Understanding the Michigan Construction Lien Act: A Residential Contractor’s Perspective
Article by Elliott Berlin
As the west Michigan real estate market continues its recovery from the recession, would-be home buyers in many communities are finding themselves in an increasingly competitive market. Newly listed homes are receiving multiple offers within days and selling for more than list price. The resulting housing shortage has led to a surge of new construction. Although residential contractors are undoubtedly enjoying this construction boom, they must also remain wary of the special protections that Michigan law, and in particular the Construction Lien Act, provides to residential home owners.
The overarching goal of the Construction Lien Act was to create a comprehensive system that allowed for the flow of information between property owners, contractors, subcontractors, laborers and suppliers. The act provides a mechanism through which contractors, subcontractors, laborers and suppliers are able to secure payment for services and materials provided by making a claim against the real estate that they have improved. At the same time, the act allows property owners to protect their property from unwarranted liens and to avoid paying for construction services twice. Information is shared between property owners and those parties providing improvements to the property through a series of documents that must be recorded, posted or exchanged at specified times. The scope of each party’s responsibilities under the act is broad; and even contractors who are generally familiar with the process for perfecting a claim of lien under the act must be aware of certain nuances that apply when working on residential projects.
Under the act, a residential structure is defined as “an individual residential condominium unit or a residential building containing not more than 2 residential units . . .” It is not sufficient, however, that a structure will be used for residential purposes in general. Instead, the structure must be one in which the owner or lessee contracting for the improvement is residing or will reside upon completion of the improvement.
In order to assert a valid lien against a residential property, a contractor must have provided the improvement to the property under a written contract with the owner or lessee of the property. The requirement that the contract be in writing applies not only to the original contract between the parties, but also to any amendments or additions to the contract. Accordingly, a contractor’s lien is limited to the difference between the amount actually paid to the contractor and the total amount specified by the written contract, including any written additions or amendments.
The written contract must also contain certain elements: (1) a statement that all residential builders, electricians, plumbers and mechanical contractors are required to be licensed by law; (2) a statement that the contractor, if required to be licensed, is actually licensed; and (3) the contractor’s license number. As a result, an unlicensed residential builder or contractor is also prohibited from filing a lien against residential property. Any owner or person affected by a lien filed by an unlicensed contractor may bring an action to discharge the lien and recover all damages resulting from the recording and any attempts to enforce the lien, including actual attorney fees and costs. Additionally, although separate from the provisions of the Construction Lien Act, unlicensed contractors should be aware that they have no right to compensation for services provided for which a license was required and the performance of such services may make them subject to a civil fine of up to $25,000 plus damages or restitution.
As a practical matter, residential and commercial contractors can avoid running afoul of the Construction Lien Act and costly litigation by working with experienced legal counsel to develop contracts that meet the act’s requirements and a system of procedures that simplify compliance with act’s technical aspects.
Posted on November 08, 2016
Tagged as Real Estate