SUMMARY OF MECHANICS LIEN LAW FOR MICHIGAN. With Changes for Name of Notice Who Must Use This Notice When How to Serve Verified or notarized?

Transcription

1 SUMMARY OF MECHANICS LIEN LAW FOR MICHIGAN With Changes for 2013 Section Contents Pre-lien Notice(s) Name of Notice Who Must Use This Notice When How to Serve Verified or notarized? Section Contents Mechanic s Lien Who is Entitled to a Lien? When to File/Record Where to File/Record How to Serve Amount of Lien Property Subject to the Lien Furnishing Information Verified or Notarized Priorities Lien Release Bond Miscellaneous Issues Section Contents Lawsuit to Foreclose Lien Introduction When Where to File Arbitration Need a Lawyer? Page 1 of 16

2 General Notes Be Careful: The courts consider a mechanic=s lien to be a privilege and not a right. You receive its benefits only if you strictly adhere to the state law requirements. Bottom line: miss a deadline by one day and you have lost it. Unlike other areas of the law where you can argue equities, find technical exceptions, and lawful excuses, there is no forgiveness here. In this case, knowledge is not only power, it=s a necessity. In this State you will be writing down dates for at least three documents: a) Notice of Furnishing; b) Mechanic=s Lien; and c) lawsuit to foreclose the mechanic=s lien. Write down all the deadlines in your calendar. Use a highlighter or red pen. If you have a staff, use a Afail safe@ system by doubling up and putting it in their calendar also. This reminds you twice. The first calendar entry should be two weeks before the due date as a preliminary reminder. On the second calendar entry, do a white lie to yourself. Put the due date as one week before it is actually due as insurance in case you get busy or need legal advice. Time is money. You will waste a lot of valuable time running around and doing it at the last moment, as opposed to doing it early. PRECONSTRUCTION NOTICE Before the start of any physical work on the project, the owner or lessee (assuming there are tenant improvements) is required to record in the office of the Registrar of Deeds of the county in which the project is located a NOTICE OF COMMENCEMENT. This notice is also required to be posted in a conspicuous place on the project. The purpose of this notice is to give subcontractors and suppliers information about the project, including the information they need to send out their prelien notices. Without this information, it is sometimes difficult to determine the exact name and address of an owner and if you are a subsubcontractor or supplier, you may not know the name and address of the general contractor. Such persons are then in a position to serve their own prelien notice which puts the owner on notice that you are a potential lien claimant and hopefully insures that the money will filter through to you. Michigan requires this notice to have special provisions and information and, therefore, standard forms are usually used. If the Notice of Commencement is not posted at the job site, copies can be obtained from the owner, tenant, general contractor, or subcontractor. These persons are required to furnish copies of the notice upon request. Send the request to the owner or to the person with whom you have a contract, by certified Page 2 of 16

3 mail. You are then required to receive a copy of the Notice of Commencement, with a blank NOTICE OF FURNISHING form. With the information available, you can then fill out the blank form and satisfy your notice requirements. Remember also that each Notice of Commencement is required to have a blank NOTICE OF FURNISHING form attached to it, whether at the recorder=s office of at the site. Always use that standard form since the language it contains is required by the statute. Remember also that the owner or tenant is required to give a copy of the Notice of Commencement and the blank NOTICE OF FURNISHING form to the general contractor. Note also that the Notice of Commencement and the blank NOTICE OF FURNISHING must be kept posted at the job site during the course of the project. It cannot simply be posted in the beginning and taken down. When an owner or tenant fails to record the Notice of Commencement, this gives subcontractors and suppliers extra time to serve their prelien notice. Normally, they must serve that notice within 20 days of first furnishing labor and materials. However, if the Notice of Commencement is recorded late, subcontractors and suppliers have 20 days to serve their notice after the recording of the Notice of Commencement. If the Notice of Commencement is never recorded, it is always safe, nevertheless, to serve your NOTICE OF FURNISHING at least at the time of the recording of your lien. PRELIEN NOTICE This state requires a Notice be sent out before the mechanic=s lien is filed/recorded. For simplicity, this notice will be referred to as a APrelien Notice@. The basic information on this Notice is as follows: Name of Notice: Notice of Furnishing Who Must Use this Notice: When: All contractors, subcontractors, laborers, and material/equipment suppliers who do not have a direct contract with the owner or the owner=s agent. For example, a general contractor with a direct verbal or written contract with the owner who acts as the prime is not required to give the Notice. See Time Deadlines table. How to Serve: Serve the owner and general contractor by certified mail, return receipt requested. After serving it, be sure you keep the return receipt card and fill out a separate proof of service that it was properly mailed. Keep that proof of service in your files. It is Page 3 of 16

