By now, you have probably heard enough from us about the new changes to the Pennsylvania Mechanics’ Lien Law. If a newsletter article and several blog posts were not enough, here is one more reminder that the long-anticipated Pennsylvania State Construction Notices Directory is up and running. Already, owners have been active in registering searchable projects. Continue Reading It’s Official: PA Construction Notices Directory Is Up and Running

The new — and much anticipated — Pennsylvania State Construction Notices Directory (“Directory”) is expected to go live this December 31. With this rollout, the PA legislature will have established a statewide directory system for owners to list projects and create a new lien notice requirement for projects in excess of $1.5 million. The Directory for the Pennsylvania Mechanics’ Lien Law, which was signed into law in October 2014, provides the following important changes:  Continue Reading PA Construction Notices Directory Goes Live December 31, 2016

On February 11, join Roy CohenEd Seglias, and Jackson Nichols at the Sheet Metal and Air Conditioning Contractors National Association (SMACNA) Mid-Atlantic Chapter in Greenbelt, MD for their presentation, “Ignorance is not Bliss: Construction Contract Provisions You Need to Know.” They will discuss provisions that allocate risk for different site conditions, and examine contract provisions addressing payment, indemnity, change orders, and termination. Their presentation will also cover Mechanic’s Liens in DC and Maryland.

For more informationa, and to register for this event, please visit the SMACNA Mid-Atlantic website.

Roy S. Cohen is the Founder and President of Cohen Seglias, as well as a Shareholder and member of the Board of Directors. In his practice, Roy represents clients involved in every facet of the construction industry, including construction managers, general contractors, municipal authorities, private developers, major trade contractors, architects, engineers and sureties.

Ed Seglias  is the Vice President of Cohen Seglias as well as a Shareholder and a member of the Board of Directors. He is also the Managing Partner of the Firm’s Delaware office and a Partner in the Firm’s Construction Group. Ed concentrates his practice in construction law and commercial litigation and has successfully tried numerous construction and commercial cases in the mid-Atlantic region.

Jackson S. Nichols is an Associate in the Firm’s Commercial Litigation and Construction Groups and represents clients in every stage of litigation, including motion practice, discovery, pre-trial preparation and trial practice and appeals. As a member of the firm’s Commercial Litigation group, Jackson assists clients in developing solutions to business disputes.

 

Pleaseman filling agreement between owner and contractor join us tomorrow, 11/4, for Shawn Farrell‘s presentation “Construction Disputes: Lessons Learned” at the Carpenters’ Company of City and County of Philadelphia’s Master Builder Dialogues.

Shawn Farrell has over 20 years of experience litigating construction disputes, and will share the lessons he learned to demonstrate how an effective project management team can identify and manage the risks associated with construction contracts without the need for litigation. This seminar will instruct participants on the realistic application of contract terms, payment statutes, lien law, and bond rights to construction operations, with the objective of maximizing profit and minimizing the time to close out a project.

For more information and to register, please visit the Carpenters’ Company’s website.

When it comes to the Pennsylvania Mechanics’ Lien Law (Lien Statute), the Pennsylvania legislature was quite active in 2014.  In July, Governor Corbett signed into law certain changes to the Lien Statute affecting residential lien rights and lien priority.  We previously covered these changes.

Change Ahead Sign

On October 14, 2014, Governor Corbett signed into law additional changes to the Lien Statute in the form of House Bill 473 (HB473).  HB473 had been written, voted against, rewritten, and voted against some more going all the way back to June 2013 when we first covered the proposed changes.

The new amendments to the Lien Statute provide for the creation of a State Construction Notices Directory (the Directory) that will serve as a statewide system for registering and tracking construction projects within the Commonwealth costing in excess of 1.5 million dollars.  The legislation is designed to provide a centralized system for owners, contractors, subcontractors, and suppliers to notify each other that projects registered on the Directory have commenced and that furnishings of labor, materials, and equipment are being made by subcontractors.

