Bulletin: PA2014006

Dear Associates:

On July 9, 2014, Governor Corbett signed Act 117 of 2014, amending Pennsylvania’s Mechanic’s Lien Law of 1963 (Act of August 24, 1963, P.L. 1175, No. 497, 49 P.S. §1101, et seq.). The primary effect of this legislation is to address the Pennsylvania Superior Court’s decision in Commerce Bank/Harrisburg, N.A. v. Kessler. As a result of these amendments, open-end mortgages recorded on or after September 7, 2014, will have regained their “super-priority” over Mechanic’s liens, as long as at least 60% of the proceeds of the open-end mortgage are used to pay or are intended to pay all or part of the “costs of construction”. Revised Section 508 (c) (2) now reads as follows:

“Section 508. Priority of Lien.--The lien of a claim filed under this act shall take effect and have priority as follows:

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

(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.   

A definition of “costs of construction” has been added to section 201 of the Mechanic’s lien law [49 P.S. §1201 (15)], as follows:

“Costs of construction” means 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, consulting fees, accounting fees, management fees, utility fees, tenant improvements, leasing commissions, payment of prior filed or recorded liens or mortgages, including mechanic's liens, 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.

Providing Mechanic’s Lien Coverage Based on Revised Section 508 (c) (2):

While revised Section 508 (c) (2) certainly strengthens our ability to provide Mechanic’s lien coverage to lenders for construction loans, even in a broken priority situation, this coverage cannot automatically be given because the mortgage is an open-end mortgage. If you are requested to provide mechanic’s lien coverage on a loan policy during construction, you must contact a Stewart Title Underwriter for approval to issue this coverage. In order to consider providing Mechanic’s lien coverage based on revised Section 508 (c) (2), it will be necessary for you to provide the following for review and approval:

1. A copy of the proposed open-end mortgage to confirm it complies with the definition set forth in 42 PA.C.S. § 8143 (f) and confirm that it secures future advances and so states that it is an open-end mortgage on its face;
2. An Open-End Construction Mortgage affidavit in the form linked below must be signed by the owner/purchaser and the insured lender acknowledging that at least 60% of the proceeds of the open-end mortgage will be used to pay or are intended to pay all or part of the costs of construction. In the event this affidavit cannot be secured, other evidence that the 60% threshold has been met may be considered such as the construction contract, the construction budget and/or sources and uses of funds for the project;
3. The lender must agree to the use of pending disbursement clause PDCX21 PA STG in the loan policy, which reads as follows:

“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.”

4.  The owner/purchaser must execute the STG Indemnity Agreement: Construction  

After review and approval by a Stewart Title Underwriter, you may be authorized in writing to provide mechanic’s lien coverage to the lender. If you are authorized to provide mechanic’s lien coverage, you may be permitted to remove the standard Mechanic’s lien exception from the loan policy and insert pending disbursement clause PDCX21 PA STG in lieu of the standard exception.

In such event, the additional charge for providing the Mechanic’s lien coverage will be 20% of the base premium in accordance with Section 5.11 B. of the TIRBOP Rate Manual, as amended through September 1, 2014. In the event the parties to the transaction or a Stewart Title Underwriter require the use of PA 1500 or PA 1510 along with PA 1520, please review with a Stewart Title Underwriter the procedure for issuing these endorsements. In any event, before or during construction, you may not delete the general mechanic’s lien exception from a Loan Policy without the written approval of a Stewart Title Underwriter.

The new amendments also allow a property owner or tenant who has paid a general contractor in full or partially to obtain a discharge of liens filed by subcontractors on certain types of residential property to the extent of the payments made to the general contractor. While these amendments to Sections 301 and 510 of the Mechanic’s Lien Law provide a potential mechanism for existing homeowners or tenants to not have to pay twice in order to remove liens filed by subcontractors, these provisions will not alter the way Stewart Title underwrites providing Mechanic’s lien coverage on new home construction and these new sections are not to be relied on for that purpose.

The amendments will be effective September 7, 2014, and apply to Mechanic’s liens perfected on or after that date, even if the work for which the lien is filed was performed prior to the effective date.

If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.

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