New Mechanics’ Lien Law Amendments

Last month, the General Assembly amended the Pennsylvania Mechanics’ Lien Law. The amendments will go into effect on September 7, 2014, which is 60 days after the passage date.

New Homeowner Protections. It has long been the law in Pennsylvania that subcontractors could lien property, even if the owner already made payment to the general contractor for the work. See Fahringer Corp. v. Newman, 1 Pa. D.&C.3d 115, 118 (C.P. Somerset Co. 1976). Under this old law, because an owner’s payment to a general contractor is not a defense to a lien, an owner could ultimately pay twice for the same work.

The revised Mechanics’ Lien Law changes this. Now, a subcontractor cannot lien residential property if the owner paid the full contract price to the general contractor. 49 P.S. § 1301 (effective September 7, 2014).

This new law is only applicable to residential properties. Regardless of this new protection, it is still advisable for owners to require lien waivers and diligent payment-tracking processes. For subcontractors, it is now very important to immediately address any delinquent payment issues.

New Lender Protections. The lending and title insurance industries was quite anxious after the 2012 Pennsylvania Superior Court decision, Commerce Bank v. Kessler, 46 A.3d 724. In Commerce Bank, the owner contracted to build a luxury home. The house was fully constructed; however, the owner failed to make payments to the homebuilder, and also failed to make payments on the mortgage. Both the bank and the homebuilder obtained default judgments. The bank believed its mortgage had priority lien rights against the property, based upon a provision in the Mechanics’ Lien Law.

The appellate court disagreed. It ruled that the mechanic’s lien took priority lien status over the mortgage. The court reasoned that the Mechanics’ Lien Law only affords priority lien status to open-end mortgages if the loan is used solely for “erection, construction, alteration, or repair.” As is typical, the loan in Commerce Bank included disbursements for tax claims, closing costs, pay-off of a prior mortgage, and other liens. Because of these other disbursements, the mortgage did not receive priority status.

Banks need not worry anymore. The amended Mechanics’ Lien Law provides that open-end mortgages take priority so long as 60% of the loan proceeds, at a minimum, go towards construction costs. The amendment also broadens the definition of construction costs to include common items paid by the loan, such as taxes, surveys, attorney’s fees, engineering fees, architectural fees, satisfaction of old mortgages, etc.

Entering contracts, getting paid, making payments, and litigating lien rights can be complicated. Owners, contractors, subcontractors, and lenders should double-check their contracts and seek proper legal advice.

What’s Happening Now . . .

7.5%

Construction Industry Unemployment Rate (unadjusted).

  • The construction industry added 22,000 jobs last month. This is the lowest unemployment rate in the construction industry since November 2007.

Source: Bureau of Labor Statistics, Series ID LNU04032231.  

* This Blog is not legal advice. Unlike this Blog, legal advice is specifically tailored to the facts, law, and objectives unique to each circumstance. To join or remove yourself from the subscription list, email jbright@h-dlaw.com or call 717-291-2236.

 

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