The Pennsylvania Legislature recently enacted legislation which amends portions of the Mechanics’ Lien Law, 49 P.S. § 1101, et. seq. (“MLL”), and provides a statutory fix to the Kessler decision.
The Superior Court of Pennsylvania’s decision in Commerce Bank/Harrisburg, N.A. v. Kessler, issued in May 2012, caused a fundamental change in the industry’s understanding that open-end mortgages for construction loans had priority over mechanics’ liens. Under the MLL at that time, a mechanics’ lien for construction improvements had priority from the date of visible commencement of work, but was subordinate to an open-end mortgage where the proceeds were “used to pay all or part of the cost of completing erection, construction, alteration or repair of the mortgaged premises. . .” The Kessler Court determined that, in order for this exception to apply, all of the loan proceeds had to be used to pay the hard construction costs, and nothing else. As such, if any of the loan advances were used to pay any other costs associated with the construction, and unpaid contractors and/or subcontractors filed mechanics’ liens to recover money owed, those liens would take priority over the loan.
On September 7, 2014, Act 117 of 2014 took effect and changed the landscape. Act 117’s amendments to the MLL provide that a construction loan secured by an open-end mortgage will take priority over a mechanics’ lien claim (even where visible commencement of work occurred prior to the recordation of the mortgage) if 60% of the loan proceeds are “intended to pay or used to pay” all or part of the “costs of construction.” The amendments include a broad definition of “costs of construction” which includes items such as insurance, taxes, utility fees, and closing fees. The amendment applies to mechanics’ liens perfected on or after September 7, 2014, even where visible work commenced prior to that date.