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Pennsylvania Amends Mechanics’ Lien Law to Protect Home Owners from Double Jeopardy and Clarify Priority Given to Open Ended Mortgages

On July 9, 2014, Governor Tom Corbett signed into law legislation amending Pennsylvania’s Mechanics’ Lien Law of 1963 (the current Mechanics’ Lien Law in Pennsylvania).  The stated primary purpose of the amendments is to protect homeowners who pay the prime contractor(s) that perform improvements to their residential property from mechanics’ liens of subcontractors that the prime contractor fails to pay.  The amendments accomplish this by eliminating a subcontractor’s right to a mechanics’ lien on residential property if: (1) the owner or tenant pays the full contract price to the prime contractor; (2) the property is to be used as the residence of the owner or a tenant of the owner; and (3) the residential property consists of one or two dwelling units.

Although this new law will likely be viewed as good public policy for owners, it potentially hurts the subcontractor or supplier who did not contract with the owner. Typically, subcontractors and material suppliers do not know if or when an owner makes payment to a general contractor. As such, mechanics’ liens can be effective tools for subcontractors and suppliers to obtain payment on a project when a general contractor absconds with the owner’s payment.

Now, subcontractors and suppliers must manage their projects and accounting more closely than ever before. Failure to do so could leave the subcontractor or supplier with no legal recourse after it financed a project to completion.

The amendments also clarify and significantly expand the definition of “costs of construction” as the term is used in the Mechanics’ Lien Law.  Specifically, the amendments define “costs of construction” as

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.

The definition is especially notable because it brings legal fees, accounting fees, and other “soft costs” that are typically not considered recoverable as part of a mechanics’ lien within the definition of “costs of construction.”  Unfortunately, however, this expanded definition may have little or no impact for contractors and subcontractors performing work within the Commonwealth because the term “costs of construction” only appears in the the section of the Mechanics’ Lien Law related to the priorities given to mortgages on the property being improved.

Specifically, following the amendments, open-ended mortgages will only receive priority over a mechanics’ lien if at least 60% of the proceeds from the mortgage “are intended to pay or are used to pay all or part of the costs of construction.”  Thus, while the amendments define “costs of construction” very broadly, that broadly defined term may have a very limited impact on the substantive rights the Mechanics’ Lien Law provides to contractors and subcontractors performing work within the Commonwealth because the term is not used to describe those things that an contractor or subcontractor may include in its lien.

Nevertheless, the inclusion of such a broad definition of “costs of construction” in the Mechanics’ Lien Law may open the door for parties to argue that their mechanics’ lien claims should include damages that were once thought to be well outside those that could be included in a mechanics’ lien claim.

The amendments took effect September 7, 2014, and will apply to any lien perfected on or after September 7, 2014 regardless of when the construction giving rise to the lien commenced.