The Pennsylvania Superior Court’s recent interpretation of a law designed to ensure payment to contractors represents a major change.
The Mechanics’ Lien Law, a powerful arrow in the quiver of an unpaid contractor, subcontractor or material supplier to a building project, is the legal procedure that allows claimants to place a lien on the real estate of the project for the value they have added to the property.
On January 6, 2012, the court overturned decades of precedent to hold that the Mechanics’ Lien Law should be construed liberally, not strictly, to affect its goals and to promote justice. In a case known as Bricklayers of Western Pennsylvania Combined Funds, Inc. v. Scott’s Development Co., the court used this new liberal interpretation to expand the number of entities permitted to file mechanics’ lien claims.
In the Bricklayer’s case, the trustees of employee benefit funds filed mechanics’ lien claims for unpaid contributions owed to union members as a result of collective bargaining agreements between a contractor and the unions. The unions themselves had no contract with the property owner, nor did they have a traditional subcontractor agreement with the general contractor. Rather, they had a collective bargaining agreement with the contractor specifying what work the union members would do, and what the contractor would pay, including contributions to the benefit funds. Despite this handicap, the court allowed the trustees to proceed with their mechanics’ lien claim.
How a mechanics’ lien works
A mechanics’ lien aims to secure payment for labor and materials related to construction or improvement to buildings or real estate. Once filed, a mechanics’ lien immediately interferes with an owner’s ability to sell or pledge his or her property. This simple yet drastic legal remedy gives claimants powerful leverage to demand payment. It provides an unpaid claimant with an extra legal option in addition to a lawsuit for breach of contract or under the Contractors and Subcontractors Payment Act.
Generally, only a “contractor” or “subcontractor,” as defined by the Law, is permitted to file a lien claim for the payment of debts owed by the owner to the contractor or by the contractor to any of his or her subcontractors, and then only for the value of labor or materials furnished during the particular construction project. Importantly, even some subcontractors who never contracted with or even met the owner of the property can file mechanics’ liens against the owners’ property where the contractor does not pay them. In a situation where the owner has paid the general contractor, which then fails to pay its subcontractor, a mechanics’ lien can ultimately force the owner to pay twice for the same work.
Historically, courts have always required claimants to strictly follow the Mechanics’ Lien Law. The slightest deviation or minor error was sufficient to void a lien entirely. The Mechanics’ Lien Law was given a strict, narrow construction because it was a special legal remedy in favor of a unique class of creditors.
What this decision could mean for your business
The decision to interpret the Mechanics’ Lien Law liberally for purposes of deciding what entities are able to file lien claims is a sea change in legal practice. This upheaval in the legal terrain will affect many aspects of the construction business, impacting owners, lenders and others far beyond the specific interests of union benefit funds.
Everyone involved in a construction project could be affected. Owners of property will want to protect against suits from employee benefit funds and others by ensuring that all contributions are made by their contractors, withholding funds or requiring labor or material payment bonds. Any unpaid entity which might qualify as a “subcontractor” under the newly loosened legal standard might consider filing a lien to enforce its legal rights. Contractors who may have to indemnify owners will also want to closely monitor claims from putative subcontractors.
Mechanics’ liens provide an incentive for an owner-developer of a property to pay the contractor since a lien will hinder him/her from obtaining permanent financing, or a mortgage, for the property. While greater protections have been provided to contractors and suppliers, there is now a greater burden placed on owner-developers to protect themselves by requiring bonds or lien releases from all contractors, subcontractors and suppliers as they are paid upon completion of work.
This article was published in the July 16, 2012, edition of Lehigh Valley Business.
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