4 always a good idea to send out the prelien notice as soon as your contract is signed. That way you will not have to compute the 20-day notice period and you would not have to worry about the time requirements. Even if you have not received a copy of the Notice of Commencement, try to secure the information about the owner and general contractor anyway and send out the notice. This prevents the owner from later claiming that it has a defense in having paid the general contractor in full (meaning you do not get paid). If the owner knows of your existence, they will hopefully insure that you get paid as opposed to simply paying the general and hoping the money filters through. If you are late in sending out the prelien notice, you are still entitled to a lien but possibly in a reduced amount. It will be reduced by the monies paid by the owner to the general before the owner receives a copy of your prelien notice. This means that if the owner has already paid the general in full by the time he or she receives your prelien notice, you are out of luck. This is even more reason to send out the prelien notices early. The prelien notice does not have to be filed with the court or recorded. Verified or Notarized?: A verified notice simply means you sign it and are representing the contents are true and accurate. A notarized notice is signed in front of a Notary Public or other official. This prelien notice does not have to be notarized or verified. MECHANICS= LIENS Who is Entitled to a Lien: A mechanic=s lien is primarily for general contractors, subcontractors, laborers, as well as material/equipment suppliers. As to residential property, the lien may not be recorded if you are unlicensed. If a lien is filed by a general or subcontractor who is not licensed, the owner may bring an action to discharge the lien. In addition, when the owner brings such an action, they may also recover damages from the recording of the lien as well as court costs and attorneys fees. Page 4 of 16

5 When to File/s Record: Where to File/Record: See Time Deadlines table. Recorded in the office of the Registrar of Deeds for the county in which the project is located. How to Serve: Within 15 days after recording the lien, it must be served on the owner by certified mail, return receipt requested, at the address shown on the Notice of Commencement. Service is considered complete on the day of mailing. Make sure you keep a proof of service of the mailing because this will have to later be attached to your lawsuit to foreclose the lien. Many attorneys also recommend that you fill out a AProof of Service@ at the same time you send out the lien and include this in the mailing. A Proof of Service is simply a statement, under penalty of perjury, that you have mailed out the notice on a particular date. Amount of Lien: Primarily for unpaid labor, material, and equipment supplied. Also includes reasonable attorneys fees as awarded by the court to the prevailing party. A special Michigan law attempts to protect homeowners from having to pay twice. In essence, it states that all the liens upon the project cannot exceed the balance owing under the contract between the owner and the general contractor. To determine this amount, change orders are considered as well as deletions and partial payments. The partial payments are what have been paid from the owner to the general as well as payments from the general to the subs and suppliers as long as the general contractor has issued a sworn statement of payment. It is uncertain what will happen if a subcontractor is asked to perform a number of change orders with the general and these change orders are unknown by the owner. Can the subcontractor claim a lien for these additional amounts even if the owner has paid the general in full? Under a strict reading of the statute, the subcontractor would not receive a lien for these change orders, although it could be argued that since the owner has delegated the general contractor to perform the work, the owner should be expected to pay for additional labor Page 5 of 16