Now, if an owner elects to register a project on the Directory (by filing a Notice of Commencement), subcontractors will be required to file a Notice of Furnishing with the Directory within 45 days after commencing work or first providing materials to the jobsite.  Under the changes, subcontractors that fail to substantially comply with these requirements forfeit their lien rights.  This front-end notice requirement is in addition to the existing back-end notice requirement in the Lien Statute requiring subcontractors to serve the owner with a notice of intent to lien at least 30 days before filing.

As we previously reported, one touted benefit of the law is that owners and contractors will be able to reconcile their payments with the list of subcontractors and suppliers registered on the Directory.  This centralized system will help owners and contractors ensure that lower-tiered contractors and suppliers have been paid.

As a product of the new amendments, subcontractors must carefully review their contracts for notice that the project in question will be registered with the Directory.  If the subcontract does not contain such a notice, subcontractors should nonetheless check the Directory out of an abundance of caution.  Suppliers will also need to monitor the Directory vigilantly for Notices of Commencement so that they file timely Notices of Furnishing and protect their lien rights.

With the Directory to be operational by December 31, 2016, members of the Pennsylvania construction industry have some time to study the new changes to the Lien Statute and modify their business practices accordingly. We welcome your comments and questions on these new changes to the Lien Statute.

Jason A. Copley is the Managing Partner at Cohen Seglias and a Partner in the Construction Group. His practice is focused on representing contractors, subcontractors and owners in the areas of construction and commercial litigation.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.

Rolled Blueprints and gavel of justice

On July 9, 2014, Pennsylvania Governor Tom Corbett signed a bill (S.B. 145) into law that amends the Pennsylvania Mechanics’ Lien Law of 1963 (the “Lien Law”). The new law took effect on September 8, 2014 and affects subcontractor lien rights on residential construction projects as well as the order of lien priority between mechanics’ liens and open-end mortgages.

Liens on Residential Property

Under the new law, an unpaid subcontractor no longer has lien rights if all three of the following conditions are satisfied:

  1. The property owner or tenant has paid the full contract price to its general contractor;
  2. The property is or is intended to be used as the owner’s or tenant’s residence; and
  3. The property in question is a one or two unit residential property or townhouse.

In other words, this amendment protects homeowners from having to pay twice for the same work (e.g., where the owner pays the general contractor but the general contractor fails to pay its subcontractor). The new law includes a procedure through which an owner can discharge or reduce the amount of the mechanics’ lien by petitioning the court and proving that he or she has paid the full contract price to the general contractor.

Changes to Lien Priority

Through S.B. 145, the Pennsylvania Legislature has also changed how the Lien Law addresses the question of lender priority. As we have blogged previously, “priority” refers to who gets paid first if a property encumbered with multiple mortgages, mechanics’ liens, or the like is sold. Before the new law was passed, a mechanics’ lien could enjoy priority over a mortgage if the work in question began before the bank recorded the mortgage and the loan proceeds secured by the mortgage were used, in part, for non-construction costs.

With the new changes to the Lien Law, these open-end mortgages will enjoy priority over a mechanics’ lien claim as long as at least 60% of the loan proceeds are used to pay the “costs of construction” (which is defined in S.B. 145 very broadly to encompass just about every conceivable construction cost including taxes, bonding, and permits). These changes appear to be the legislature’s response to situations like the one in which the Pennsylvania Superior Court encountered in the case of Commerce Bank/Harrisburg, N.A. v. Kessler. In Kessler, a contractor’s mechanics’ lien was given priority over a bank’s open-end mortgage on the property in connection with a construction loan because not all of the proceeds from the loan were used to cover the costs of construction.

What Do These Amendments Mean to Players in the Construction Industry?

For subcontractors, the risk of nonpayment on residential projects increases because the homeowner may be able to demonstrate that it paid the general contractor in full. In those instances, the subcontractor’s recourse will most likely be limited to a breach of contract lawsuit against the general contractor. It is important for all members of the construction industry to note that this new protection to owners is limited to residential properties where the owner intends to use it as his or her residence.

