12.12.17 Mechanic's Liens

Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

Can the Construction Loan Mortgage have initial priority over mechanic's liens?

As to new construction, the mechanic's liens take priority from the date of visible commencement or date that materials are delivered to the site of the new construction by any contractor, subcontractor, sub-subcontractor or materialman who worked on the job (49 P.S. Section 1508). However, any lien obtained under the act by a contractor or subcontractor shall be subordinate to an open-end mortgage as defined in 42 Pa.C.S. § 8143(f) (relating to open-end mortgages), where at least sixty percent (60%) of the proceeds are intended to pay or are used to pay all or part of the costs of construction. (49 P.S. Section 1508 (c) (2)).

The claim must exceed $500.00 (49 P.S. Section 1301).

Will initial priority as to future disbursements be retained only if certain procedures are followed?

Under Pennsylvania case law, obligatory advances made pursuant to an advance money mortgage takes lien priority over mechanic's liens filed subsequent to date of recordation of the mortgage provided no visible work commenced or materials were furnished at time of recordation of the mortgage. Trustees of C.I. Mortgage Group v. Stagg of Huntington, Inc., 372 A.2d 854,247 Pa. Super. 366, 1977.

Future advances made pursuant to Pennsylvania Open End Mortgage legislation (42 Pa. C.S.A. Section 8143) shall take lien priority over mechanic's lien filed subsequent to recordation of mortgage provided no visible commencement of work or materials were furnished prior to recording of mortgage, or in the event visible commencement has occurred prior to the recordation of the mortgage, future advances made under an open-end mortgage as defined in 42 Pa.C.S. § 8143(f) (relating to open-end mortgages), will have priority over filed mechanic’s liens so long as at least sixty percent (60%) of the proceeds are intended to pay or are used to pay all or part of the costs of construction.

If priority is lost, can it be regained?

Yes, any lien obtained under the act by a contractor or subcontractor shall be subordinate to an open-end mortgage as defined in 42 Pa.C.S. § 8143(f) (relating to open-end mortgages), where at least sixty percent (60%) of the proceeds are intended to pay or are used to pay all or part of the costs of construction. (49 P.S. Section 1508 (c) (2)) even if initial priority is lost.

Is there a difference between on-site and off-site work?

No, applies to all labor, materials and supplies of all kinds, and also includes fixtures, machinery and equipment reasonably necessary to and incorporated into the improvement.

Is priority the same for all contractors and subcontractors on the same project?

As to new construction, the mechanic's liens takes priority from the date of visible commencement or date that materials are delivered to the site of the new construction by any contractor, subcontractor or materialman who worked on the job, however in the case of the alteration or repair of an improvement, priority is as of the date of the filing of the claim. (49 P.S. Section 1508).

Time Limits:

What are the time periods for recording lien claims by original contractors and subcontractors?

The claim must be filed in the Office of the Prothonotary within six (6) months after all work is completed by the claimant (49 P.S. Section 1502).

After what period of time can you waive a mechanic's liens if no suit is filed?

The claim must be filed in the Office of the Prothonotary within six (6) months after all work is completed by the claimant (49 P.S. Section 1502). An action to obtain judgment upon the claim must be commenced by the filing of a complaint within two (2) years) from the date of filing of the mechanic’s lien. A judgment must be obtained within five (5) years from the date the claim is filed or the lien may be lost (49 P.S. Section 1701).

Removing or Waiving Liens:

Is there a statutory procedure for affidavits of completion or notices of completion?

There is no statutory procedure for affidavits of completion or notices of completion.

Can a statutory bond terminate the mechanic's liens as an encumbrance on the title?

A mechanic's lien claim can be discharged if the owner or any party in interest deposits with the Court a sum equal to the amount of the claim. In lieu of a case deposit, approved security in double the amount of the claim may be submitted with the Court to discharge the lien (49 P.S. Section 1510).

Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanic's liens by general contractor and/or subcontractors?

Only as to residential construction of three stories or less, a contractor or subcontractor may waive his right to file a claim by a written instrument (49 P.S. Section 1401). A written contract between the owner and contractor or a separate written instrument signed by the contractor can provide that NO mechanic's liens can be filed by anyone and shall be binding upon subcontractors provided proper notice has been given to the subcontractor (49 P.S. Section 1402). Proper notice of the Waiver of Liens will be effective when filed in the Office of the Prothonotary prior to the commencement of work and indexed in the name of the contractor as defendant and the owner as plaintiff and also in the name of the contractor as plaintiff and the owner as defendant (49 P.S. Section 1402). As to other types of property, a waiver by a contractor of lien rights is against public policy, unlawful and void unless given in consideration for payment for the work, services, materials or equipment provided and only to the extent that such payment is actually received.

Can a bona fide purchaser or bona fide lender take free of mechanic's liens later filed for earlier work?

A bona fide purchaser is not protected in a new construction situation against mechanic’s liens later filed for earlier work.

