10A — August 30 - September 12, 2013 — Mid Atlantic Real Estate Journal
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c oMMeRciAl R eAl e stAte l Aw By Jeffrey L. Silberman, Esquire, Kaplin Stewart Mechanics’ Liens in the New Age
M any aspects of real e s t a t e p r a c t i c e have changed since
“180”. Under the former law, Pennsylvania was one of the few states that allowed a contractor to waive its and its subcontractors’ rights to file a lien before the job even started. This was done by simply executing and record- ing an agreement stating that the contractor waived its right to file a mechanics’ lien. A pre-construction lien waiver offered owners and lenders a significant degree of protection from having their projects encumbered by mechanics’ liens. However, the law changed
and brought Pennsylvania back to the more common way of dealing with liens. Except in certain limited circumstances, pre-construc- tion lien waivers were ruled unenforceable. A contractor can still waive or release its right to file a lien, but only to the extent of payment. Therefore, as in most states, to safeguard against liens, the owner and its lender should trade payment for a release of liens for the work for which the contractor is being paid.
Even with this small incon- venience, lenders still had a very effective way of making sure that their mortgages would not be subordinate to a mechanics’ lien – the “open- end” mortgage. An open-end mortgage gives an entire mortgage priority from day one, even though the loan will not be fully advanced on day one. This means that if the lender advanced one dollar at closing but recorded a proper open-end mortgage, the entire loan amount is protected, even if a lien for $1,000,000 was recorded the
next day.
In 2012, the open-endmort- gage protection was thrown for a loop with the decision in CommerceBank/Harrisburg, N.A. v. Stephen F. Kessler & Lisa K. Kessler et. al . In brief summary, and reading the case in a conservative light, the Kessler case held that a mortgage is not an open- end mortgage if the loan has any funds for non-construc- tion items, such as interest reserve or soft-costs. As we all know, most construction loans have non-construction components. If a lender has a “regular” mortgage, any lien filed could have priority over unadvanced loan proceeds. The case has left lenders scrambling for solutions. One solution we have seen is that the lender makes 2 loans, one for construction dollars only, and one for non-construction dollars. The construction- only loan would qualify as an open-end mortgage, thereby reducing (though not elimi- nating) the exposure to liens. This requires additional documentation and transac- tion costs. Another solution we have seen is that the lender ad- vances the entire loan into an escrow account, so that the entire loan is funded and no lien can jump in front of future advances. The prob- lem is that the entire loan is advanced and accruing interest during the entire build-out. The other problem is that title insurance companies have gotten crushed recently with mechanics’ lien claims. As the economy soured, more projects failed and more contractors were forced to file liens. Most title compa- nies are taking the position that title insurance was not meant to insure mechanics’ liens and they are making coverage for liens virtually impossible. Our world changes fast these days so it’s important to watch closely. Jeffrey L. Silberman, Esquire is a principal of Kaplin Stewart in the Real Estate, Business & Finance Department. n
the market downturn , but perhaps none more d r a m a t i c than deal- i n g w i t h mechanics’ liens.
Jeffrey Silberman
Since the mid-2000s, pro- tecting owners and lenders against the prospect of me- chanics’ liens in Pennsyl- vania has done a complete
Contact: Jeffrey A. Silberman 910 Harvest Drive, Blue Bell, PA 19422-0765 • 610-260-6000 • www.kaplaw.com Other Offices: • Cherry Hill, NJ 856-675-1550 • Philadelphia, PA 215-567-3120 Kaplin Stewart At t o rne y s a t Law Getting you through the maze of real estate law. Strategy. Skill. Success.
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