Jul 24, 2014

Two Key Aspects of PA Mechanics’ Lien Law Gets Statutory Shake-up

On July 9, 2014, Governor Corbett signed Act 117 into law, amending two sections of the Mechanics’ Lien Law which have proven to be bones of contention to two separate interest groups.

First, for realtors and residential homeowners, up until now, the Lien Law had permitted distant subcontractors or suppliers to file lien claims where the general contractor failed to pay for their labor or materials used in improvements at a home. Just as the case was for the owner of a commercial building, whether the residential property owner had paid her general contractor or not was of no concern under the PA Lien Law. Absent a stipulation against liens prior to the start of work, the unpaid sub or supplier could proceed to threaten and file a lien claim if it had not been paid for its portion of the construction, and it was the homeowner’s responsibility to make certain not only that the general contractor was paid, but also that appropriate funds trickled down to all of the GC’s subs & suppliers as well.

In an attempt to prevent what some interested parties referred to as the unfair victimization of residential owners, Act 117 now provides that where the owner or tenant in a residential property has paid the “full contract price” to the general contractor, a sub or supplier may not proceed with a lien claim for the value of its improvements. If the residential owner only paid the GC a portion of the balance due, the sub or supplier may file a lien, but the amount will be limited to the unpaid portion of the owner-GC contract.

While the threat of mechanics’ liens by subs or suppliers on a residential project have been a hard pill for homeowners to swallow, there is no doubt that the reputable sub or supplier who supplies labor or materials to improve a residence, but gets left holding the bag when a GC skips town or goes insolvent, will be left with additional headaches under these new revisions to the statute. Once again, it becomes imperative for anyone working on a project to keep close tabs on receivables and payment issues. An unintended result of this change may be that subs or suppliers move more quickly to place homeowners on notice where they sense payment distress on the horizon.

The second interest group directly benefitted by Act 117 is construction lenders. Two years ago, the PA Superior Court held that unless 100% of the loan proceeds of an open-ended construction mortgage went toward actual “hard” construction costs, as opposed to other common charges such as closing costs and satisfaction of prior mortgages, a mechanics’ lien could take priority in judgment enforcement proceedings. The Kessler decision represented a significant departure from common practice under the statutory language of the Lien Law, and gave contractors, subs and suppliers further comfort in the enforceability in their payment claims.

Following the passage of Act 117, the Mechanics’ Lien Law now will state that an open-ended mortgage takes priority over lien claims if only 60% of the funds are used to pay for construction costs. With the passage of this legislation, open-ended construction loans regain the “super-priority” over lien claims which they had enjoyed up until the 2012 Kessler decision.

These amendments formally take effect on September 7, 2014.

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