Governor Corbett Signs Amendments to Pennsylvania Mechanics’ Lien Law Effective September 2014
In 2006, the Pennsylvania legislature passed sweeping changes (known as Act 52) to the 1963 Mechanic Lien Law, including a section that subordinated mechanics lien claims to the lien of open ended construction mortgages, “the proceeds of which are to be used to pay all or part of completing erection, construction, alteration or repair of the mortgaged premises secured by the open end mortgage.”
In 2012, the Pennsylvania Superior Court in the case of Commerce Bank v. Kessler interpreted the “all or part of “ language to mean that the mechanics lien would be subordinate only if all of the proceeds from the mortgage were used to pay the cost of completing erection, construction, alteration or repair of the mortgaged premises subject to the open -end mortgage.
In response to the Kessler decision, the legislature passed, and Governor Corbett signed into law, Act 117 that amends the Mechanics’ Lien Law. Act 117 quantifies the amount of the loan proceeds secured by an open end mortgage to qualify the mortgage for superiority over mechanics lien claims. Specifically, mechanics’ liens by contractors and subcontractors are subordinate to open end mortgage liens where at least 60% of the proceeds of the open end mortgage loan are intended to pay or are used to pay all or part of the costs of construction. It also adds a broad definition of the “costs of construction” Further, Act 117 provided that a subcontractor does not have a right to a lien regarding residential real property if i) the owner or tenant paid the contract price to the general contractor, ii) the property is intended to be used as a residence of the owner or tenant of the owner and iii) the residential property consists of not more than two (2) dwelling units. Also added was a provision that authorizes an owner to discharge a mechanics lien claim of a subcontractor upon proof that the full contract price was paid to the contractor or to reduce the amount of the mechanic’s lien claim to the unpaid amount of the contract price.
This new amendments take affect on September 7, 2014 and should have a positive affect on construction financing secured by open end mortgages and related title insurance. Subcontractors should also be aware of this new law and its effects on the viability of mechanic’s lien claims where the contractor has been paid.
Attorney Thomas Capehart provides bank clients with legal counsel pertaining to bankruptcy, foreclosure, collections, and creditors’ rights matters.