6A — September 26 - October 9, 2014 — Fall Preview — M id A tlantic

Real Estate Journal

C onstruction L aw By Robert R. Watson, Jr., Eastburn & Gray

Two key aspects of PA Mechanics’ Lien Law get statutory shake-up


n July 9, 2014, Penn- sylvania’s Governor Tom Corbett signed

mitted distant subcontrac- tors or suppliers to file lien claims where the general contractor failed to pay for their labor or materials used in improvements at a home. Just as the case was for the owner of a commercial build- ing, whether the residential property owner had paid her general contractor or not was of no concern under the state’s Lien Law. Absent a stipulation against liens prior to the start of work, the unpaid sub or supplier could proceed to threaten and file a lien claim if it had not been

paid for its portion of the construction, and it was the homeowner’s responsibility to make certain not only that the general contractor was paid, but also that appropri- ate funds trickled down to all of the general contractor’s subs & suppliers as well. In an attempt to prevent what some interested par- ties referred to as the unfair victimization of residential owners, PA Act 117 now pro- vides that where the owner or tenant in a residential property has paid the “full contract price” to the general

contractor, a sub or supplier may not proceed with a lien claim for the value of its improvements. If the resi- dential owner only paid the general contractor a portion of the balance due, the sub or supplier may file a lien, but the amount will be limited to the unpaid portion of the owner-GC contract. While the threat of me- chanics’ liens by subs or suppliers on a residential project have been a hard pill for homeowners to swallow, there is no doubt that the reputable sub or supplier

who supplies labor or mate- rials to improve a residence, but gets left holding the bag when a general contractor skips town or goes insolvent, will be left with additional headaches under these new revisions to the statute. Once again, it becomes im- perative for anyone working on a project in Pennsylvania to keep close tabs on receiv- ables and payment issues. An unintended result of this change may be that subs or suppliers move more quickly to place homeowners on no- tice where they sense pay- ment distress on the horizon. The second interest group directly benefitted by PA Act 117 is construction lenders. Two years ago, the state Su- perior Court held that unless 100% of the loan proceeds of an open-ended construc- tion mortgage went toward actual “hard” construction costs, as opposed to other common charges such as closing costs and satisfac- tion of prior mortgages, a mechanics’ lien could take priority in judgment enforce- ment proceedings. The Kes- sler decision represented a significant departure from common practice in the Com- monwealth under the statu- tory language of the Lien Law, and gave contractors, subs and suppliers further comfort in the enforceability in their payment claims. Following the passage of Act 117, the Pennsylvania Mechanics’ Lien Law now will state that an open-ended mortgage takes priority over lien claims if at least 60% of the funds are used to pay for construction costs. With the passage of this legislation, open-ended construct i on loans regain the “super-pri- ority” over lien claims which they had enjoyed in Penn- sylvania up until the 2012 Kessler decision. And, the comfort to contractors, subs and suppliers provided by that decision will be reduced. These amendments for- mally took effect on Septem- ber 7, 2014. Bob Watson has been practicing in construc- tion law for the last 14 years. He is a sharehold- er in Eastburn and Gray’s Blue Bell, PA office, and can be reached at rwat- son@eastburngray.com or 215-345-7000. n

Act 117 into law, amend- ing two sec- tions of that state ’ s Me- chanics’ Lien Law wh i ch have proven to be bones of contention to two separate interest groups. First, for realtors and resi- dential homeowners, up until now, PA’s Lien Law had per- Bob Watson

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