Presentation by Bodman Construction Practice Group Partners Matthew T. Jane and Matthew R. Rechtien at the Washtenaw Contractors Association (WCA)'s Emerging Professionals in Construction (EPIC) program on March 10, 2016. An overview of the Michigan Construction Lien Act and how construction liens work. Modern construction lien statutes provide procedures that allow builders who make property improvements on credit to have assurance (or security) of payment, while property owners protect themselves against double-payment. Knowing and following the process to preserve and enforce lien rights will provide real estate improvers security for the debt owed, bargaining leverage, and a way to seek payment from the owner or interested party. Matthew T. Jane is a member in Bodman's Ann Arbor office, focusing in construction law, contracts, and general business litigation, including contract development and negotiation, construction liens, construction defect and delay claims design errors and omissions, insurance matters, and disputes under the Uniform Commercial Code. He is active in local construction industry & bar associations and was recently listed as a 2015 Michigan Super Lawyer for Construction Litigation. Matthew R. Rechtien is a member in Bodman's Ann Arbor office, focusing his practice in construction law as well as commercial & insurance litigation. He is a licensed professional engineer, and prior to law school, Matt worked as a consulting structural engineer in Texas, designing structures for buildings & stadiums. He is listed as a "Rising Star" in Construction Litigation in the 2015 edition of Michigan Super Lawyers. Bodman's Construction practice group represents owners, developers, architects, engineers, general contracts, construction manager, and specialty and other subcontractors both public and private projects. We have extensive experience representing clients in various phases of the construction project process, including the acquisition & development of real estate; project bonding & financing; contract negotiation; risk management; employment issues; zoning & land use; intellectual property matters; and claim avoidance, litigation & alternative dispute resolution (ADR). For more information, please visit http://www.bodmanlaw.com

1. © 2016 Bodman PLC
Washtenaw Contractors Association – EPIC Program
Matthew T. Jane • Matthew R. Rechtien
March 10, 2016
Managing the Construction Lien Process:
A Primer on the Lien Act and Recurring Pitfalls

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The Problem
• Have you ever done work and not gotten paid?
– Construction is volatile business; companies come and go.
– Work is often on credit, for promise to pay.
– Fragile reliance on cash-flow, i.e., “upstream” money to pay “downstream”
obligations.
– Parties in “stream” may be shells, with no real capitalization or “collectability.”
• Significant risk party you contracted with, will not pay, even if you complete work.
• Parties providing work produce real value to property.
• Through careful contracting on each project, possible to allocate risks, but
transaction costs would be high.
.

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The Solution
• The Lien Act was enacted in 1980 (effective 1982).
• Complex system of “mechanic’s liens” existed before.
– Nearly all states have analog.
• Purposes:
– To provide procedures through which:
• Builders improving property on credit get security for payment.
• Owners to protect themselves against double-payment.
– “Remedial statute … liberally construed to secure” its “beneficial results” –
“substantial compliance”
• Avoids “reinventing wheel” of risk allocation and payment processes.
• “Oils the gears” of commerce; reduces transaction costs.
– Creates automatic rights and obligations, implied by law.

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Why You Should Protect
Your Lien Rights
• Preserving and enforcing your lien:
– Provides security for the debt owed
– Provides you with bargaining leverage
– Allows you to bring other parties to bear
against debtor, e.g., owner can pressure
architect or contractor
– May be your only means of payment if the
party you contracted with goes out of
business, or bankrupt, etc.
– Gives you avenue to seek payment from real
party in interest.
• But, requires knowing & following process.

5. © 2016 Bodman PLC
A Construction Lien:
• Lien Act gives improvers of property a lien on
property.
• Black’s: a lien is “[a] legal right or interest that a
creditor has in another’s property, lasting usually
until a debt or duty that it secures is satisfied.”
• Most common lien: A mortgage.
• Arises automatically; lost if not perfected.

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Creation of the Lien
• Creation is, by law, automatic.
• “Each contractor, subcontractor, [or] supplier …
who provides an improvement to real property
has a construction lien upon the interest of the
owner … “
• Real Property: buildings, heavy machinery, etc.

