Avoiding Construction Liens in the Post-Recession Economy

Recently President Obama visited the Michigan Assembly Plant in Wayne, Michigan to
laud the recovery of the Ford Motor Company and the overall American auto industry.

The comeback and resurgence of both the auto industry and the overall economy has
also led to new commercial and residential construction. With such will come the
inevitable reality of some contractors and suppliers not being paid and the unfortunate
consequences thereof, including construction liens being placed against the related
properties.

As many in the lending and construction industry can recall, this problem plagued real estate development for nearly 10 years from 2000 to 2010, or so. While not intended to be a legal treatise on construction liens in Michigan, the following are some quick pointers to remind and assist the construction industry, as well as owners and lenders, on how they might avoid unnecessary pain:

1. Have a written contract between the parties. The old saying: “Get it in writing” is most applicable here. While specifically required when improving residential property, a carefully prepared written contract should set forth what is to be done, what materials should be used, when the work and or materials should be provided and the price.

Any variances or modifications should also be in writing, all to avoid and or assist if there is later conflict. If there is a lender involved, its construction department should have the contract and be kept abreast of all changes.

2. If the contractor or materials provider is not being immediately paid, Michigan law requires that within 90 days of that party’s last provision of materials or labor, that it record a claim of lien in the office of the Register of Deeds where the property is located.

While the creation and recording of a valid and enforceable claim of lien has other requirements, the timeliness of recording is mandatory and failure to comply will result in an unnecessary loss of a good source of payment.

3. The lien may have to be foreclosed. Just because the lien is recorded does not mean automatic payment. To legally enforce it, it has to be foreclosed.

While liens can, in fact, otherwise be satisfied during the course of financing or sale of the property, they are invalid after one year, unless, within that one year, the lien claimant files an action to foreclose the lien in the circuit court. While the costs of a foreclosure can be a concern, unlike other areas of jurisprudence where everyone typically pays their own attorney fees, Michigan law can allow attorney fees to a prevailing lien claimant in a construction lien foreclosure action.

4. Beware of Retroactive Priority of a Claim of Lien. Unlike many states, in Michigan, the priority of a construction lien relates back to the first day of actual physical improvement to a property.

For example, the priority of a roofer’s lien relates back to when the excavator dug the first hole. For lenders, knowledge of this concept is critical for maintaining the priority of a construction mortgage. Its construction department should work closely with the contractor and or title company to get those proper sworn statements and waivers to assist in avoiding a loss of priority.

Keeping it Real

While contractors, owners and lenders are busily involved in projects going on in Michigan, hopefully, the above brief summary will serve as a “wake up call” and reminder of those problems that had plagued the Michigan construction related industry in the not too distant past that can easily again rear their ugly heads. Specifics as to the nuances of construction lien law should be addressed with a qualified professional.

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