Matters Column

Contractors ought to take notice of construction liens

April 22, 2016
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West Michigan's building boom continues. In Grand Rapids, each month seems to provide a new medical building to the north of the Center City area or a new office tower to the south. There will also be barrel after barrel of beer to be consumed once another brewmaster completes a production facility and parking structure on the near west side.

So it's a great time to be a building contractor — provided you get paid for your effort.

Just how does one secure payment following participation in the current construction boom? Fortunately, there are rules for that.

Chief among the rules is Michigan's Construction Lien Act, which — although complicated — provides a framework and a system to assure deserving contractors are paid for their work.

The CLA and related statutes provide a method for securing payment of outstanding invoices for services and materials. Perhaps it's no great surprise the laws have many nuances and technicalities.

Construction liens, in general

A contractor, subcontractor, supplier or laborer who provides an improvement to real property may acquire a construction lien under the CLA. The lien attaches to the interest of the owner, lessee or optionee who contracted for the improvement to the property and any interest they may acquire after the improvement is provided.

Construction liens may be asserted against both commercial and residential property, although the requirements for obtaining and enforcing a lien is different in each circumstance. The CLA has specific definitions for many of these terms, such as "residential," and common usage of many terms does not apply.

The CLA has two purposes. The first is to protect the rights of lien claimants to receive payment for labor or materials. The second is to protect owners from paying twice for those services or materials.

CLA basics

The framework for the CLA is a series of notices. The first is a Notice of Commencement. The CLA requires that a property owner or its representative record the NOC with the office of the Register of Deeds in the county in which the property is located and physically post a copy of the NOC on the property, as well.

The intent of the NOC is to provide notice of who actually owns the property to subcontractors, suppliers and laborers, the property's legal description, the general contractor (and design professional, if one is involved) and a general description of the project.

The failure to record an NOC and post it at the property may, under some circumstances, eliminate the second of the CLA's notice requirements, the Notice of Furnishing.

Given the impact a lien can have on a parcel of property and the owner's interest in the property, the CLA requires subcontractors, suppliers and laborers give the owner initial notice of their involvement in providing an improvement to the property.

This is accomplished by providing the owner with an NOF, which serves to alert the owner that the particular subcontractor, supplier or laborer is involved and will expect to be paid. The owner then has the ability to more thoroughly track the project, especially as to payment issues.

The NOF must be provided to the owner within 20 days of the subcontractor, supplier or laborer first providing services or materials. Depending on the circumstances, that timing requirement may be satisfied by substantial compliance. At the same time, the failure to provide the NOF may preclude the ability to pursue a lien.

The third notice is a Sworn Statement. The CLA requires the general contractor to include one with its payment applications. The Sworn Statement should identify anyone providing labor or materials through the general contractor, indicate how much each has been paid and how much remains to be paid to each.

The Sworn Statement should be accompanied by a lien waiver from each subcontractor, supplier and laborer. This enables an owner to track the payments made, and its use may prevent some construction liens. For instance, if an owner makes payments to its general contractor over a Sworn Statement and a supplier or laborer who did not provide an NOF later attempts to assert a lien against the property, the CLA will likely preclude that lien.

The fourth and final notice is the construction lien itself. A construction lien is created by recording a claim of lien document with the office of the Register of Deeds in the county where the improved property is located. The CLA requires certain language appear in the lien, but the physical format of construction liens often varies to some degree.

Liens must be recorded

A construction lien must be recorded within 90 days of the date labor or materials were last provided. This is one of the strictly enforced deadlines and Michigan courts have consistently ruled that a lien recorded more than ninety days after the last labor or materials were provided is invalid.

Lien enforcement

A lien is enforced by the filing of a lawsuit to foreclose the lien. The suit is filed in the circuit court in the county where the improved property is located and the process is somewhat similar to a suit to foreclose a mortgage. The lien claimant is required to prove the validity of its lien.

Once a court rules that a valid lien exists and determines its dollar amount, the property will be ordered sold at a foreclosure sale. The proceeds from the sale will be used to satisfy the lien, or multiple liens, and other encumbrances such as mortgages. Any remaining funds are paid to the property owner.

A lien claimant only has one year from the date its construction lien is recorded to file the foreclosure suit. This is the second of the strictly enforced deadlines. Suits that are filed more than one year after the lien is recorded are typically dismissed by the courts.

The requirements of the CLA may seem daunting and its application often involves technicalities and legal nuances. However, the CLA's system of notices makes a good deal of sense and, with a commitment of a few hours to establish a "system" to handle the paperwork, keeping up with the CLA's requirements is not difficult.

Mark Hills is a partner with Varnum LLP. His practice includes a focus on construction and real estate litigation, including all aspects of construction liens and bond disputes.

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