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7/18/2014 | Construction Blog

On July 9, the Pennsylvania Legislature amended the Mechanic’s Lien Law to change lien priority rules flowing from the 2012 Kessler decision by the Pennsylvania Superior Court. The Kessler Court had established that mechanic’s liens had priority over open-end mortgages where visible commencement of work at the site pre-dated the recording of the mortgage and advances on the mortgage were made for costs other than “hard construction costs”.

Act 117 amends the Mechanic’s Lien Law to provide that a construction loan will have lien priority ahead of any filed mechanics lien claims if it is secured by an open-end construction loan mortgage under which at least 60% of the proceeds are “intended to pay or used to pay” all or part of the “costs of construction”. This is the case even if visible commencement of work precedes the recording of the construction loan’s open-end mortgage. The Act was signed into law by Governor Corbett on July 9, 2014 and becomes effective on September 7, 2014.

mortgageAct 117’s definition of “cost of construction” is very broad. 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 improvements, made or intended to be made, to the property. For purposes of this definition, “reimbursements” 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.

Given the broad definition of “cost of construction”, most if not all construction open-end mortgage disbursements will have priority over mechanic’s liens. Act 117 provides that its amendment to the lien law will apply to mechanics’ liens perfected on or after Act 117’s effective date (September 7, 2014). So, the lien of an existing construction loan will have priority over a mechanic’s lien, even where visible commencement of any work began before the recording of the construction loan mortgage, if the mechanic’s lien is perfected after September 7, 2014.