This blog is part of an ongoing series discussing the Pennsylvania Mechanics’ Lien Law. For more information on Mechanics’ Liens in Pennsylvania, click here.
Prior to the Amendments to the Pennsylvania Mechanics’ Lien Law of 1963 which became effective January 1, 2007, Mechanics’ Lien Claims were granted priority over Mortgages against the liened property that were recorded after the effective date of the Lien. Under the old law, a Mechanics’ Lien Claim representing amounts due to the Contractor for erection or construction “related back” to the start of work on the property, and Liens representing amounts due for alteration and repair dated from the filing of the Lien Claim. Therefore, a Mechanics’ Lien Claim could have priority over a Mortgage recorded against the property, and a Foreclosure of a Mortgage or Mortgages against the property and resultant Sheriff’s Sale would not extinguish the prior Mechanics’ Lien Claims against the property.
When the General Assembly recently revisited the Pennsylvania Mechanics’ Lien Law – what one Pennsylvania Court called an “antiquated patchwork of statutory enactments” – it did so with the purpose of modernizing the Law and granting greater protection to Contractors and Subcontractors. The General Assembly largely succeeded in doing this by severely restricting the ubiquitous Lien Waivers that had become so commonplace that effective Mechanics’ Lien Claims were often unavailable to the Contractor or Subcontractor left without payment. In exchange for restricting Lien Waivers, however, and under pressure from lobbyists for Mortgage Lenders, the General Assembly changed the statutory framework of Lien priority, subordinating Mechanics’ Lien Claims (regardless of when the Claims are filed) to two common types of Mortgages. Following the Amendments to the Law effective January 1, 2007, Mechanics’ Lien Claims are subordinated to Purchase Money Mortgages and Mortgages securing loans the proceeds of which are used to pay all or part of the cost of completing erection, construction, alteration, or repair.
This change, while seemingly hyper-technical, can have a real dollars and cents impact upon Contractors and Subcontractors in the current Foreclosure climate. As is often the case, homeowners in financial difficulty simply ignore their mortgage payments, accruing interest at a penalty rate, fees, costs and a significant attorney’s commission due to the Mortgage Company in the several months before a Sheriff’s Sale. This, along with falling residential real estate values can put a property “under water,” meaning that by the time of the Sheriff’s Sale, the Mortgage Company is owed more than what the property is worth, and likely owed more than will be bid at the sale. When this happens, the Mechanics’ Lien Claim can be “wiped out” by a Mortgage Lien. The modern Contractor or Subcontractor with a Lien Claim must be certain that a Sheriff’s Sale upon a Mortgage that proposes to extinguish a Lien Claim is of the narrow kind of Mortgages that have absolute priority over Mechanics Lien Claims.
