Source: http://www.fullertonlaw.com/newsletters/156-protections-for-pennsylvania-homeowners-and-open-end-mortgages
Timestamp: 2019-04-20 03:00:18
Document Index: 194022131

Matched Legal Cases: ['§1405', '§1405', '§1301', '§1405', '§1510', '§1510', '§1508', '§1201', '§1508']

Protections for Pennsylvania Homeowners and Open End Mortgages
An owner can create a defense of payment by filing a copy of the general contract in the prothonotary’s (court clerk’s) office before commencing construction.[1] This will limit each subcontractor to a pro rata share of money still owed the general contractor.[2] In addition, general contractors can waive lien rights for lower tier subcontractors if the general contractor posts a payment bond to cover the value of the labor and materials provided. Lien waivers by a general contractor are made by filing a “Stipulation Against Liens” (“Stipulation”), often referred to as a “Stip.” Most commercial Pennsylvania project owners will continue to do one of these things. Most Pennsylvania construction lenders require it.
Beginning in 2014, most owners will have an automatic defense of payment to a subcontractor lien on owner occupied residential projects.[3] If the owner has paid the general contractor in full, all subcontractor liens will fail. For the defense of payment to apply, the property must be a residential single townhouse or a building consisting of one or two dwelling units. The property must be used or intended to be used as the residence of the owner or a tenant of the owner subsequent to occupation by the owner. It seems that a tenant would not have a defense of payment for any construction unless the property was previously occupied by the owner. This would also seem to rule out any builder or developer owned residential properties. Professional residential builders must still file a copy of the general contract in the prothonotary’s (clerk’s) office before commencing construction or give the subcontractor written notice of the contract payment provisions to create a defense of payment.[4]
The statute says that “a subcontractor does not have the right to a lien with respect to an improvement to a residential property” if all of these conditions are met. However, subcontractors would normally have no way to know whether the owner had paid the general contractor or whether the owner intended to use the property for their own residence. Accordingly, it appears that subcontractors can and should file their lien claims if they are not paid. The statute seems to recognize this, stating that a court can issue an order discharging the lien against the property in response to a petition or motion to the court by the owner or a party in interest, when the owner or tenant has paid the full contract price to the general contractor.[5] It is up to the owner to contest the lien. It is not clear who has the burden of proof on each condition. However, a subcontractor would not be in possession of evidence regarding payments by the owner or the intended use of the property, so the owner should have the burden.
An owner can also have a partial defense of payment. Where the owner or tenant has paid the contractor less than the full contract price, a court can also reduce the lien to the amount of the unpaid contract price owed.[6]
It does seem like the Pennsylvania legislature tried to give open-end mortgages (construction loans) priority over mechanic’s liens in the 2007 amendments. This was a significant change in the Pennsylvania Mechanic’s Lien Code. However, the Superior Court decided in Commerce Bank/Harrisburg, N.A. v. Kessler [7] in 2012 that the construction loan lender did not have priority unless ALL of the proceeds off the loan were used for the hard costs of "completing erection, construction, alteration or repair of the mortgaged premises." In response to this decision, Pennsylvania lenders successfully lobbied for a change or clarification.
Starting in September 2014, a construction loan (open-end mortgage) will have priority over any type of mechanic’s lien, whenever at least sixty percent (60%) of the mortgage proceeds are intended to pay or are used to pay all or part of the costs of construction.[8] Costs of construction are defined to include all costs for erection, construction, alteration, repair, mandated off-site improvements, government impact fees and other construction-related costs, including, but not limited to taxes, insurance, bonding, inspections, surveys, testing, permits, legal fees, architect fees, engineering fees, consulting fees, accounting fees, management fees, utility fees, tenant improvements, leasing commissions, payment of prior filed or recorded liens or mortgages, including mechanics liens, municipal claims, mortgage origination fees and commissions, finance costs, closing fees, recording fees, title insurance or escrow fees.[9]
© (2014) James D. Fullerton Clifton, VA (703) 818-2600 www.FullertonLaw.com
[1] 49 P.S. §1405.
[2] 49 P.S. §1405.
[3] 49 P.S. §1301(b).
[4] 49 P.S. §1405.
[5] 49 P.S. §1510(f)(1).
[6] 49 P.S. §1510(f)(2).
[7]Commerce Bank/Harrisburg, N.A. v. Kessler, 2012 PA Super 100, 46 A.3d 724 (2012).
[8] 49 P.S. §1508(c).
[9] 49 P.S. §1201(15). This expanded definition of construction costs and the 60% of mortgage proceeds safe harbor in 49 P.S. §1508(c). were added in a 2014 amendment to the statute in response to the result in Commerce Bank/Harrisburg, N.A. v. Kessler, 2012 PA Super 100, 46 A.3d 724 (2012).