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A Construction Lien
Protects:
• Anyone who provides an improvement to
real estate pursuant to a contract
• Contractors
• Subcontractors
• Suppliers
• Laborers
• Examples:
– Construction management
– Design professionals
– Equipment rental
• But not lawyers, accountants, marketing

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Important Definitions
• Improvement – Result of labor or material provided by contractor, subcontractor,
supplier, or laborer pursuant to contract
• Contractor – Anyone who has a direct contract with Owner who provides
improvement
• Subcontractor – Engaged by contractor – no direct contract with Owner
• Supplier – Provides material (no labor) – no direct contract with Owner
• Laborer – Provides improvement through personal labor pursuant to contract with
contractor or subcontractor
• Project – the aggregate of improvements contracted for by the contracting owner –
defined by the Notice of Commencement
• Contract – means a contract, of whatever nature, for the providing of improvements
to real property, including any and all additions to, deletions from, and amendments
to the contract

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Limitations on Lien Rights
• Value:
– Capped at “the amount of the lien claimant’s contract less payments made on
the contract.”
– Consequential damages, i.e., delays, etc., not typically included.
– The “amount of lien claimant’s contract” could include “extras,” interest and
time/price differential charges.
– Sum of value of all liens attached to properly cannot “exceed the amount the
owner … agreed to pay the person with whom he or she contracted for the
improvement … less payments made … pursuant to contractor’s sworn
statement or waiver of lien …”
• Limited to interest of Owner/Lessee described in NOC; tenant improvement problem.

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Overview of the Perfection Process

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Record and
Post Notice of
Commencement
First Actual
Physical Improvement
First Date
of Work
Service of
Notice of
Furnishing
Sworn
Statement
Last Date
of Work
Filing
Claim of
Lien Lawsuit
20 Days 90 Days 1 Year15 Days
Service
of Claim
of Lien
Notice of Commencement  Record and/or post prior to Commencement
of Construction
Notice of Furnishing  Service within 20 days of first date of work
Sworn Statement  When requested, when payment requested,
but always prior to lawsuit
Claim of Lien  File within 90 days of last date of work
Service of Claim of Lien  Within 15 days of filing of Claim of Lien
Filing of Lawsuit  Within 1 year of recording of Claim of Lien
Construction Lien Timeline

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Notice of Commencement (Residential)

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Notice of Commencement (Commercial)

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Notice of Commencement

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Notice of Furnishing

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Sworn Statement

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Sworn Statement – When Required
• Contractor must provide to Owner:
– When payment is due
– When Contractor requests payment
– Upon demand of Owner
– Prior to filing lawsuit*
• Subcontractor must provide to Owner or Lessee:
– Upon demand of Owner or Lessee
– Prior to filing lawsuit*
• Subcontractor must provide Sworn Statement to Contractor:
– When payment is due to the Subcontractor from the Contractor
– When the Subcontractor requests payment from the Contractor

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Information Required
in Sworn Statement
• List of each subcontractor, supplier, or laborer
providing labor or material
• Type of improvement provided
• Total contract price
• Amount already paid
• Amount currently owing
• Amount of laborer wages due but unpaid
• Amount of laborer fringe benefits and
withholdings due but unpaid

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Information Not
Required to Include in
Sworn Statement
• Material furnished by the contractor or
subcontractor out of his or her own inventory –
not purchased specifically for performing the
contract
• Information about contract of party completing the
Sworn Statement, e.g. Contract between Owner
and Contractor
• Balance to Complete (optional)

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Waivers of Lien
• Four types authorized and required by statute
• Partial Unconditional –Progress payment not conditioned upon actual payment
• Partial Conditional – Progress payment conditioned upon actual payment
• Full Unconditional – Full payment not conditioned upon actual payment
• Full Conditional – Full payment conditioned upon actual payment

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The Importance of
Notices of Furnishings,
Sworn Statements and
Lien Wavers
• Notice of Furnishing lets persons upstream know
who is performing work
• Sworn Statement lets upstream person know
who is owed what (snapshot)
• Lien Waver ensures that person receiving
payment cannot file lien as to amounts paid

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Claim of Lien

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Contractor
Lien Requirements
• Include all amounts that you would claim in lien
• File Claim of Lien within 90 days of last date of work
• Serve Claim of Lien on Owner within 15 days of
filing
• Serve Sworn Statement prior to foreclosure lawsuit
• Sue to foreclose within 1 year of recording of claim
of lien

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Priority
• Major issue when sum of liens < value of property.
• All construction liens have same lien priority:
– Attach as of the first actual physical improvement, regardless of date recorded.
• “Actual physical improvement” is an actual physical change in, or alteration of, real
property as a result of labor provided, pursuant to a contract …”
– Alerts a person upon reasonable inspection of the existence of an improvement;
major source of battle.
– Does not include preparation for alteration: surveying, soil boring and testing,
engineering planning, or supplies delivered to or stored at the real property. No
visible notice that construction under way.
• Priority for Liens v. Other Recorded Interests.
– Michigan is a race-notice statute – lien’s priority is subordinate to all prior liens of
which the lienor had notice (actual, or constructive [recorded or obvious]).
– Construction lender’s mortgage.