6 and materials that benefit his or her property, even though the change order is not signed directly by the owner. Only the court can determine this issue on a case-by-case basis. One way to prevent this is to make sure the owner also signs off on the change orders. Even though a lien is overstated in the amount, it does not necessarily become invalid. It is common for the amount to change at the time of trial and long as it was not filed in bad faith, the court will reduce the amount actually proven without voiding the lien. Attorney s fees. Even if you do not have an attorney s fees clause in your written contract, if you win a lien foreclose action in court, the judge will automatically award reasonable attorney s fees as the prevailing party (Section effective August 23, 2010). Technically, that would mean winning even $1.00. Of course, your attorneys fees would have to be reduced if the amount of recovery was that small. In most cases if a statute provides for attorneys fees for one party, the other party also receives them through mutuality of remedy as the prevailing party. For example, if the owner wins in your lien foreclosure action and does not have to pay any money, they would receive attorneys fees as well. Not in Michigan. The owner must not only prove nothing is owed, but that your claim was vexatious, meaning without substance and in bad faith. So, for example, if you have a $10,000 lien but because of back charges, alleged defects, and other defenses, you end up getting nothing, attorneys fees are awarded only if you prosecuted a knowingly false lien. Interest or finance charges can be included in your mechanic s lien, but only under certain circumstances. A subcontractor or supplier may receive interest on their lien amount: a) if they have a provision in their contract with a another sub or the general that provides for it, and b) you only get interest for 90 days after recording the lien. After that period, the interest, by operation of law, ceases. To be able to claim interest, you should have a contract provision which states: Any unpaid balance for labor, materials, or equipment furnished on this project, including change orders, shall be subject to a finance charge of 1 ½% per month. Can a lien claimant enforce a lien not only for unpaid labor and materials, but for damages based on breach of contract? In most states, the answer is emphatically No. The lien can only Page 6 of 16

7 be for the reasonable value of labor and materials actually conferred and which have improved the property. For example, assume a general contractor has completed 50% of the value of the work on a $30,000 contract. Without justification, the homeowner repudiates the contract and denies access to complete the job. In most states, the contractor would only be allowed a lien for $15,000, representing the amount of labor and materials conferred up until the date of breach. The contractor would not be able to request, for example, an additional $5,000 representing lost profits in being prevented from completing the work. But not in Michigan. Section (as of 1982) allows a lien for [a]ny additional damages which the lien claimant may be entitled to as a matter of law, referring to situations in which the contractor was prevented from completely performing the contract. This would appear to allow lost profits, the inability to bid on other jobs, lost investment opportunities, and other consequential damages. Property Subject to the Lien: A mechanic=s lien applies only to private projects. No lien is allowed in public projects against government property. Furnishing Information: Verified or Notarized?: Upon request, the general should furnish others with information about the owner so the required notices and lien can be filled out properly. A verified notice simply means you sign it and are representing the contents are true and accurate. A notarized notice is signed in front of a Notary Public or other official. A verified notice is all that is required in this state. The lien must be notarized but is not required to be verified. Priorities: A mechanic=s lien is entitled to priority over other liens and the construction mortgage as long as some physical work begins before the recording of such a mortgage (Section ). This physical work must be visible and of a kind that would alert a person upon reasonable inspection. This means that surveying, soil boring, and design professional preparation by architects or engineers are not included in the definition of Aactual physical improvement@. However, preliminary grading, for example, would be included. Page 7 of 16

8 If the construction mortgage is recorded before the physical work begins, it will take priority. This is important because sometimes there is not enough equity in the property to take care of both the construction lender and the lien holders. As between the lien claimants, they are all treated as having the same priority. It does not make any difference who files their lien first. Lien Release Bond: A lien may be discharge upon the filing of a cash deposit or a surety bond with the county clerk. The lien claimant continues with the action and upon judgment, can go against the surety bond or deposit. The amount of the bond or cash deposit which is recorded with the county clerk must be for twice the amount of the lien. Miscellaneous Issues: Homeowner s Affidavit: Major change as of August 23, There have been numerous complaints across the country about a residential homeowner paying everything under their contract with the general, but the money not filtering down to the subs and suppliers who then file liens. In taking care of those liens, the homeowner sometimes has to make double payment. On the other hand, general contractors complain they are asked to do extra work (many times the homeowner refuses to sign a change order even though they instructed the contractor to do the work) and should not be handcuffed into the original contract amount. They need to be paid the extras as well. A compromise to this dilemma was enacted in new Section (a) as of August 23, A residential homeowner can file an affidavit with the court stating payment has been made fully under the contract with the general contractor. The affidavit includes a copy of the contract, the amount paid, and canceled checks. If so filed, it prevents subs and suppliers from filing a lien if they are not paid by the general. Note, the Affidavit is not filed with the Register of Deeds as is Page 8 of 16

