In response to the Pennsylvania Superior Court’s decision in Commerce Bank v. Kessler, Governor Corbett signed into law Act 117 of 2014 on July 9, 2014, which amends the Pennsylvania Mechanics’ Lien Law.
In Commerce Bank v. Kessler, the Superior Court held that one hundred percent (100%) of the proceeds of a construction loan secured by an open-end mortgage had to be used for “hard costs” of construction in order for the open-end mortgage to have statutory priority over mechanics’ liens. The Mechanics’ Lien Law amendment provides that a construction loan secured by an open-end mortgage “where at least sixty percent (60%) of the proceeds are intended to pay or are used to pay all or part of the costs of construction” will have lien priority ahead of any filed mechanics’ lien claims. Moreover, the definition of “costs of construction” was broadened to include “soft costs” like legal fees, architect fees, engineering fees, finance costs, and closing and title fees.
In addition, the Mechanics’ Lien Law amendment includes provisions relating to certain residential property. The following Section 301(b) was added to the Mechanics’ Lien Law:
A subcontractor does not have the right to a lien with respect to an improvement to a residential property if: (1) the owner or tenant paid the full contract price to the contractor; (2) the property is or is intended to be used as the residence of the owner or subsequent to occupation by the owner, a tenant of the owner; and (3) the residential property is a single townhouse or a building that consists of one or two dwelling units used, intended or designed to be built, used, rented or leased for living purposes. For the purposes of this paragraph, the term “townhouse” shall mean a single-family dwelling unit constructed in a group of three or more attached units in which each unit extends from foundation to roof with a yard or public way on at least two sides.
In the event that a subcontractor files a mechanics’ lien with respect to an improvement to residential property described in Section 301(b), the owner may (1) discharge such mechanics’ lien claim upon proof that the full contract price was paid to the contractor or (2) cause the mechanics’ lien to be reduced to the amount of the unpaid contract price in the event that the entire contract price was not paid to the contractor.
For more information on this article or mechanics’ liens, please contact Theodore F. Claypoole at 610.692.1371 or tclaypoole@utbf.com.
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