Construction Lien Process

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Construction Workers In OutlineWe understand the construction business and the important of the Michigan Construction Lien Act (“Act”).  Very simple if you do not understand and use the Act you should contact us to take advantage of this very helpful Act and avoid the harsh outcomes if the Act is not followed correctly.  Hafke Legal Services has handled a wide variety of construction lien-related matters including but not limited to:  setting up the entire construction lien process, enforcement of liens, collections under liens and avoidance of liens.

Highlights Of The Michigan Construction Lien Act And Contract Law Perfecting A Construction Lien

A. Notice of Commencement.

  • You should  always request a Notice of Commencement at the time you are engaged on the project.
  • The party  contracting for the improvement, usually the owner bears the burden of  preparing the Notice of Commencement.
  • The Notice of Commencement provides certain  information relative to the ownership of the property, the legal  description of the property, the name of the general contractor and the  party to whom notices should be sent to facilitate the lien claimant  perfecting his lien.
  • Commercial –  Record the Notice of Commencement and Post it.
  • The Owner,  Lessee or Designee must furnish the Notice of Commencement to a  sub-contractor, supplier or laborer within 10 days after receiving the  written request by certified mail.
  • Failure to record the Notice of Commencement  extends the time within which a sub-contractor or supplier must provide a  Notice of Furnishing until 20 days after the Notice of Commencement has  been recorded.
  • Residential –  There is no requirement that the Notice of Commencement be recorded but if  the homeowner does not live in the property being improved then a copy of  the Notice of Commencement must be posted at the site.
  • All requests  for Notices of Commencement should be made by certified mail in accordance  with the Act.

B. Notice of Furnishing.

The purpose  of the Notice of Furnishing is to alert the owner that you are supplying  labor or material to the job. This notice allows the owner to take  appropriate action to make sure that the sub-contractor or supplier  receives payment.

  • It is a  notice to the owner and to the contractor showing a particular individual  or entity is providing improvements to real property.
  • Who sends  it? All sub-contractors, suppliers and laborers.

What it must  include:

  1. Name and address of the party who contracted with the sub-contractors and suppliers (the contractor).
  2. Description of the type of work performed (electrical, plumbing, carpentry) or the type of supplies provided (lumber, building materials, equipment).
  3. Names and addresses of the potential lien claimants (sub-contractors, suppliers, laborers).

• When to send  it:

  1. (1) If you are a sub-contractor or supplier, provide the Notice of Furnishing within 20 days of the first delivery of goods and services.
  2. (2) If you are a laborer on the job, send your Notice of Furnishing within 30 days after wages were due.
  • The Notice  of Furnishing must be served by certified mail or personally.
  • A party  dealing directly with an owner or lessee is not required to serve a Notice  of Furnishing to preserve his lien rights.
  • A proof of  service of the Notice of Furnishing must be prepared which verifies that  the Notice of Furnishing was sent to the contractor, owner or other  responsible party.
  • Failure to  provide a Notice of Furnishing may defeat your right to claim a lien later  on if you are not paid. ALWAYS SEND YOUR NOTICE OF FURNISHINGS IN A TIMELY  FASHION.

C. Sworn Statement.

  • What is it?  An itemized list of all individuals who have provided improvements,  materials or labor, and an accounting of all money due them for supplies  or wages.
  • Who  prepares it? A contractor or sub-contractor.
  • When?  Whenever payment is due, or when requested from the owner of the property.
  • Who  receives it? The homeowner or the party acting on his or her behalf  receives it from the contractor. (If you are a sub-contractor, you must  provide a Sworn Statement to the contractor when you request payment.)
  • A Sworn  Statement is not required from a supplier or laborer.
  • The statute  gives the owner the right to rely on the Sworn Statement to avoid the  claim of a sub-contractor, supplier or laborer unless the sub-contractor,  supplier or laborer has provided Notice of Furnishing as required by the  Act.
    The law requires that a Sworn Statement, which gives the description of all work and materials, for which the homeowner is billed, must be prepared whenever payment is requested.

The Sworn Statement must be accurate as of the date it is signed. The statement must be signed in front of a notary and notarized and witnessed. Any attempt to defraud on a Sworn Statement is a criminal offense under the Construction Lien law.

