If you are a developer of commercial property, a homeowner building a new home, a contractor working on a commercial or residential project, or a subcontractor or supplier, you may never have heard of a mechanic’s lien. In today’s tight economy and difficult lending environment, an understanding of mechanic’s liens can be terribly important whether you are developing or constructing a building.
What is a Mechanic’s Lien?
A mechanic’s lien allows one who supplies labor, material, or services in connection with the improvement of privately owned real property and is unpaid to lodge a public claim against the improved real estate. The right to file a mechanic’s lien is based on a Pennsylvania statute.
Who Can File a Mechanic’s Lien, and for What?
A mechanic’s lien can be filed by a contractor to an owner of real estate, a subcontractor, a sub-subcontractor, or a supplier to a contractor or subcontractor. Architects and engineers who contract with an owner for design work and to supervise or superintend actual construction work can also file a lien.
Can a Lien be Filed for Work Done on a Residential Property?
Yes. One having a home built, or a developer of multiple homes is exposed to the risk of a lien being filed by their contractors, subcontractors, or suppliers if they are not paid. The value of a lien claim must exceed $500.
How Can a Property Owner Protect Itself Against the Filing of a Lien?
Under certain circumstances, an owner can negotiate a Waiver of lien rights from a general contractor, which can function to waive lien rights of lower tier subcontractors and suppliers. Lien waivers are allowed on residential projects of buildings of less than three stories. Thus, on most single family home residential projects, a homeowner or developer can negotiate an up-front waiver of lien rights from its general contractor. If the waiver is timely filed, it will waive lien rights of any lower tier subcontractor or supplier. However, on non-residential projects, an up-front lien waiver for subcontractors is not allowed unless the prime contractor has provided a labor and material payment bond. If it has, the contractor may negotiate lien waiver agreements with its subcontractors and suppliers covered under the payment bond. Without a payment bond, up-front lien waiver agreements with subcontractors and suppliers are not enforceable.
When Can a Lien Be Filed?
A lien must be filed within 6 months of the last work performed by the claimant. Subcontractors, suppliers and sub-subcontractors must first give written notice to the property owner of their intention to file a lien at least 30 days before the lien is filed.
Why You Should Care About Mechanic’s Liens.
If you are building on your land, whether it is a home or a commercial or retail building, you do not want a lien filed against your real estate. A lien creates a “cloud on title” which impedes the sale or subsequent financing of the real estate. If ultimately enforced, a lien judgment can result in a judicial sale of the real estate. Securing an up-front lien waiver (where allowed), or a “release of lien” as payments are made is the best security against your property being liened. Identifying in advance all of the contractors working on your property, and establishing a mechanism to ensure that they are all being paid as work progresses, is key to preventing liens.
A mechanic’s lien can be a very effective way for a contractor to ensure that it is paid for construction work. Subcontractors and suppliers, who do not have a contract directly with a property owner benefit from the lien option as it allows them to secure payment directly from an owner if they are not paid by the contractor. In Pennsylvania, an owner who pays a prime contractor for its work can be legally compelled to “pay twice” for the same work if unpaid subcontractors or suppliers are not paid and file liens.
Anyone developing or constructing real estate in Pennsylvania should have a good understanding of the Mechanic’s Lien Law. In advance of a project, consulting with an experienced construction lawyer can help avoid many problems created by the mechanic’s lien process.