Act 34 retools the exemption for construction contracts for residential property by replacing the exemption for contracts under $1,000,000 with a 3-story height limitation

On August 11, 2009, Governor Ed Rendell signed Pennsylvania General Assembly Senate Bill 563, Printers No. 1355, also known as Act 34 (hereinafter “Act 34”), which amends the Pennsylvania Mechanics’ Lien Law of 1963, 49 P.S. 1101 et seq. (as amended, the “Mechanics’ Lien Law”) effective October 10, 2009. Under the new law, a contractor or subcontractor may continue to waive its right to file a mechanics’ lien claim against residential property regardless of amount of the construction contract so long as the building does not exceed three stories (not including the basement) in height.

On January 1, 2007, various amendments to Mechanics’ Lien Law took effect (the “2007 Amendments”), the primary purpose of which were to better protect contractors and subcontractors by limiting the circumstances in which an owner could obtain a waiver of mechanics’ liens from a contractor or subcontractor prior to the time the contractor or subcontractor was actually paid for the work. The 2007 Amendments allow a contractor or subcontractor to waive its right to file a mechanics’ lien claim against a property for erection, construction, alteration or repair of a “residential building” in which the total contract price between the owner and contractor is less than $1,000,000 if the waiver is in writing and signed by such contractor or subcontractor, or there is other conduct which, in fairness, ought to prevent the prevent contractor or subcontractor from filing a claim. The 2007 Amendments also included the new term “residential building,” which means property on which there is a residential building or which is zoned or otherwise approved for residential development, planned development or agricultural use, or for which a residential subdivision plan or planned residential development plan has received preliminary, tentative or final approval pursuant to the Pennsylvania Municipalities Planning Code.

The impetus behind Act 34 was a very public situation involving the bankruptcy of a large Southeastern Pennsylvania developer who left homeowners with extensive liens on their properties.   Act 34’s chief sponsor, Pennsylvania State Senator Pat Browne (R-16), and several other legislators in both chambers heard repeatedly from concerned constituents impacted on the residential side.

As previously noted, Act 34 mends the Mechanics’ Lien Law in two primary respects. First, Act 34 eliminates the requirement that the total contract price between the owner and contractor be less than $1,000,000. And second, Act 34 replaces the term “residential building” with a new term “residential property,” the definition of which borrows heavily from definition of the term that it is replacing. The primary change to the definition is the addition of a 3-story height limitation. In other words, commencing October 10, 2009, a contractor or subcontractor will be permitted to waive its right to file a mechanics’ lien claim against residential property regardless of the amount of the construction contract.

However, Act 34 leaves unchanged those provisions of the Mechanics Lien Law which:

Allow a subcontractor to waive its right to file a mechanics’ lien claim against a property (residential or nonresidential) for erection, construction, alteration or repair if the contractor has posted a payment bond guaranteeing payment for labor or materials provided by subcontractors.

Allow a contractor to waive a mechanics’ lien claim on behalf of a subcontractor if the contractor has posted a payment bond guaranteeing payment for labor or materials provided by subcontractors.

Allow a contractor or subcontractor to waive a mechanics’ lien claim in consideration for payment for the work, services, materials or equipment provided to the extent that such payment is actually received.

As mentioned above, Act 34 takes effect October 10, 2009.

If you have any questions about Act 34 or the Mechanics Lien Law, please contact Stephan L. Cutler (215.569.4199; scutler@klehr.com), Peter J. Norman (215.569.3596;pnorman@klehr.com), Gregory G. Gosfield (215.569.4164, ggosfiel@klehr.com) or one of the other members of our Real Estate and Finance Department.