On July 9, 2014, Governor Corbett signed Act 117 of 2014, amending Pennsylvania’s Mechanics’ Lien Law of 1963 (Act of August 24, 1963, P.L. 1175, No. 497, 49 P.S. §1101, et seq.). One of the principal purposes of the amendments appears to be the overruling of the Pennsylvania Superior Court’s decision in Commerce Bank/Harrisburg, N.A. v. Kessler. In Commerce Bank, the Court determined that under the 2006 amendments to the mechanics’ lien law (effective January 1, 2007), the exception in the mechanics’ lien law giving priority to open-end mortgages would not give an open-end mortgage priority over a mechanics’ lien unless all of the proceeds secured by the mortgage had been used to pay the costs of “completing erection, construction, alteration or repair of the mortgaged premises.”
The Court stated that “any other interpretation of the statute would permit lenders and owners to improperly manipulate the system to defeat lien rights.” The Court’s interpretation, however, was contrary to the longstanding practice of having open-end mortgages secure a variety of project costs in addition to direct costs of construction, including in some cases, the cost of acquisition of the underlying property. The Commerce Bank interpretation of the 2006 amendments to the mechanics’ lien law created a great deal of consternation in the Pennsylvania construction lending market.
The new amendments provide priority to an open-end mortgage over mechanics’ liens if at least 60% of the proceeds of the mortgage “are intended to pay or are used to pay all or part of the costs of construction.” A definition of “costs of construction” has been added to section 201 of the mechanics’ lien law (49 P.S. §1201), as follows:
“Costs of construction” means all costs, expenses and reimbursements pertaining to erection, construction, alteration, repair, mandated off-site improvements, government impact fees and other construction-related costs, including, but not limited to, costs, expenses and reimbursements in the nature of taxes, insurance, bonding, inspections, surveys, testing, permits, legal fees, architect fees, engineering fees, consulting fees, accounting fees, management fees, utility fees, tenant improvements, leasing commissions, payment of prior filed or recorded liens or mortgages, including mechanics liens, municipal claims, mortgage origination fees and commissions, finance costs, closing fees, recording fees, title insurance or escrow fees, or any similar or comparable costs, expenses or reimbursements related to an improvement, made or intended to be made, to the property.
Therefore, open-end mortgages have regained their “super-priority” over mechanics’ liens, as long as at least 60% of the proceeds of the open-end mortgage are used to pay or intended to pay all or part of the costs of construction. These amendments restore a great deal of the simplicity which construction loans enjoyed in Pennsylvania prior to the 2006 amendments to the mechanics’ lien law.
The new amendments also allow a party who has paid a contractor to obtain a discharge of liens filed by subcontractors on certain types of residential property to the extent of the payment to the contractor.
The amendments will be effective September 7, 2014, and apply to mechanics’ liens perfected on or after that date, even if the work for which the lien is filed was performed prior to the effective date.