Priority of Mechanic's Liens in PA
I. PRIORITIES AMONG MECHANICS’ LIEN HOLDERS AND OTHER LIEN HOLDERS.
A.Erection or Construction of New Improvements Versus Alterations and Repairs. Under 49 P.S. § 1508, a mechanics lien claim “… shall take effect and have priority:
(1). In the case of the erection or construction of an improvement, as of the date of the visible commencement upon the ground of the work of erecting or constructing the improvement; and
(2). In the case of the alteration or repair of an improvement, as of the date of filing of the claim."
The distinction between new construction and alterations and repairs critical to lien priority, and, as will be discussed, to the ability to enforce the lien against a bona fide purchaser for value.
B.New provisions setting priority between mechanics’ liens and certain purchase money mortgages. A mechanics lien of a contractor or subcontractor is be subordinate to the following under the 2006 Act:
(1). A purchase money mortgage, as defined in 42 Pa.C.S. § 8141(1) (relating to time from which liens have priority). A purchase money mortgage as defined by 42 Pa.C.S. § 8141(1) is either of the following:
i. In the case of a mortgage taken by the seller, a mortgage that secures payment of the purchase price to the seller;
ii. In the case of a mortgagee who is not the seller, a mortgage that secures payment of the purchase price to the seller, provided that the mortgage is expressly stated to be a purchase money mortgage. The new provisions appear to be intended to incorporate the proviso in Section 8141(1) that a mortgage that is not from the seller “ … shall not be a purchase money mortgage … unless expressly stated so to be." 42 Pa.C.S.A. § 8141(1).
Unpaid contractors and subcontractors are advised to carefully read any mortgage that is claimed to take precedence. If it was not issued by the seller and it does not expressly indicates that the loaned funds were used to pay the purchase price, the mechanics lien could take precedence.
In a case that did not involve mechanics’ liens. a mortgagee’s bacon was saved by a showing that the mortgagee, seller and buyer had entered into presale agreement that stated the mortgagee was to be secured by a first mortgage and seller was to be secured by s second mortgage. See Farmers Trust Co. v. Bomberger, 362 Pa.Super. 92, 98, 523 A.2d 790, 793 (1987). The mortgage did not contain the required language. It was only because the intention of the parties was clearly set forth in the agreement that the mortgagee’s lien priority was preserved.
iii. Purchase money mortgages have priority from the date they are delivered to the mortgagee, if the mortgage is recorded with 10 days. See 42 Pa.C.S.A. § 8141. A mortgage that otherwise qualifies as a purchase money mortgage under Section 8141 may come ahead of a mechanics’ lien due to the 2006 Act, even if it was not filed within 10 days. This theory is discussed in Mr. Dixon’s article. See EAD Article, page 36.
(2) Open-end Mortgages versus Mechanics’ Liens: Under a provision brought in by the 2006 Act, a mechanics lien is subordinate to an open-end mortgage as defined in 42 Pa.C.S. § 8143(f), the proceeds of which are used to pay all or part of the cost of completing erection, construction, alteration or repair of the mortgaged premises, however, the open end mortgage must meet the definition of “Open-end Mortgage" in 42 Pa.C.S.A. § 8143 in order to have priority:
“A mortgage which secures advances, up to a maximum amount of indebtedness outstanding at any time stated in the mortgage, plus accrued and unpaid interest. Such a mortgage shall be identified at the beginning thereof as an “open-end mortgage" and shall clearly state that it secures future advances, which in the case of a home equity plan, the lender has a contractual obligation to make on the terms and conditions set forth in the mortgage and open-end loan agreement with the borrower. Such open-end mortgage shall be deemed to secure obligatory future advances even though the mortgage or loan agreement contains some or all of the limitations and conditions on the obligation to make advances which are permitted for home equity plans under the Home Equity Loan Consumer Protection Act of 1988 (Public Law 100-709, 102 Stat. 4725) [FN1], as implemented by Regulation Z issued thereunder in 12 CFR 226.5(b) (relating to general disclosure requirements)." 42 Pa.C.S.A. § 8143(f) (emphasis supplied).
The topic is beyond the scope of this outline, but it is important for mortgage lenders operating in Pennsylvania, and their attorneys, to memorize 42 Pa.C.S. §§ 8141 et seq. Viewing these sections three times in a mirror while hanging upside down from the ceiling is recommended.
It is equally important for attorneys representing unpaid contractors to detect any indication that a lender with whom your client is competing for lien priority slipped up in terms of drafting or getting the mortgage recorded in a timely fashion.