New Mechanic's Lien Law
In June, the Governor Rendell signed a new law that becomes in effect on January 1st. The new law empowers sub-contractors and suppliers with the right to place a lien against a property if the owner or general contractor does not pay the sub-subcontractor for his/her work. The old law limited this right to the prime contractor and the sub-contractor.
Why did we need a new mechanic’s lien law?
The purpose of the law is to protect sub-subcontractors, title insurance companies, and mortgage lenders who finance development projects. Owners are now motivated to pay a lien regardless of whether they dispute the claim because liens cloud the property title and interfere with the owner’s ability to sell the property after the lien is attached.
Who can this law harm?
While sub-subcontractors celebrate the new law, owner-developers are not so happy. The law now broadens the class of people who can file a mechanics lien. In addition the law limits a developer’s ability to protect her property from a mechanic’s lien. In the past, a developer and a sub-contractor could sign a waiver relieving the parties of their right to file a mechanic’s lien. The new law enforces a waiver only if the developer purchases a bond equal to 1% of the project.
How will this law work?
An owner-developer purchases a residential lot. The developer sub-contracts with Company Builder to builder the homes. Company Builder in turn contracts with Dry Wall Company to put up the walls for the new homes. Dry Wall Company orders 300,000 nails from Nail Supplier in China. After the nails arrive, Dry Wall Company refuses to pay Nail Supplier because the Company Builder did not pay Dry Wall Company for its work. Who can file a mechanic’s lien against the property? The Nail Supplier and Dry Wall Company can file. The owner-developer will be forced to pay Nail Supplier and Dry Wall Company directly to protect the property’s title, even though the developer only has a contract with Company Builder.
How can I protect my property from a mechanic’s lien?
To prevent this from occurring, a developer will have to purchase a bond worth at least 1% of the project and get signed waivers from all the sub-subcontractors and suppliers working on the project.
If you need help determining whether this law applies to your company, please call or email me.