The purpose of the Sworn Statement: The homeowner who pays the contractor expects the contractor to pay all of the applicable sub-contractors, suppliers and laborers on the project. The Sworn Statement tells the homeowner who is owed money, in what amounts and for what supplies or work done. This gives the homeowner a record for the items, which the general contractor is billing for. The money that the general contractor receives from the owner is money, which the general contractor is required to hold in trust for the benefit of the sub-contractors, suppliers and laborers who have furnished materials and labor for the project. The general contractor stands in a fiduciary relationship and by law is obligated to pass these monies down through to the appropriate sub-contractors, suppliers and laborers. Failure to pass the money through to the unpaid sub-contractors, suppliers and laborers is a violation of Michigan law and will expose the general contractor to criminal and civil penalties.

In certain circumstances an owner could choose to pay sub-contractors, suppliers and laborers directly. If they choose to do this, the homeowner should be obtaining Sworn Statements from those individual sub-contractors. Generally prior to a contractor or sub-contractor asserting a Claim of Lien he will be required to provide a Sworn Statement to support the claim.

D. Waivers Of Lien.

  • A contractor,  sub-contractor, supplier or laborer gives a Waiver whenever payment is made. In simple terms, it  is a receipt for payment. Most importantly, it announces to the homeowner  that lien rights are being relinquished – either in full, if full payment was received, or in part, if partial payment was received.
  • Waivers are legal documents that must use prescribed  wording. The text of the Waiver and the filling in of blanks and dates is crucial in determining  what is actually waived. Be certain of the kind of waiver form you sign if  you are a sub-contractor, supplier or laborer.

There are 4  basic types of Waiver forms:

  1. Full unconditional waiver. States that full payment has been received and that there is no claim of lien against the homeowner’s property.
  2. Full Conditional Waiver. States that as soon as full payment is received, or some condition of payment as agreed upon is met, there will be no claim or lien against the homeowner’s property.
  3. Partial Unconditional Waiver. This is a receipt for partial payment. No claim will be made again for this particular amount.
  4. Partial Conditional Waiver. This is a receipt for partial payment, which may still have a condition pending or will be effective as soon as payment is received. Note: With Partial Waivers a balance may still owe, or more work may remain to be done.

E. Claim Of Lien.

The right to a Construction Lien absolutely ceases to exist unless within 90 days after the last labor or material is supplied by a lien claimant, a Claim of Lien is recorded in the County in which the property is located. Of course, in order to have a properly perfected claim of lien, you should have sent out your Notice of Furnishing 20 days after the date you first supplied product or labor to the project.

  • The Claim  of Lien is essentially a legal document,  which will encumber the title to the property when the Lien is recorded. Remember, it must be filed and recorded with the County Register of Deeds  where the property is located. Remember, you must file and record it with  the Register of Deeds within the 90-day time frame. If you wait beyond  that time frame the Lien will not be valid. Once recorded the Claim of Lien is effective for 1 year from the date of recording. A suit to  foreclose the lien must be filed, if at all, within one year from the date of recording. If you wait beyond that you lose your right to foreclose the  lien entirely.

What It  Contains:

  1. The first day labor commenced and materials were provided.
  2. The last day labor was completed and materials were provided.
  3. Name and address of the party or parties placing the claim.
  4. Name and address of the homeowner or lessee obtained from the Notice of Commencement.
  5. The total contract price and the amount paid or received to date and the amount of the Claim of Lien.

Responsibilities  Of Sub-Contractors, Suppliers Or Laborers:

  1. A Claim of Lien must be properly signed, dated and notarized. A Proof of Service of Claim of Lien must also be prepared to prove that all parties have been notified. A Proof of Service of the Notice of Furnishing must also be attached to the Claim of Lien.
  2. Within 15 days after filing the Lien, a sub-contractor, supplier or laborer must present the lien to the homeowner or a designee (bank or other party listed on the Notice of Commencement as responsible).
  3. Once a Claim of Lien is paid then the lien claimant must prepare and file a Discharge of Lien. Parties are strongly urged to consult with counsel to prepare Claims of Lien.

Homeowner Construction Lien Recovery Fund

  • The Fund  only applies in the case of a residential structure.
  • It is in  essence an insurance fund, funded by a $50.00 fee on each licensed  contractor. Other persons who wish to make a claim against the Fund, such  as sub-contractors or suppliers, who are not required by law to be  licensed, may gain the benefit of participation in the Fund by paying a  $50.00 fee.