Lenders and title companies will likely celebrate the changes to the Lien Law because it effectively overrules the Kessler decision and defines “costs of construction” more broadly such that open-end mortgages in connection with construction loans are likely to enjoy priority over a mechanics’ lien claim under most circumstances.

As is evident from these amendments, the Lien Law is a powerful and complicated statutory remedy that affects the rights of most participants in a construction project including lenders, owners, contractors, subcontractors, and suppliers. These latest changes remind us how challenging it can be to balance and navigate the competing rights and interests of each player. Anyone with questions regarding these new changes or the Lien Law generally should feel free to contact Cohen Seglias.

Jason A. Copley is the Managing Partner at Cohen Seglias and a Partner in the Construction Group. His practice is focused on representing contractors, subcontractors and owners in the areas of construction and commercial litigation.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.

As we first reported back in January of 2012, the Pennsylvania Superior Court issued a decision in Bricklayers of Western Pennsylvania Combined Funds v. Scott’s Development Co. that significantly changed the meaning of the Pennsylvania Mechanics’ Lien Law. In its decision, the Superior Court expanded the Lien Law’s definition of “subcontractor” to include union members, giving the union trustee the ability to assert lien claims on behalf of its members for unpaid contributions to the union trust funds. This decision exposed contractors and owners to liability for a subcontractor’s failure to make benefit contributions, and we provided insight on strategies to avoid or limit such exposure.

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From a legal perspective, the Superior Court’s liberal construction of the Lien Law overturned decades of precedential case law that required contractors and subcontractors to comply strictly with the Lien Law requirements.

However, on April 17, 2014, the Pennsylvania Supreme Court unanimously reversed the Superior Court’s decision and held that union workers are not “subcontractors” under the definition in the Lien Law and that the union Trustees are not entitled to file a lien claim for unpaid benefit contributions.

It is worth noting that the Supreme Court did not weigh in on whether the Lien Law should be strictly interpreted and applied as it was prior to the subject case. Instead, the Court stated that the clear and unambiguous portions of the Lien Law should reflect the intent of the Legislature, while ambiguous provisions should be reviewed further.

What does this mean going forward? It is clear that union members do not have mechanics’ lien rights under the Lien Law and have thus lost a collection tool. With regard to the strict versus liberal interpretation of the Lien Law, we will have to wait for the Court to take another case raising that issue. However, given the reversal of the Superior Court’s ruling here, it can certainly be argued that the Supreme Court rejects liberal interpretations of the Lien Law. On the other hand, this ruling likely eliminates concerns that owners and general contractors had as a result of the Superior Court ruling. As always, we will continue to monitor any new developments.

Jason A. Copley is the Managing Partner at Cohen Seglias and a Partner in the Construction Group. His practice is focused on representing contractors, subcontractors and owners in the areas of construction and commercial litigation.

Lori Wisniewski Azzara is an Associate at Cohen Seglias Pallas Greenhall & Furman PC. Lori practices in the areas of construction and commercial litigation and has experience in contract negotiation, claims for delay and inefficiency, mechanics’ liens, and all types of contractual disputes.

A recent case before the Appellate Division of the Superior Court of New Jersey (Morris County Improvement Authority and Somerset County Improvement Authority v. Power Partners Mastec, LLC) involving solar construction has shed light (pun intended) on the complications associated with projects that are publicly and privately owned and financed, especially with regard to municipal mechanics’ liens and private construction liens. As the parties in MasTec learned the hard way, the intersection of public and private lien rights can wreak havoc on contractor and subcontractor lien rights. All bidders are wise to consider the ramifications prior to submitting a bid.

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New Jersey Lien Law: A Tale of Two Statutes

Before we get into the particulars of the MasTec case, recall that New Jersey has two lien statutes: (1) the Municipal Mechanics’ Lien Law (MMLL) and (2) the Construction Lien Law (CLL). The MMLL applies to public projects and allows subcontractors and suppliers (not contractors) to have a lien placed upon the project funds for the unpaid amount of work it performs. The CLL, on the other hand, permits contractors, subcontractors, and suppliers to place a lien against the relevant privately owned property interests for the unpaid amount of work it performs.