Only two types of mortgages have statutory priority over mechanic’s liens:

Any lien obtained under the act by a contractor or subcontractor shall be subordinate to the following:

(1)  A purchase money mortgage as defined in 42 Pa.C.S. § 8141(1) (relating to time from which liens have priority).

(2)  An open-end mortgage as defined in 42 Pa.C.S. § 8143(f) (relating to open-end mortgages), where at least sixty percent (60%) of the proceeds are intended to pay or are used to pay all or part of the costs of construction.

Title Company Requirements:

What are the customary requirements for issuing Loan Policies on construction loan mortgages?

Construction Loan Closing:

If no broken priority:

a)   Confirm mortgage to be recorded is an open-end mortgage as defined in 42 Pa.C.S. § 8143(f) (relating to open-end mortgages);

b)   Include pending disbursement clause PDCX08 STG in the loan policy;

c)   Confirm by photographic evidence taken after recordation of the mortgage that there has been no visible commencement of construction;

d)   In the case of residential construction of three stories or less, if a stipulation against liens is to be relied on, confirm by photographic evidence taken after filing of the stipulation against liens that there has been no visible commencement of construction.

If broken priority, always contact a Stewart Underwriter for guidance to determine which procedure will be required if mechanic’s lien coverage is requested by the lender:

a)   Confirm mortgage to be recorded is an open-end mortgage as defined in 42 Pa.C.S. § 8143(f) (relating to open-end mortgages) and either;

b)   Confirm by PA Open-End Construction Mortgage Affidavit signed by the owner and the lender, or other means approved by a Stewart Underwriter, that at least sixty percent (60%) of the proceeds of the loan are intended to pay or are used to pay all or part of the costs of construction and put pending disbursement clause PDCX21 PA STG in the loan policy (Act 117 Procedure); or

c)    If the Act 117 Procedure is not possible or is not permitted by a Stewart Underwriter, PA Endorsement 1500 (ALTA 32-06) or PA Endorsement 1510 (ALTA 32.1-06) will need to be issued at closing, upon terms and conditions approved by a Stewart Underwriter and PA Endorsement 1520 (ALTA 33-06) will need to be issued at the time of each construction draw, again subject to requirements approved by a Stewart Underwriter.

Construction cannot commence at the insured premises until the following steps have taken place:

a)   Deed recorded, if applicable;

b)   Mortgage recorded;

c)   Stipulation against liens filed in the Office of the Prothonotary for residential property of three stories or less;

d)   Evidentiary photographs of the property site should be taken verifying that no work was commenced and no materials were furnished prior to the recordation of the Mortgage and the filing of the stipulation against liens;

Is it customary to add a "pending disbursement" clause or mechanic's liens exception in the Loan Policy insuring a construction loan mortgage?

Yes, pending disbursement clauses are used. Where there is no broken priority, use PDCX08 STG:

Pending disbursement of the full proceeds of the loan secured by the Insured Mortgage, this Policy insures only to the extent of the amount actually disbursed for improvements, but increases as each such disbursement is made in good faith and without Knowledge of any defects, liens or encumbrances on the Title, up to the face amount of the Policy. At the time of each such disbursement of the proceeds of the loan, the Title must be continued in writing by the Company for defects, liens or encumbrances on the Title intervening or recorded between Date of Policy and the date of the disbursement.

Where you have broken priority and are relying on the Act 117 Procedure use PDCX21 PA STG:

Pending disbursement of the full proceeds of the construction loan secured by the construction mortgage described in Schedule A, this Policy insures only to the extent of the amount actually disbursed in good faith and without knowledge of any defects, liens or encumbrances on the title, up to the face amount of the Policy. The Company in no way guarantees the sufficiency of the mortgage proceeds as adequate to complete improvements, or against loss because of the failure of the Insured to disburse the entire amount of proceeds of the loan secured by the lien of the Insured Mortgage. This Policy does not insure against the lack of priority of the lien of the Insured Mortgage over any statutory lien for services, labor or material arising from erection, construction, alteration or repair of any improvement or work related to the Land unless at least sixty percent (60%) of the initial loan and future advances secured by the Insured Mortgage are intended to pay or are used to pay all or part of the costs of construction [as “costs of construction” are defined in 49 P.S. § 1201 (15)]. At the time of each disbursement of the proceeds of the loan, the Title must be continued in writing by the Company for defects, liens or encumbrances on the Title intervening or recorded between Date of Policy and the date of the disbursement. Nothing contained in this paragraph limits any exception or any printed provision of this Policy. Notwithstanding any other language contained in the Covered Risks or any other insuring provisions of this Policy, the above provisions are the sole provisions applicable to coverage for loss or damage resulting from mechanic's liens or claims not of record.

Where you have broken priority and PA Endorsement 1500 (ALTA 32-06) or PA Endorsement 1510 (ALTA 32.1-06) along with PA Endorsement 1520 (ALTA 33-06) are used as approved by a Stewart Underwriter, PDCX06 STG or PDCX07 STG may be required.

Also subject to any bulletins relating to mechanic’s liens.

Updated 3/16/21