State Lien Law Changes Again

February 7, 2008
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Commercial developers applied just enough pressure last year to influence state lawmakers to amend the Michigan Construction Lien Act last summer — a change that came only months after legislators altered the law for the first time in nearly two decades.

Residential developers, though, were not as fortunate, as the first change still applies to their projects.

Starting in January 2007, the state lien law required all developers, regardless of project type, to make sure that every subcontractor that worked on a project had been fully paid by the general contractor. To accomplish this, a project owner would receive a sworn statement from the general contractor affirming that every sub had been paid in full and that the owner should now pay the general contractor.

Before the amendment to the act last year, an owner could assume that all subcontractors had been paid simply by relying on that sworn statement. If a sub later claimed that it hadn’t been paid, the project’s owner was shielded from any responsibility by the sworn statement that came from the general contractor.

But after the amendment last year, the owner of a project was required to check with every subcontractor listed by the general contractor in the sworn statement to make sure those firms were paid in full.

“It put all the burden back on the owner to go through all the paperwork to determine who had been working on the job and follow up with them,” said attorney Bruce Courtade, a partner at Rhoades McKee PC and a member of the firm’s Construction Law Group.

That alteration to the act added layers of paperwork and produced additional costs for owners, especially for those with commercial projects that took a few years to build and had two or three tiers of subcontractors working on them.

“The change that was made significantly increased the burden on all commercial projects and put a lot more duties on the owners of commercial projects,” said Courtade.

The concerns about the new law that commercial developers expressed last winter and spring was strong enough to convince lawmakers in July to remove that requirement from projects. So, in essence, the lien law was returned to what it was before it was changed, and owners of commercial projects are now allowed again to rely on the sworn statement they receive from their general contractor.

“If change is good, then this is awesome,” said Courtade, “because they changed it, and then they went back and they realized they had made it worse, so they scaled back the changes dramatically.”

Courtade said the law interprets mixed-use developments that have commercial and retail space with housing units as residential, and these project owners are still required to check with each subcontractor to make sure they are paid. But in most cases, as with a housing development, there usually aren’t as many tiers of subs for a project owner to contact.

“When you’re building a house, you’re generally dealing with a limited number of contractors. You may have a plumber, an electrician and a drywaller. On a job like building Bridgewater Place, a general contractor is going to hire a HVAC contractor who may hire out portions of that job to two or three different companies,” said Courtade.

“It was an administrative headache for owners.”

State law is also strange for builders of apartment houses. Under the Construction Lien Act, apartment houses are considered commercial developments, and project owners could rely on the statements they get from general contractors. But the state’s occupational code says apartment complexes are considered residences, and owners can’t rely on the statements.

“Under the occupational code, it’s clear that those are residences. Therefore, the belt- and-suspenders approach is you treat it as a residence, and owners have to follow the rules that apply to residences. It’s a murky area,” said Courtade.

Courtade said commercial clients of the firm’s Construction Law Practice complained about the first change to the lien act and took their message to lawmakers in Lansing almost immediately after the amendment became effective. By the following July, legislators rescinded the change and returned the act, at least for commercial developers, to the way it was in the late 1980s.

“There was a sense of relief,” Courtade said of his clients’ reaction to the change. “There was a little frustration in that some of the clients had already implemented changes in the way they were doing everything, and now didn’t have to make those changes. But overall, it was a relief.” CQX

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