The MasTec Project P3 Financing Structure

In the MasTec case, the Morris County and Somerset County Improvement Authorities (the Authorities) hired SunLight General Capital, LLC (SunLight) to design and construct about seventy solar energy generating systems (SGF’s) on properties owned or occupied by government entities in Morris, Somerset, and Sussex Counties. Seventy percent of the Project was to be funded by taxable municipal bonds, and the remaining thirty percent was to be financed privately through SunLight; a classic public-private partnership arrangement.

Under this public-private partnership, the Authorities would own the SGF’s and lease them to SunLight for a minimum of fifteen years (after which SunLight would have the option to purchase the SGF’s for a nominal price). Meanwhile, SunLight contracted with MasTec to build the SGFs, and MasTec was to be paid with funds generated from the municipal bonds. Confused? You should be, because it’s confusing.

When Payment Was Withheld, MasTec Filed Two Types of Liens

Project delays ensued, and MasTec, concerned it would not be paid monies owed for its work, filed approximately $50 Million of liens under both of the New Jersey Lien Statutes. First, MasTec filed one set of liens under the MMLL against $50 Million of the public funds generated from the municipal bonds. A trial court, however, ruled that the liens were invalid because MasTec was not a “subcontractor” as the term is defined in the MMLL. Next, MasTec filed a second set of liens under the CLL against SunLight’s leasehold interest in the SGF’s, including SunLight’s rights to draw down the project funds from the municipal bonds.

Unfortunately for MasTec, the Appellate Division ruled against it with respect to both sets of liens. With regard to MasTec’s municipal mechanics’ liens, though the Court agreed with MasTec that it is a “subcontractor” under the MMLW, it also concluded that another statute, the County Improvement Authorities Law, protects County Improvement Authorities like the Morris County and Somerset Improvement Authorities from municipal mechanics’ liens.

As for MasTec’s construction liens, the Court held that such liens could attach to SunLight’s leasehold interest on the properties but not on the municipal bond funds. In so holding, the Court reasoned that bond funds are not “real property” under the CLL. This ruling undermines the force and effect of MasTec’s construction liens because the liens will have no effect on the disbursement of the municipal bond funds.

Proceed with Caution: In This Developing Area of the Law, Liens May Not Have the Expected Effect

This intersection of public and private interests is a relatively new and untapped area of the law that, as demonstrated in MasTec, can wreak havoc on contractor and subcontractor lien rights and must be carefully considered prior to bidding. The MasTec case teaches that when public and private interests intersect, the application and effect of lien law is impacted.

This case is particularly interesting because of the complicated array of public and private contractual relationships. On the one hand, the Improvement Authorities, which own the SGF’s, publicly bid the project with seventy percent of the funds to come from the public. On the other hand, the Improvement Authorities leased the SGF’s to the private developer and thirty percent financier in SunLight.

We will continue to monitor this case, as MasTec could petition the New Jersey Supreme Court to consider an appeal of these issues. It is also interesting and worth noting that MasTec and SunLight are currently embroiled in arbitration to determine which party is responsible for the delays and cost overruns that took place during construction.

In the meantime, all parties involved in similar P3 financed projects should reassess the force and effect of New Jersey’s lien statutes as avenues for recovering payment.

Jennifer M. Horn is a Partner at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate. 

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law. Dan counsels clients at all tiers of the construction industry, including general contractors, subcontractors, owners, developers, and design professionals.

 

As most contractors recall, the Pennsylvania Lien Law was modified in 2007 to reinstate lien rights.  We have previously reported on proposed changes to the lien law and lien rights preservation.  Additional proposed changes to the lien law, if passed, would have widespread impact across the industry.  Pending Pennsylvania House Bill 473 seeks to amend the current lien law to create a State Construction Notices Directory.  The Directory would be an online database providing extensive details of each registered project.

Owners and General Contractors would have access to a centralized, detailed list of subcontractors and sub-subcontractors.

