Amendments to the Pennsylvania Mechanics’ Lien Law

In March of 2011, after tornados swept through Westmoreland County, homeowners were forced to complete repairs.  After paying their contractor in full, 11 homeowners had mechanics’ liens filed against their property by a roofing supplier who was not paid by the contractor.  The mechanics’ liens delayed sales and prohibited owners from refinancing mortgages to obtain more favorable rates.  In response, Governor Casey on July 9, 2014, signed into law amendments to Pennsylvania’s Mechanics Lien Law.

The amendments prohibit a subcontractor from filing a mechanics lien with respect to residential property if the owner or tenant paid the full contract price to the contractor.  Additionally, even if the owner has not paid the contractor in full, the owner has the opportunity to seek a Court order reducing the lien amount to the unpaid contract price owed by the owner to the contractor.

Presuming that a subcontractor would not have knowledge of whether or not the contractor has been paid in full and files a mechanics lien, the amendments give the owner the ability to seek a court order discharging the subcontractor’s lien when the owner has paid the full contract price to the contractor or the ability to reduce the lien amount to the value of the unpaid contract balance.

This limitation is only applicable to property that is or is intended to be used as the residence of the owner or subsequent to occupation by the owner or tenant and is a single townhouse or a building consisting of one or two dwelling units.

In addition to the above amendments a definition of “costs of construction” has been added to the statute which is defined 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, tenant improvements, leasing commissions, payment of prior filed or recorded liens or mortgages, including mechanics, 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.  For purposes of this definition, reimbursement includes any such disbursements made to the borrower, any person acting for the benefit or on behalf of the borrower, or to any affiliate of the borrower.

While the definition appears to intend to include a wide range of soft costs into the “cost of construction” it appears (at least to this writer) to include a wide range of costs that would not typically be incurred by a mechanics lien claimant (contractor or subcontractor) but more appropriately incurred by the owner.  It remains to be seen how this definition will play into future claims.

The amendment also further defines an open-end mortgage to require that at lest sixty percent (60%) of the proceeds are intended to pay or are used to pay all or part of the costs of construction.  Previously the statute did not impose any limitation on the amount of the mortgage being applied to the costs of construction.

Although the amendments now provide some protections to residential homeowners against the filing of mechanics liens when their contractor has been paid but has not made payment to its subcontractors, these same protections were already in place with application of forethought by the property owner by the filing of a no-lien agreement on residential property.

It remains to be seen on whether the definition of costs of construction will allow for an expansion of claims or merely the ability to increase the value of claims and whether the open-end mortgage limitation will impact lending or place additional restrictions on borrowing.

The above amendments become effective for all liens perfected after September 7, 2014 whether or not the commencement of visible construction occurred prior to that date.

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