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Special Rules for Liens Against Condominiums
Party Authorizing Work Location of Improvement Effect
Owner, lessee or others Unit or limited common element Only attaches to the unit where work was
performed
Developer, residential builder, or
principal contractor of a condo
project
Work performed on common elements Attaches only to condo units owned by
developer, residential builder, or principal
contractor at time of lien filing
Association of Co-owners of
condo units
Any improvement Attaches to each condo unit but only to
proportional extent that co-owner of condo unit
is required to contribute to admin. expenses per
condo docs
Anyone Work performed on common elements Lien will not attach if work was not contracted
for by developer, residential builder, principal
contractor, or the condo association

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Right to Obtain Contract and Statement
of Amount Due and Unpaid
• Lien claimant may demand that an owner or lessee who contracts for an
improvement to real estate to provide a copy of the contract for the improvement
between the Owner or Lessee and a written statement of the amount due and unpaid
on that date on the contract
• Must be provided within 10 days after receipt of written demand
• Failure to provide information after demand entitles lien claimant to actual damages
sustained due to the failure
• Note that Owner or Lessee can request written statement from lien claimant – failure
to provide allows Owner or Lessee right to withhold payment to lien claimant
until it receives information

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Special Protection for the Residential
Owner
• Lien will not attach to residential project to the extent payments have been made if
Owner files an affidavit with Court stating that Owner has:
– Paid contractor for the improvement to the residential structure according to the
contract and the amount paid and attaching to the affidavit copies of the contract
and evidence of payment
• No right to lien a residential structure unless the work is provided pursuant to a
written contract containing the required licensure language and the lien claimant’s
license number (if a license is required)
• Owner can bring an action to discharge a lien recorded by an unlicensed person and
can recover their costs and attorney fees.

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Foreclosure
• Suing to foreclose perfected lien is end-game.
• Requirements:
– File in County Circuit Court where property is.
– One-year strict limitation from recording of Claim of Lien.
– Upon filing, must record and serve a notice of Lis Pendens (“pending litigation”).
– Join all parties who have interests in property that could be impaired by
foreclosure, i.e., anyone whose title plaintiff is trying to beat.
• Court examines all claims and defenses and to determine the amount due to each lien
claimant, or to any other party holding an interest in the property being foreclosed, as
well as priorities of each.
• Reasonable attorney fees available to prevailing lien claimants, and to prevailing
defendants if action was “vexatious.”
• Claimant can simultaneously sue for breach of contract, unjust enrichment, etc.
• Successful plaintiff can obtain foreclosure judgment, with order to sell and distribute
proceeds – deficiency judgment.

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Common Issues
• Lien claimant “manages” last date of work (punch list vs. warranty work)
• Lien claimant alleges extras and other circumstances that increased the lien claim
• Claim that “first actual physical improvement” predates recordation of bank
mortgage
• Disputes over terms of contract
• Public projects (no lien rights); bonding

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Common Issues
• Is it a “lienable” project? Fixture?
• Late service of NOF (within 20 days of first date of work)
– Effect – lien does not apply to work already paid by owner pursuant to sworn statement
• “Safe harbor” - Unless subcontractor can show owner knew about subcontractor. Better late
than never
• Failure to timely record claim of lien (90 days of last work)
– Total loss of lien rights; no substantial compliance
• Failure to sue within a year; no substantial compliance

38. © 2016 Bodman PLC
Matt Rechtien
mrechtien@bodmanlaw.com
(734) 930-2499
Matt Jane
mjane@bodmanlaw.com
(734) 930-6898
• Representing owners, developers, architects,
engineers, general contractors, construction
managers, specialty, and other
subcontractors
• Construction planning, contracts, risk
management, litigation, arbitration, and
mediation
• Construction team includes a Professional
Engineer, a LEED AP accredited
professional, members of the American
Arbitration Association’s Construction
Arbitration Panel