HB 473 would only affect projects which are registered in the Directory.  Owners would have the option to register a project by filing a notice of commencement.  This notice would be available online and displayed at the project site.  For all such registered projects, subcontractors and suppliers would be required to file notices of furnishing within 20 days of first providing work, services or materials in order to preserve lien rights.

Many owners are likely to take advantage of the new law to create an additional step for claim preservation and limit the pool of potential lien claimants.  General contractors would not have additional requirements under HB 473.  The law would give owners and general contractors access to a database listing all potential lien claimants on a job.

Subcontractors will be required to monitor notices of commencement and file notices of furnishing to preserve lien rights.

HB 473 requires subcontractors to locate notices of commencement and to file notices of furnishing within 20 days of first providing work or materials.  Late notices of furnishing would result in forfeiture of lien claim rights for work performed more than 20 days before the filing of the notice.

One stated benefit of the law is that owners and contractors would be able to reconcile their payments with the list of subcontractors and suppliers registered on the Directory.  This would help ensure that all such subcontractors, second tier subcontractors and suppliers have been paid.  If adopted, the law would place an additional burden on subcontractors, who would need to vigilantly monitor notices of commencement and file timely notices of furnishing before starting work to avoid forfeiting lien claim rights.

HB 473 has potential to significantly impact mechanic’s lien claim rights in Pennsylvania because of the new notice requirements.  However, it is still in the legislative process and further developments are expected.

Jason A. Copley is the Managing Partner at Cohen Seglias and a Partner in the Construction Group. His practice is focused on representing contractors, subcontractors and owners in the areas of construction and commercial litigation.

Catherine Nguyen, an Associate in the Construction Group, contributed to this post.

The Backdrop

Since the Recession of 2008, the story of the construction project that fell through shortly after breaking ground has repeated itself far too frequently.  In too many of these situations, financing dries up, leaving owners without project funds to pay general contractors and general contractors without funds to pay early-phase subcontractors who have already performed their work (e.g., demolition, excavation, and site work).  With that uplifting backdrop, let’s discuss how these circumstances affect mechanics’ lien rights.

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As many of our readers know, mechanics’ lien claims are powerful tools for contractors to ensure that they get paid for their work by “encumber[ing] the owner’s property and, if taken to their logical end, force a sale of the property to pay creditors.”  A recent case in the Superior Court of Pennsylvania brought to light the issue of mechanics’ lien rights on buildings that go un-built.

In B.N. Excavating, Inc. v. PBC Hollow-A, L.P. and PBC Hollowb, L.P., a site contractor (“BN Excavating”) was hired as a subcontractor to perform excavation work for the proposed construction of a two-building project.  BN Excavating performed its work, but the buildings were never actually constructed.  The contractor that hired BN Excavating never paid for the work, so BN Excavating filed a mechanics’ lien claim on the property.

The owner argued that BN Excavating’s lien was invalid because the buildings were never actually erected.  The Superior Court, however, allowed BN Excavating’s claim to proceed because the excavation work was incidental to planned construction.  In other words, the Court held that BN Excavating’s lien rights were tied to the existence of a construction plan, not to the ultimate fulfillment of that plan.

The Take-Away

For contractors, subcontractors, and suppliers who perform site work can rest easier knowing that your lien rights are tied to the nature of your work and not whether a building is ultimately erected.   It is nonetheless critical for you to supply your attorney with detailed information about the project, so that he or she drafts the mechanics’ lien claim in a way that makes clear that your work was part of a construction plan.

For owners and developers, understand that the Mechanics’ Lien Law could be unsympathetic to situations in which a construction project falls through before a building is erected.  Predecessor work such as demolition and excavation will still be protected under the Mechanics’ Lien Law.

Jennifer M. Horn is Senior Counsel at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Daniel E. Fierstein is an Associate in the Construction Group of Cohen Seglias and focuses his practice on construction law.

Trevor Taniguchi, a summer associate with Cohen Seglias, contributed to this post.