Michigan's Construction Lien Act: (Part 3)

In this article, part 3 of a series concerning the Michigan Construction Lien Act, I will be discussing two segments that are closely related: 1) Sworn Statement, and 2) Waiver of Construction Lien. These are often collectively referred to as "Sworn Statements and Waivers."

Before I begin, I would like to remind the reader of a few things. Remember that a contractor contracts directly with the owner. The subcontractor contracts with the contractor to perform a portion of the contractor's overall contract with the owner. There may exist multiple mini-contracts between multiple parties, all designed to satisfy the original contract between the general contractor and the owner.

Section 570.1110 contains the statutory provisions regarding the sworn statement.

The sworn statement is a very practical device that is used to identify all contracting parties that remain unpaid as of the date the sworn statement is issued. The owner may rely on the statement, as issued by the contractor or subcontractor.

The contractor or subcontractor must supply a sworn statement to the owner when a request for payment is made.

The typical scenario is this: The general contractor has completed a portion of the overall contract with the owner and is now requesting partial payment from the owner. To accomplish this, the general contractor will prepare and submit a sworn statement to the owner. The sworn statement will display to the owner who is still owed money, if any that be.

Now, don't forget, there may be one or more subcontractors on the job. If the subcontractors have engaged contracts of their own, each subcontractor will have to supply a sworn statement as well. The owner wants to know who, if any, remain unpaid.

The owner wants to avoid construction lien(s) being placed on their property. They do this by utilizing Section 570.1115, which contains the statutory provisions regarding waiver of construction lien.

A lien claimant who receives FULL payment for his or her contract shall provide to the owner, lessee, or designee a full unconditional waiver of lien.

A lien claimant who receives PARTIAL payment for his or her contract shall provide to the owner, lessee, or designee a partial unconditional waiver of the lien for the amount which the lien claimant has received, if the owner, lessee, or designee requests the partial unconditional waiver.

A partial conditional waiver of lien or a full conditional waiver of lien shall be effective upon payment of the amount indicated in the waiver.

As disclosed, waivers come in the following forms:

1) Full unconditional waiver;
2) Full conditional waiver;
3) Partial unconditional waiver; and
4) Partial conditional waiver.

The conditional waivers are conditioned on the payment of a specific amount of money. When that money is paid, the lien rights will be waived up to the date of waiver.

Summary:

Sworn statements and waivers are highly utilized by title agencies involved in the new construction market. For example, an original construction loan may be for an amount of 5 million dollars. The title underwriter will only insure to the amount actually disbursed on the date the the original loan policy is issued. Let's assume that only $500,000.00 of this 5 million was disbursed on March 1, 2010. When the bank disburses additional money, it will seek to have a "date-down" endorsement attached to its original loan policy. This endorsement simply increases the amount of the coverage to the current amount disbursed. It also moves the policy date forward.

The title underwriter will not issue such endorsement until its agency has procured all necessary sworn statements and waivers. In this way, it can be comfortable that a party performing work on the property will not maintain a lien superior to that of the newly disbursed amount.

Sworn statements and waivers are designed to assist the parties in their dealings with one another. It offers a way for all parties to be dealt with fairly. As with anything, it is never a problem until it is a problem. Lack of honesty and sloppy paper work often contribute to problems between the parties.

The next section in this series will concern the construction "lien" itself. I hope to conclude this series in that article. I will also be offering an overall summary of the Construction Lien Act that I hope will leave the reader with a general understanding of its function.

Take care,

dave