Pennsylvania Act Intended to Prohibit Waivers of Liens by Contractors and Subcontractors Becomes Effective January 1, 2007
On June 29, 2006, Pennsylvania Governor Ed Rendell signed General Assembly House Bill 1637, also known as Act 52 (“Act 52”) which will be effective on January 1, 2007. Act 52 amends the Pennsylvania Mechanics’ Lien Law, 49 Pa. C.S. 1101 et seq. (the “Statute”), and is intended to prohibit waivers of liens by contractors and subcontractors in most commercial situations.
The Statute historically provided contractors and subcontractors with a statutory method to secure payment for their work or materials. In order for a contractor or subcontractor to file a lien against an owner’s property under the Statute, the claim had to be filed with a local prothonotary within four months of the work’s completion. Properly filed mechanics’ liens would then become superior in priority to previously filed liens on the property, including mortgage liens.
As a protective measure for other lien holders, the Statute provided that contractors could, prior to the commencement of work, waive the right to such subsequent liens by entering into a written agreement with the property owner. This “waiver of liens” was also binding on subcontractors. Lenders, owners and title insurers came to require the execution and filing of such lien waivers prior to the commencement of construction projects, in order to insure that contractors’ liens would not be superior to prior filed liens.
Act 52 amends the Statute to prohibit commercial property owners from obtaining and recording a waiver of liens from a contractor unless such a lien waiver is “given in consideration for payment for the work, services, materials or equipment provided and only to the extent that such payment is actually received.” Waivers of liens entered into prior to the commencement of construction are therefore prohibited by Act 52. The new terms are the same for the prohibition against waivers of liens by subcontractors “unless the contractor has posted a bond guaranteeing payment for labor and materials provided by subcontractors.”
While the prohibitions against the filing of lien waivers are of particular concern to mortgage lenders, Act 52 does provide such lenders with some comfort that their mortgage liens remain superior to after-filed mechanics liens in certain situations. Under Act 52, mechanics’ liens will be subordinate to purchase money mortgages as defined in 42 Pa.C.S. §8141(1) and open-end mortgages as defined in 42 Pa.C.S. §8143(f), when the proceeds of such loans are used to pay all or a portion of the cost of completion, erection, construction, alteration or repair of the property secured by the open-end mortgage. The foregoing notwithstanding, lenders advancing funds under other facilities are not protected by Act 52.
While the application of certain aspects of Act 52 and the process for complying with its requirements have not yet been fully determined, as Act 52’s implementation date on January 1, 2007 draws closer, we will utilize all of our resources to provide recommendations to our clients for how best to comply with Act 52.