Mechanics lien and bond claim laws are nearly constantly changing or being clarified. These changes and clarifications are brought about in many ways, including legislation and court cases. The Construction Payment Blog routinely provides updates to inform our readers of changes or potential changes to mechanics lien laws nation-wide. 2014 was an active year in the mechanics lien law world with routine clarifications being joined by wholesale changes to entire legal schemes. The following article provides an overview of some of the noteworthy 2014 lien law changes – in case you missed them when they happened. But, to not miss them next year, subscribe to the CFJ by email.
Misunderstands “Improvement”?: A Utah appeals court provided clarification as to what constitutes an “improvement” for the purposes of mechanics lien protection, and by extension, which type of parties are able to validly file a lien claim. In the case Total Restoration, Inc. v. Merritt the court determined that the flood remediation work performed by Total Restoration was not an improvement to property able to be secured by a mechanics lien. Central to that outcome was the determination that mitigation or remediation work merely “returns the property to its pre-casualty condition” and is not an improvement to the property for the purposes of the Utah mechanics lien law. This is a poor result, and one that seems to violate the spirit of the Utah mechanics lien scheme.
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Pennsylvania decided to make multiple modifications to its lien law in 2014. These changes considered whether union workers should be classified as employees or subcontractors, examined the question of “unfair” liens as related to Pennsylvania being a “full-price” or “unpaid balance” lien state, and contemplated the creation of a State Construction Notices Directory.
State Construction Notice Directory: This change to Pennsylvania’s mechanics lien law becomes effective on December 31, 2016. The main modification envisioned by Act 142 is the creation of a centralized electronic notice database. Property owners may use this database to register their property/project prior to the commencement of work. Doing so will result in an affirmative duty for subcontractors on these projects to monitor the database, and to provide a preliminary notice of furnishing within 20 days of their first furnishing labor and/or materials to the project to protect the right to file a valid lien. The electronic directory is only available for projects of more than $1.5 million, and registration is optional (at the discretion of the property owner).
PA Supreme Court: Union Workers Not Subcontractors – PA Legislature: Not So Fast: In Bricklayers of Western Pennsylvania Combined Funds, Inc. v. Scott’s Development Co. and Laborers’ Combined Funds of Western Pennsylvania, et al., v. Scott’s Development Company, the Pennsylvania Supreme Court determined that union employees of a general contractor were not properly classified as subcontractors, and thus, while “[the mechanics lien act] is intended to protect subcontractors who suffer harm occasioned by the primary contractor’s failure to meet its obligations, we have determined that the Legislature did not intend the term “subcontractor” to subsume employees of the primary contractor.”
The legislature can keep both the protections of mechanics liens, and those gained through the employees’ collective bargaining agreements. Almost immediately after that decision a bill was introduced to alter the lien law landscape as understood by the Pennsylvania Supreme Court. The introducing representative said that his “legislation will amend the Mechanics’ Lien Law to ensure that benefit funds covered by the Employee Retirement Income Security Act of 1974 and related federal laws are considered subcontractors and afforded rights and remedies under the law.” In reconsidering whether the union trustees qualify as subcontractors, the legislature can keep both the protections of mechanics liens, and those gained through the employees’ collective bargaining agreements.
Full-Price or Unpaid Balance: In a confusingly worded law attempting to protect homeowners from “unscrupulous contractors”, Pennsylvania decided to become an “unpaid balance” lien state in regard to residential projects. Pursuant to the new law, mechanics liens on residential property are completely disallowed if the property oner has paid the GC in full for the project. Unfortunately, the law is unclear in many respects, including the lack of any necessary timing provisions. The specific language does not state by when the owner or tenant must have paid the GC to gain mechanics lien immunity. 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 if the property owner later provides full payment to the GC.
Naming Requirements Unclear: New York, while helping one lien claimant, made the results of an error in naming a party on a mechanics lien document less clear. In a court case in which the direct opposite result was reached than in a case decided by another NY court merely one year prior, the lien claimant in 555 Partners, L.P. v. Unitech Ver-tech Elevator, was able to amend its lien to correct the minor “scrivener’s error”. Instead, the court simply stated that:
If a corporation files a notice of lien in which it does not use its true legal name but gives ‘adequate notice of the lienor’s identity to all concerned,’ the notice can be amended to reflect the correct name of the corporation.