The creation of this Fund was the result of a compromise between those who felt that homeowners should not be placed in jeopardy of having to pay twice or lose their homes and those who felt some extra means of protection was necessary to sub-contractors, suppliers and laborers who provide improvements to those homeowner’s residences, but were not paid. The Fund essentially is an insurance mechanism under which the sub-contractor, supplier or laborer who is not paid can receive payment without jeopardizing the interest of the homeowner. The title of the Fund is somewhat misleading since it is the lien claimant and not the homeowner who actually recovers from the Fund. Please keep in mind that the Fund only applies to residential construction.

If you as a sub-contractor, supplier or laborer have followed the rules of the Michigan Construction Lien Act, and you properly perfect your claim of lien, and you have nevertheless not been paid by the general contractor, and you are forced to file suit to foreclose the lien, then, the Homeowner Construction Lien Recovery Fund, if the circumstances are appropriate, will step in to pay your claim of lien. It is essential if you find yourself in such a situation to retain qualified legal counsel early on.

Examples of Completed documents, such as the Notice of Commencement, Notice of Furnishing, Waivers of Lien, Claim of Lien and Proofs of Service are included in the handout entitled, “A Guide To The Michigan Homeowner Construction Lien Recovery Fund,” which has been provided by the State of Michigan. Additional copies may be obtained by calling the State of Michigan or the Michigan construction Protection Agencies Web site or (248) 968-0200

Your Contract With The Owner

A. Important Provisions

  • A written  contract is generally required for residential construction and is  generally a pre-requisite to your right to assert a claim of lien if not  paid.
  • The State  of Michigan requires certain language in all residential building  contracts.
  • Identification  of the contract documents, including detailed specifications and  incorporation of the architectural plans.
  •  If owner  supplies the architectural drawings owner should warrant the completeness and efficiency of the design.
  • No  modifications of the contract documents should be binding upon either  party unless they are evidenced by a written change order or amendment to  the contract setting forth a detailed description of the change (addition  or deletion), and the cost, or credit thereof.
  • Payment and  financing. Details of the costs of the contract and manner of payment  should be spelled out in detail. Owner should be required to spell out his  method of financing and detailed disbursement information should be  covered. Additionally the contractor should be entitled to receive written assurances from the owner and/or financing institution of the availability of funds.
  • The  contract should cover owner responsibilities providing timely decision-making  information to contractor.
  • If the  owner is to provide certain materials or work the owner should be mandated  to coordinate its activities with the contractors and the contractor  should be entitled to a contract adjustment if the owner interferes with  the completion of the project.
  • Owner  should warrant that the site for construction is suitable.
  • Owner  should warrant that appropriate zoning is in place for the construction  contemplated.
  • Change  Orders. The contract should spell out that there should be no changes in  the work specified in the contract documents unless accomplished by a  signed written change order.
  • Warranties.  Generally the contractor should spell out the length of time of his  warranty and what the contractor is guaranteeing. The warranty should be  written in such a way that all other expressed or implied warranties,  including the warranty of inhabitability is disclaimed after the specific  warranty period. A limited warranty should be the sole and exclusive  warranty given by the contractor. It should further provide that the  warranty should be effective only when the contractor has received full  payment on the project.
  • The  contract should cover possession and occupancy.
  • The rights  and remedies under default.
  • Required  language under Michigan law.
  • The rights  of the contractor to withdraw if payment is not received.
  • Provisions  for ingress and egress.
  • Provisions  for surveys, if any.
  • Provisions  for insurance
  • Provisions  for arbitration, if applicable.
  • Time of  commencement and substantial completion in project scheduling.
  • Rights to erect signage on the site.
  • Provisions  covering unforeseen conditions.

Liability

All builders and sub-contractors should be cognizant of the risk of liability. Those who work in the construction field should have a qualified insurance representative review their needs to cover liability risks as well as other perils and potential losses.

All  builders and sub-contractors should also seriously consider incorporating  their business to protect their own personal assets. This can be done  through either forming a Michigan Corporation or a Michigan Limited  Liability Company. Properly created and maintained, incorporating your  business will add another layer of protection for your own personal wealth  you have accumulated.