As an owner, if the contractor on your construction project goes out of business or simply walks off the job, will your company have to pay twice for the same work? As a subcontractor, if your general contractor goes out of business, will you get paid?
The answer to both is “perhaps” — depending on whether your company followed the Michigan Construction Lien Act.
The act grants a person who provides labor or materials for an improvement to real estate the right to lien an owner’s property if payment isn’t received. Designed to ensure payment by the property owner, the act can protect all parties involved — property owner, contractor and subcontractor — if it is employed properly.
But recent closures of a couple general contractors in West Michigan left businesses and subcontractors scrambling with a host of unfinished construction projects and unpaid bills. These shutdowns underscored the critical importance of understanding the construction lien process in Michigan — and of having a solid set of contracts to protect you, your business and your employees.
Process critical to payment
The Michigan Construction Lien Act traces its roots to the days of Thomas Jefferson and James Madison, who proposed the first lien statute, which was passed into law in 1791. Known at that time as a “mechanic’s lien,” the law encouraged building in what was to become Washington, D.C., by allowing a property owner to use his land as security for any improvements.
Although mortgages were available, credit was still in its primitive stages, and the paper currency in circulation was inflationary. The boom-and-bust cycle of land speculation made it challenging to put property up as security for a bank loan.
Enter the mechanic’s lien, which allowed builders and small landholders an extra measure of security when it came to financing construction projects — and avoiding foreclosures in the event of a hiccup. The concept spread to other states, which were quick to expand the initial protections and shift some of the risks inherent in building.
In Michigan, construction liens give an avenue for owners, contractors, subcontractors and suppliers to protect themselves. The property owner can require written proof of everyone working on the project and the subcontractor or supplier can furnish written proof of its existence, even if the owner does not ask. Contractor, subcontractor and supplier lien waivers are then exchanged for progress payments, which are typically made every 30 days and cover the material used and the labor performed.
The process has three steps:
- Notice of commencement: Before any “actual physical improvement” takes place, the property owner must post a notice of commencement and record it with the county register of deeds.
- Notice of furnishing: The subcontractor or supplier must send a notice of furnishing to the property owner within 20 days after providing the first labor or material. This informs the owner how many parties are working on the project through the contractor, for what work and in what amount.
- Sworn statement and lien waiver: Contractors must provide a sworn statement to the property owner whenever payment is due or requested. These detailed statements list every subcontractor or supplier who is owed money and therefore could place a lien on the property if they are not paid. Unconditional lien waivers of all the parties listed should accompany the sworn statement.
However, obtaining lien waivers for all the work can present challenges to the contractor. So as to minimize exposure although not completely eliminate it as a concession to the contractor, many property owners will require lien waivers for everything paid to a subcontractor or supplier up to the last progress payment.
So if a party does walk away — or worse, closes its doors — while in the middle of a building project, the most any owner will be out is 30 days, and likewise the innocent contractor, subcontractor or supplier will only have at risk 30 days of unpaid bills. Of course, on large construction projects, a lot can happen in 30 days, so implementation of the full construction lien process may be needed to protect all of the parties.
Like any law, the Michigan Construction Lien Act has nuances and exceptions, so it’s critical to understand the act and get everything spelled out in a contract before the first shovel of dirt is turned. That way, all parties — general contractor, subcontractors, suppliers and owner — should find a positive outcome with no surprises.
Melissa N. Collar is a licensed real estate broker and partner at Warner Norcross & Judd LLP where she chairs the firm’s Real Estate and Condominium practice groups. She can be reached at firstname.lastname@example.org.