Mechanics’ Lien Law Clarified: Open-End Construction Loans

By Michael E. Fiffik, Esquire

On September 7, 2014, Act 117 of 2014 became effective. Act 117 amends the Pennsylvania Mechanics’ Lien Law (“MLL”), 49 P.S. 1101, et seq., to provide that a construction loan secured by an open-end mortgage will have lien priority ahead of any filed mechanics’ lien claims, even when the visible commencement of work was prior to the recordation of the open-end mortgage where at least 60 percent of the proceeds are “intended to pay or used to pay” all or part of the “costs of construction.” The amendment to the MLL overcomes the problems created by the decision by the PA Superior Court in Commerce Bank/Harrisburg, N.A. v. Kessler. That ruling mandated that for an Open-End Construction mortgage to have statutory priority over mechanics liens, 100% of the proceeds of the loan had to be used for hard costs of construction. And if any portion of the loan proceeds were used for something other than the costs of construction, such as closing costs, satisfaction of an existing mortgage or payment of other judgments and liens, the entire mortgage lost its statutory protection against mechanics liens.

Now, in addition to clarifying that loan proceeds may be used for purposes other than construction costs, an expansive definition of “costs of construction” has been added to the MLL, which encompasses 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;

1. insurance;

2. bonding;

3. inspections;

4. surveys;

5. testing;

6. permits;

7. legal, architect, engineering, consulting, accounting, management and utility fees;

8. tenant improvements;

9. leasing commissions;

10. payment of prior filed or recorded liens or mortgages, including mechanics’ liens;

11. municipal claims;

12. mortgage origination fees and commissions;

13. finance costs;

14. closing fees;

15. recording fees;

16. title insurance or escrow fees; or

17. any similar or comparable costs, expenses or reimbursements related to an improvement, made or intended to be made, to the property.

Act 117 will apply to mechanics’ liens perfected on or after the Act’s effective date of September 7, 2014, including liens relating to construction of an improvement for which the visible commencement of work occurred prior to the effective date. For Further Information If you have any questions about this change in the MLL, please contact Michael E. Fiffik, or the attorney in the firm with whom you are regularly in contact.