On July 9, 2014, Pennsylvania Governor Tom Corbett signed into law Senate Bill 145 (aka “Act 117”), amending Pennsylvania’s Mechanics’ Lien Law of 1963. Act 117 is effective September 7, 2014.
Among other things, Act 117 provides that, any lien obtained under the Act by a contractor or subcontractor is subordinate to “[a]n open-end mortgage as defined in 42 Pa.C.S. § 8143(f) (relating to open-end mortgages), 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.” This change responded to the May 9, 2012 Pennsylvania Superior Court case of Commerce Bank v. Kessler, in which the court interpreted the “all or part of” language in the existing mechanic’s lien laws 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.
Subcontractors should also note that a subcontractor does not have the right to a mechanic’s 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.
Act 117 adds a definition for “costs of construction.” It includes “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.” A “reimbursement” includes any such disbursements made to the borrower, any person acting for the benefit or on behalf of the borrower, or to an affiliate of the borrower.
Photo: David Hill, Mountain Laurel, Kalmia latifolia – Creative Commons