Mechanics Lien Subordination to Construction Lenders Clarified: Illinois, over the last several years, has been examining, debating, and modifying the rules regarding the priority of mechanics liens as related to the claims of construction lenders. New legislation contemplated the complete prohibition of allowing the subordination of mechanics liens as against public policy, but was modified to allow for some subordination possibilities. Agreements to subordinate mechanics lien priority in Illinois are now generally prohibited, but can be a acceptable if the “agreement is made after more than 50% of the loan has been disbursed to fund improvements to the property.”
Mechanics Lien Priority and GCs: In Moorefield Construction, Inc. v. Intervest-Mortgage Investment Company, a California court examined a situation at the intersection of lien waivers and lien priority, specifically related to California Civil Code Section 3262(d)’s prohibition against waiving or impairing lien rights. While that prohibition stands as related to the GC (or any other party) waiving or imparting the lien rights of other parties, the court determined that the cited code section did not apply to GCs waiving their own rights. This decision should cause California GCs to be wary of waiving their own mechanics lien priority.
The court found the statutory language noting preliminary notice was due “on or before seventy-five days from the last day of the month in which the material was delivered…” clearly required a preliminary notice be sent within 75 days of the last day of each month in which the materials were delivered. Monthly” Notices Now Required: In most states, a preliminary notice requirement is a one-time thing. Once the requirement has been met, the noticing party can move on without paying any more attention to it. In a very small number of states, however, certain notices must be given multiple times. In the J. Reed Constructors, Inc. v. Roofing Supply Group, LLC case, it was determined that Louisiana’s preliminary notice requirement for material suppliers can be a recurring requirement.
The court found the statutory language noting preliminary notice was due “on or before seventy-five days from the last day of the month in which the material was delivered…” clearly required a preliminary notice be sent within 75 days of the last day of each month in which the materials were delivered. So, for Louisiana material suppliers who furnish materials in more than one month, more than one notice is mandated. The Louisiana Supreme Court declined to hear an appeal of the case, and so, either agreed with the First Circuit, or at the very least, determined that the issue was not worth debating to fully settle the issue state-wide
“Commencement” of Improvement Clarified: In another lien priority case, the Nevada Supreme Court was called upon to determine what constitutes the commencement of an improvement, and whether 1) grading or site-prep work could constitute commencement of the improvement, and 2) if so, could this occur prior to building permits being issued or before the GC is hired?
The Nevada Supreme Court answered both questions affirmatively. Therefore, in Nevada, pre-construction work (even if months before the permits were issued or the GC hired) can signify the commencement of a work or improvement for priority purposes, as long as it is both visible, and part of the same work of improvement that later gave rise to the mechanics liens at issue.
Completely New Mechanics Lien Law Scheme: In the largest change to mechanics lien law in 2014, Mississippi completely changed the foundation of its entire lien law scheme. Where previously only contractors with a direct contract with the property owner were allowed mechanics lien protection, Mississippi now allows the following parties to claim a mechanics lien:
(a) All contractors, all subcontractors and all materialmen furnishing material for the improvement of real estate;
(b) All registered architects or professional engineers furnishing plans, drawings, designs, or other architectural or engineering services on or with respect to any real estate;
(c) All registered land surveyors performing or furnishing services on or with respect to any real estate.
Worth noting, however, is that the new statute specifically defines “materialmen” as a party furnishing materials to a prime or first-tier subcontractor. This means that material suppliers to a sub-sub or below is not protected by the new Mississippi scheme. Also, “subcontractor” is similarly limited by definition. For the purposes of Mississippi lien protection, a subcontractor is defined as only a first or second-tier sub. Third tier subcontractors are excluded from lien protection.
The modifications also encompassed a new notice requirement for parties that did not contract directly with the property owner, and set forth new statutory lien waiver documents.
While these are only some of the changes, clarifications, amendments, and/or modifications to the lien laws throughout the country that occurred in 2014, they are some of the noteworthy ones. To keep fully informed of all changes and potential changes related to mechanics liens, bond claims, and other construction documents and issues, subscribe to the Construction Payment Blog and watch out for Lien Law Alerts.