Michigan's Construction Lien Act: (Part 1)

Michigan's Construction Lien Act, which I will refer to as CLA, is set forth in Chapter 570.1101 through 570.1305 of the Michigan Compiled Laws. I believe that all statutory compilations are easy to understand if you simply break down the relevant sections into digestible bites. When you understand the relevant sections, you understand the whole of the statute.

Many people in the real estate industry seem intimidated by the CLA. I believe the intimidation stems from information overload. The CLA contains numerous sections. A misunderstanding of any particular section can give the practitioner an extreme headache. In today's world, where many suffer from some form of ADD, an understanding of the CLA can seem a daunting task. Well, don't panic. I am here to help you. And it's all free!

My plan is to lay out the CLA in digestible bites. This first article, referenced in the title as "Part 1," will concern the Notice of Commencement. What is the Notice of Commencement and what role does it play in the filing of an "actual" lien? Subsequent articles will cover the remaining sections of the statute that I deem relevant to an overall understanding of the CLA.

The Pocket Hercules would like to help us out. He is here to demonstrate how and when the CLA becomes pertinent.

May, 2011:

Pocket Hercules has just completed his aerobic workout, aptly called "Sweating With the Midgets." He is standing on the deck of his 40 acre farmhouse located in Holly, Michigan. An entire 1/4 of the Southwest 1/4. This is usually the time he pops open a Bud Light and looks forward to watching the Tigers of FSD.

The cat is reading a newspaper, smoking a cigarette, and listening to the Elton John station on Pandora radio. Hercules informs the cat that smoking is bad for his health and, as is usually the case, the cat ignores him.

Now, instead of popping open a beer, he entertains a brilliant thought - I will build a workout facility right behind the pole barn. After all, with his own facility he can train at all hours of the day with his buddies, including Chairman and that clown Dave that he met while fishing for Walleye on Lake St. Clair. Maybe he can even get the cat to change his bad ways.

So how will Hercules accomplish this task?

He makes a few phone calls and decides to hire "Musclehead Building Corporation." Musclehead is a corporation formed in Delaware, with its home office located in Michigan. Schizoid jurisdictional issues. For those of you who understand personal jurisdiction and civil procedure, you may get a kick out of that.

Hercules meets with a representative of Musclehead. They come up with a design for the facility and Musclehead estimates $20,000.00 for completion of the project. Hercules accepts, with scheduled ground breaking of July 5.

You must be aware of and understand the following definitions, as they are key in the reading of the CLA:

"General contractor" means a contractor who contracts with an owner or lessee to provide, directly or indirectly through contracts with subcontractors, suppliers, or laborers, substantially all of the improvements to the property described in the notice of commencement.

"Subcontractor" means a person, other than a laborer or supplier, who pursuant to a contract between himself or herself and a person other than the owner or lessee performs any part of a contractor's contract for an improvement.

"Supplier" means a person who, pursuant to a contract with a contractor or a subcontractor, leases, rents, or in any other manner provides material or equipment that is used in the improvement of real property.

"Laborer" means an individual who, pursuant to a contract with a contractor or subcontractor, provides an improvement to real property through the individual's personal labor.

As a part of Musclehead's standard operating procedure, it hires "Fritz Concrete Company" to lay the foundation for the facility. Fritz now qualifies as a subcontractor of the project, as Fritz has contracted directly with the contractor, Musclehead.

Fritz will obtain a copy of the Notice of Commencement (NOC).

The relevant section in the CLA concerning the NOC is set forth in 570.1108a, which reads, in relevant part:

(1) An owner or lessee contracting for an improvement to a residential structure shall prepare and provide a notice of commencement to a contractor, subcontractor, supplier, or laborer who has made a written request for the notice pursuant to this section.

(2) The notice of commencement shall contain the following information:

(a) The legal description of the real property on which the improvement is to be made.

(b) The name, address, and capacity of the owner or lessee of the real property contracting for the improvement.

(c) The name and address of the fee owner of the real property, if the person contracting for the improvement is a land contract vendee or lessee.

(d) The name and address of the owner's or lessee's designee.

(e) The name and address of the general contractor, if any. The notice of commencement form shall contain the following caption below the line for the general contractor's name and address: (the name of the person with whom you have contracted to provide substantially all the improvements to the property.)

