In May 2012, the Pennsylvania Superior Court issued its decision in Commerce Bank/Harrisburg, N.A. v. Kessler, effecting fundamental change in the previously understood priority of open-end construction loan mortgages over mechanics liens. At the time of the Kessler decision, the Mechanics Lien Law (“MLL”), 49 P.S. 1101, et seq. provided that, although a mechanics lien for construction of improvements generally has priority as of the date of visible commencement of work, it was subordinate to an open-end mortgage “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…”. The Kessler court interpreted the statute to mean that, in order for the exception to priority to be applicable, all of the loan proceeds secured by the open-end mortgage must be used for such “hard costs,” and none of the loan proceeds could be used for other purposes, such as closing costs, satisfaction of an existing mortgage, or payment of other judgments and liens. As a result of the Kessler decision, lenders have sought to structure transactions to allow for title insurance coverage against mechanics liens for construction loans when visible work commenced prior to the mortgage recording date.
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