For decades, Pennsylvania was recognized as an adversary to construction creditors. Lien laws in the state lagged in the dark ages compared to the rest of the country and a "no lien" culture was prevalent, proving to be a scourge for materials suppliers and subcontractors. An owner could have a "no lien" contract with a prime contractor, and downstream suppliers and subs wouldn't even know about it. Thankfully, in 2007, the state legislature enacted changes that aligned Pennsylvania's lien statutes with those of the other 49 states.
"Historically, Pennsylvania had the most restrictive lien statute in the country," explained Greg Powelson, director, NACM's Mechanic's Lien and Bond Service (MLBS). "First, it was one of the only statutes in the country that limited lien rights to second tier suppliers. Second, Pennsylvania was infamous for this concept of a 'no lien' contract where materials suppliers and subcontractors were getting bullied into signing these contracts and giving up lien rights."
He stated simply, "Pennsylvania had one of the worst statutes in the country. It was a horrible, horrible statute that was completely rewritten in 2007."
But that modernization may have been short-lived.
On October 10, 2009, new amendments to Pennsylvania's lien statute will go into effect and many commercial construction creditors are worried about the direction the state is heading. Senate Bill 563 was signed into law by Governor Edward Rendell bringing with it significant changes for the state's mechanic's lien laws for residential projects and welcoming back the unfriendly creditor lien environment that existed prior to 2007. Under the new amendments, once again, Pennsylvania will allow up-front waivers of lien rights from contractors and subcontractors on residential properties. This can be written in as a condition of a contract, recanting the legislative changes introduced just two years ago that had deemed such advance waivers¬† unenforceable and against public policy, though they were still allowed in certain, limited exceptions for residential projects.
The statute defines residential property as:
"property on which there is or will be constructed a residential building not more than three stories in height, not including any basement level regardless of whether any portion of that basement is at grade level, or which is zoned or otherwise approved for residential development on which there is or will be constructed a residential building not more than three stories in height, not including any basement level, regardless of whether any portion of the basement is at grade level, planned residential development or agricultural use, or for which a residential subdivision or land development plan has or planned residential development plan has received preliminary, tentative or final approval on which there is or will be constructed a residential building not more than three stories in height, not including any basement level, regardless of whether any portion of that basement is at grade level, pursuant to the act of July 31, 1969 (P.L. 805, No. 247), known as the 'Pennsylvania Municipalities Planning Code.'"
Under the new statute, the $1,000,000 limitation on the residential exception has also been removed.
"The bright spot is that they're going backwards, but they're only going backwards with residential," offered Powelson. "But from a trade creditor's perspective, it's going to make it much more difficult to negotiate fair contracts and that's the problem.
By eliminating lien rights, these changes have the potential to place contractors, subcontractors, sub-subcontractors and material suppliers at greater risk of nonpayment for services rendered on residential property projects.
"It's because of where Pennsylvania was that makes this even scarier," said Powelson. "What happens is with these 'no lien' contracts, the general contractors are going to bully the subs and the materials suppliers to accept 'no lien' contracts to get work. They're going to force them to accept a much higher level of risk, which should never be built into any of these statutes in my opinion."
The larger fear at the moment is whether this is just the first step in a backwards slide for Pennsylvania lien statutes in general; will the commercial environment be next?
Powelson urges any creditors working in the residential sector in Pennsylvania to be more cognizant when reviewing purchase orders and subcontracts. "Because we now know that within those purchase orders and subcontracts, under this new statute, there may now be provisions for 'no lien.' The biggest issue is that if they don't review those documents, they could potentially be buying that term and condition and not realizing it," said Powelson. "So, reviewing subcontracts and purchase orders is job number one. Job number two is if there is a 'no lien' provision within that document to make sure that it's crossed out and returned or negotiated away before accepting the contract. Or if they do recognize that that 'no lien' provision is in there and they're willing to take on that risk, they need to recognize that their recourse for collection is going to be limited to the entity that they have a contract with."
Matthew Carr, NACM staff writer