(f) The following statement in boldface type on the front of the form:

WARNING TO HOMEOWNER:

Michigan law requires that you do the following:

1. Complete and return this form to the person who asked for it within 10 days after the date of the postmark on the request.

2. If you do not complete and return this form within the 10 days you may have to pay the expenses incurred in getting the information.

3. If you do not live at the site of the improvement, you must post a copy of this form in a conspicuous place at that site.

You are not required to but should do the following:

1. Complete and post a copy of this form at the place where the improvement is being made, even if you live there.

2. Make and keep a copy of this form for your own records.

(g) The following statement:

“To lien claimants and subsequent purchasers:

Take notice that work is about to commence on an improvement to the real property described in this instrument. A person having a construction lien may preserve the lien by providing a notice of furnishing to the above named designee and the general contractor, if any, and by timely recording a claim of lien, in accordance with law.

A person having a construction lien arising by virtue of work performed on this improvement should refer to the name of the owner or lessee and the legal description appearing in this notice. A person subsequently acquiring an interest in the land described is not required to be named in a claim of lien.

A copy of this notice with an attached form for notice of furnishing may be obtained upon making a written request by certified mail to the above named owner or lessee; the designee; or the person with whom you have contracted.”

The owner, lessee, or designee, within 10 days after the date of mailing of a written request by certified mail from a contractor, subcontractor, supplier, or laborer, shall prepare and provide a copy of the notice of commencement, together with an attached blank notice of furnishing form, to the contractor, subcontractor, supplier, or laborer requesting a copy of the notice of commencement. A contractor, subcontractor, supplier, or laborer who requests a notice of commencement from an owner or lessee of a residential structure shall supply a blank notice of commencement form together with the attached blank notice of furnishing to the owner or lessee at the time the request is made.

So how does the NOC play into our set of facts?

First, the statute suggests, but does not require, that Hercules post a copy of the NOC in a conspicuous place on the property. He is not required to post a copy because he resides there.

Fritz Concrete, seeing no posting, makes a written request, by certified mail, to Hercules for a copy of the NOC. Notice that, in the case of a residential structure, Fritz must supply a blank copy of a Notice of Commencement to Hercules. Hercules then has 10 days in which to return a completed NOC to Fritz.

Why does Fritz need the NOC? The function of NOC is to give a subcontractor, supplier or laborer the proper information for the filing of a Notice of Furnishing. The Notice of Furnishing, covered in Part 2 of this series, is a prerequisite for the filing an actual lien.

The NOC is just as its name implies. It is a notice to relevant parties that work is about to commence. If you believe you are positioned as a possible lien holder, you must contact the parties listed on the NOC.

A word about the NOC to abstractors and examiners. The NOC is only a notice. The NOC is required to be recorded in the case of improvement to commercial property. It is not required that NOC pertaining to a residential structure be recorded. Nonetheless, an NOC is frequently recorded. You should realize that the NOC has no statute of limitation. Unlike the actual lien, which must be enforced within one year of its filing, the NOC is only a notice of an upcoming improvement. Many entities treat the NOC as if it has a one year expiration. That is simply not the case. The danger is this: As you will learn, a lien claimant has 90 days, AFTER COMPLETION OF WORK, in which to file its lien. So, although a NOC is recorded May 1, 2008, actual work may not be completed until let's say September 1, 2011, more than three years after the initial placement of the NOC.

I would recommend that all NOC's be shown on search reports and reflected as a note on all commitments. Why? Because it is recorded evidence that actual physical improvement may still be ongoing as to the subject property. It allows your client to question the owner of the property directly regarding the status of construction. I know many entities rely on the Owner's Affidavit signed at closing. But when papers are flying at the closing table, an affidavit could be signed in error. Showing the recorded NOC to the homeowner and getting direct feedback as to its validity will offer much more protection to the lender in case of a subsequent filing of lien. And, by the way, a subsequently filed construction lien will maintain priority over the newly recorded mortgage, as there is a relation back concerning the construction lien. The construction lien will relate back to the date improvements began. Sneaky stuff!

Please visit my site on Sunday October 23 for a discussion of the Notice of Furnishing. The Notice of Furnishing stems from the Notice of Commencement and brings us closer to the actual filing of the lien.

See ya,

dave