Bulletin: PA000013

Dear Associates:

Act 52 of 2006 (House Bill 1637 Printers #4229) was approved by the Governor and is effective for all contracts entered into on and after January 1, 2007. Any mechanic's lien filed prior to January 1, 2007, remains a lien and is governed by the current law.

A filed mechanic's lien by a contractor or subcontractor will be subordinate to a purchase money or an open-end construction mortgage.

In order to qualify as a purchase money mortgage:

1. It must be recorded within 10 days of the date on the mortgage document;

2. It can be a Seller Take-Back mortgage; OR

3. The mortgage secures the payment of all or part of the purchase price; AND

4. The mortgage must expressly state that it is a "Purchase Money Mortgage"

If the mortgage to be insured does not meet all the requirements for the purchase money mortgage as stated above, (for example, the proceeds are used to pay off other debt or credit cards) then the mortgage will not be protected from a mechanic's lien.

An Open-End Construction loan must contain all of the following to have priority over mechanics' liens:

1. It must be identified as an "Open-End Mortgage;"

2. It can only secure advances up to the maximum amount of indebtedness;

3. It must only be used for the improvements on the premises;

4. It must clearly state that it secures future advances; AND

5. It cannot be used to payoff other debt.

(These definitions are described in 42 Pa.C.S. §§8141 and 8143)

Under the new amendment, the effectiveness of lien waivers has been greatly diminished. Waivers or Stipulations Against Liens are now considered ?against public policy, unlawful and void? and therefore, ineffective in preventing a mechanic's lien for all commercial projects and for residential buildings for $1,000,000 or more, except:

1. where the waiver is given in conjunction with payment for the work or materials; or

2. when the general contractor has posted a labor and material payment bond guaranteeing payment for the subcontractors work or materialmen's supplies. Contractors may still execute a Waiver or Stipulation Against Liens for Residential buildings under $1,000,000.

Residential building projects are defined as "a project on which a residential building exists, or on land which is zoned or otherwise approved for residential development, planned development or agricultural use, or on which a residential subdivision plan or planned residential development plan has received preliminary, tentative or final approval under the Pennsylvania Municipalities Planning Code."

The definition of a "subcontractor" has been expanded to include a sub-subcontractor; (i.e. one who has a contract with a subcontractor.)

In addition, the time for filing the mechanic's claim has been extended from 4 months to 6 months following the completion of that mechanic's work. Written notice of the filing of the claim must still be served upon the owner within one month after the lien claim is filed.

Please, call the State Underwriting Department with any questions.