David B. Lipnor | Cozen O’Connor | April 20, 2017
Effective December 31, 2016, Pennsylvania’s Mechanics’ Lien Law of 1963 (lien law) was amended to allow for an online State Construction Notices Directory (directory) to provide notice to parties involved in projects costing a minimum of $1,500,000 (searchable projects). This Alert provides an overview of the directory and offers suggested provisions to be included in construction contracts for searchable projects.
In the absence of the directory, owners are left to rely on general or primary contractors to disclose the identity of the subcontractors1 working on a project. However, the general contractor or primary contractors might not know the identity of all the subcontractors working on the project. This lack of knowledge presents a problem for owners who want to make sure that the subcontractors are being timely paid and signing releases of liens when progress payments are received.
The directory provides a modern way for owners to ascertain the identity of subcontractors working on the project. It also gives subcontractors an easy way to let the owner know if they are experiencing payment issues so that the owner can quickly address the issues with the general contractor or primary contractors. If subcontractors do not timely identify themselves by making the appropriate filing with the directory (as discussed below), they risk their lien rights being cut off.
Notices Transmitted via the Directory
The directory provides for four different notices: (1) Notices of Commencement, (2) Notices of Furnishing, (3) Notices of Completion, and (4) Notices of Nonpayment. These notices will be discussed in further detail below.
Notices of Commencement
Prior to the commencement of labor, work, or the furnishing of materials for a searchable project, the searchable project owner (or its agent) may file a Notice of Commencement with the directory. A contractor may file a Notice of Commencement as agent for the searchable project owner if: (1) specifically authorized to do so by contract and (2) if the searchable project owner assumes responsibility for the contractor’s actions. However, given the ease of filing a Notice of Commencement, it is recommended that the searchable project owner file on its own behalf (or have an attorney act as its agent).
Although the statute does not require a searchable project owner to file a Notice of Commencement, it is advantageous to do so. Specifically, filing a Notice of Commencement allows a searchable project owner to potentially benefit from the cutting off of a subcontractor’s lien rights if the subcontractor does not timely file a Notice of Furnishing and also allows the searchable project owner to learn who is furnishing work on the project.
After filing for and receiving a copy of the Notice of Commencement, a searchable project owner has two additional obligations: (1) conspicuously post a copy of the Notice of Commencement, including the project’s directory-assigned unique identifying number, at the project site prior to physical work commencing and take reasonable measures to ensure that the Notice of Commencement remains posted at the site until completion of the project;2 and (2) along with contractors, make reasonable efforts to ensure that the Notice of Commencement is made part of contract documents provided to all subcontractors awarded work on searchable projects.
Notices of Furnishing
If a searchable project owner has opted to use the directory by filing a Notice of Commencement, and assuming the owner has provided appropriate notice of this decision to subcontractors by including the required statutory notice language discussed below in its construction contracts and posting the Notice of Commencement at the project site, subcontractors performing work or services or furnishing materials to the searchable project must file a Notice of Furnishing within 45 days after first performing work or services or furnishing materials to the job site.
Subcontractors that fail to file a Notice of Furnishing substantially compliant with the requirements set forth in the lien law forfeit the right to file a lien claim.
Notices of Completion
A searchable project owner may file a Notice of Completion within 45 days of the actual completion of work (as defined in the amended lien law) on a searchable project. Upon filing, the Notice of Completion is sent, via the directory, to all subcontractors who have filed Notices of Furnishing. The Notice of Completion is purely informational, not mandatory, and is not dispositive as to when completion actually occurred. It is not clear what purpose the Notice of Completion serves, and it is debatable whether filing the notice carries any benefit to a searchable project owner. It is recommended that a searchable project owner not file a Notice of Completion without careful consideration because it could potentially complicate warranty issues and make it more likely for a subcontractor to remember to perfect its rights under the lien law.
Notices of Nonpayment
Subcontractors on searchable projects who have not received full payment for their work, goods, or services may file a Notice of Nonpayment with the searchable project owner (or agent) in the directory for informational purposes only. A subcontractor’s failure to file a Notice of Nonpayment will not affect or limit the subcontractor’s rights under the lien law. Additionally, filing a Notice of Nonpayment does not relieve subcontractors from complying with other written notice requirements set forth in the lien law. Similar to the Notice of Completion, the filing of a Notice of Nonpayment is purely informational, not mandatory, provides for improved communication between owners and subcontractors, and will likely give the owner quicker notice of payment issues with subcontractors than the owner would have received in the absence of the directory.
Mandatory and Recommended Construction Contract Provisions
The statute requires the following provision to be included in construction contracts for searchable projects to put subcontractors on notice that failing to file a Notice of Furnishing will result in the loss of their lien rights:
“A subcontractor that fails to file a Notice of Furnishing on the Department of General Services publicly accessible Internet website as required by the act of August 24, 1963 (P.L. 1175, No. 497), known as the Mechanics’ Lien Law of 1963, may forfeit the right to file a mechanics lien. It is unlawful for a searchable project owner, searchable project owner’s agent, contractor or subcontractor to request, suggest, encourage, or require that a subcontractor not file the required notice as required by the Mechanics’ Lien Law of 1963.”3
In addition to including the required statutory notice language in searchable project contracts, searchable project owners should include the following four covenants in contracts with searchable project contractors requiring that the contractor:
(1) Include the required statutory notice language in all contracts for the searchable project. It is important that a searchable project owner includes this provision in its contract with the contractor because the statute is ambiguous as to whether there are consequences to a searchable project owner (i.e., not being able to benefit from the cutting off of a subcontractor’s lien rights) if its contractor fails to include the required statutory notice language in its contract with any subcontractor.
(2) Provide a copy of the Notice of Commencement to all subcontractors. It is important for a searchable project owner to include this provision in its contract with the contractor because searchable project owners and the contractor are required to use reasonable efforts to ensure that the Notice of Commencement is made part of contract documents for subcontractors awarded work on the searchable project. A searchable project owner who does not use this provision is at risk of not benefitting from the new amendments to the lien law that can ultimately result in the forfeiture of a subcontractor’s right to file a lien claim.
(3) Include in any contract with a subcontractor a requirement for the subcontractor to: (a) include the required statutory notice language in any contracts subcontractors may enter into with sub-subcontractors for the searchable project and (b) attach a copy of the Notice of Commencement to any contracts subcontractors may enter into for the searchable project. Searchable project owners are required to take reasonable measures to ensure that the Notice of Commencement is made part of contract documents provided to all subcontractors awarded work on searchable projects. While the lien law does not set forth what “reasonable measures” are, the inclusion of this provision is our recommended best practice to maximize compliance. There is no requirement that sub-subcontractors include any of these provisions or provide a Notice of Commencement to any person with whom the sub-subcontractor contracts with on the searchable project.
(4) Notify the searchable project owner if the Notice of Commencement is not posted at the searchable project site and make commercially reasonable efforts to replace the Notice of Commencement after noticing that it is not posted. Searchable project owners are required to take reasonable measures, such as reposting the notice within 48 hours after becoming aware of or being notified that the notice is not posted, to ensure that the Notice of Commencement remains at the site until completion of the project.
The directory can be accessed at https://apps.pa.gov/scnd and promises to be a valuable tool for searchable project owners who use it properly, by housing in one location valuable information that owners previously had to track down from general and primary contractors.