpose for the construction industry.

PAR President Kim Shumanick, quoted by PAR Manager of Media Relations Kim Shindle, said that “Home buyers who have purchased a newly-constructed home should be protected from mechanics’ liens being filed against the property by subcontractors once closing has occurred. These unfair liens or threats against a consumer’s property prohibit them from securing future loans and selling their property.” This statement demonstrates the PAR’s misunderstanding of the mechanics lien instrument (or, perhaps, the PAR’s ambivalence towards the mechanics lien’s purpose in the face of the PAR’s own interests). The fundamental purpose of a mechanics lien is to get parties on a construction project paid – and it has many ways to accomplish this feat, of which encumbering the underlying property, and obligating more parties to pay the debt are two. A property owner who wishes to remove a lien against his or her property by paying the amount due (if he or she has already paid the GC) has an action against the GC to recover the duplicative payment. Further, the non-paying GC is an essential party to any lien enforcement lawsuit.

Ms. Semanick went on to say that the “PAR does not advocate for the elimination of the right to file mechanics’ liens but does not believe they should be filed against the party who has paid in full.” This statement also misunderstands the nature of the leon remedy. A mechanics lien obligates all parties up-the-chain from the claimant, so the owner who has “paid in full” is a necessary and important party, however, the lien is filed against the property – not individual parties.

The new Pennsylvania law will likely result in litigation, but until that time, it is impossible to know the full consequences of the change.