9 done with a mechanic s lien, but instead with the clerk s office of the court in which the property is located. That s the good news for the homeowner, except the Affidavit must contain a large quantity of information as follows: 1. A description with dates of when payments were made and to whom, 2. Copies of any contracts by the person or persons filing the liens, 3. Copies of all change orders, 4. Evidence of all payments, including but not limited to: copies of canceled checks, receipts, or credit card payments. Note also that the Affidavit must states facts under penalty of perjury and the court will certainly scrutinize any attempt to make false allegations. But what about change orders? The statute is not entirely clear, but it does mention the homeowner must attach copies of change orders to the affidavit. This implies change orders must be paid also. For this reason, it is crucial to receive signed change orders. Frankly, tell your homeowner that unless the change orders signed, the work will not be done, citing the requirements of Michigan law. If your contract with the homeowner is verbal, they can also file the affidavit stating full payment has been made. There is then a rebuttal presumption they can cut-off lien rights to the extent of those payments. To overcome this is a heavy burden: it requires clear and convincing evidence that full payment has not been made. Condos and Subdivisions: Condominium projects can generally be categorized into work done to the common areas or to the condominium units themselves. For a lien to attach to the common areas, one must have a contract with either the developer or the condominium association. As to work on condominium units themselves, either new construction or renovation, the lien attaches to each condo unit to the extent each owner is required to contribute to the association and if the condo association authorizes the work in the first place. Finally, if an individual condo owner authorizes work to his or her property, a lien can apply only to that individual unit. Page 9 of 16

10 Licensing: Sworn Statement: Residential home builders must be licensed at the time they enter into a contract. It is also important that the legal entity that entered into the contract, whether it is a limited liability company or a corporation, is the one that is licensed at the time of entering into such contract, not just the individual contractor himself or herself. Under previously law, on both residential and commercial projects, general contractors, and many times subcontractors, were required to fill out, verify, and have notarized a SWORN STATEMENT ( Statement ) and serve it as a condition to receiving payment. This lists all subcontractors, subsubcontractors, material and equipment suppliers, and laborers with whom the person has a contract and describes the amounts unpaid, if any. As of 6/28/07, the law changed and now requires the Statement only on residential projects. It is required currently in the following cases: 1) General Contractors: Before being paid for any progress or final payments. It is served on the Owner. 2) Subcontractors and Suppliers: Serve on the general contractor before being paid for any progress of final payment. Serve on the owner only if requested. There is no need to furnish a list of material or equipment suppliers or the materials themselves in the Statement that are part of your own inventory and were not purchased specifically for a particular project. If the Statement shows subcontractors, suppliers, or laborers are unpaid, the owner has the election to withhold these monies from the general and pay the claimants directly. However, if the owner does this, on the first occasion there must be 5 days= notice to the general. And, upon request by the general, the owner must give an itemized statement describing the exact amounts withheld and the amounts paid directly so the general can reconcile his or her books. The obvious purpose of the Statement is for the owner or the general to know whether suppliers and subs have been paid in full and to insure they do not file liens. If you get a call from the general or owner (and code section (6) requires a residential owner to call you if they get a copy of the Page 10 of 16

11 Statement), by all means, speak with them and make sure you tell them you have not actually been paid if this has occurred. The owner or general will be calling you to confirm that they received the Statement and also to make sure the statements contained therein are true. Unfortunately, Michigan has had a bad experience with false sworn Statements in which someone represents that the persons they have contracted with (subcontractors, sub-subcontractors, and suppliers) were paid when this was not true. This will also give you a great opportunity to get paid. And, by all means, if you get such a call, ask that a copy of the Statement be sent to you it must be sent within 10 business days as a matter of law if requested. There is also a form titled: Sub s Request for a Copy of a Sworn Statement on this site which can be used by a sub to request the owner/general send them a copy of the Statement. Specifically, as to residential property only, once an owner receives a copy of the Statement from the general, it must notify all subs and suppliers (who have sent a Notice of Furnishing) either a) in writing, b) by a phone call, c) or personally, that it has received the Statement. Note also that owners or their agents sometimes request verbally or in writing that you as a subcontractor, subsubcontractor, or supplier send them a sworn statement that you have paid persons under you and in which you have contracts. Make sure you do so, as it is required under code section (2). If a general receives the Statement from a sub, does the general have an obligation to call the sub-subcontractors or suppliers to the subcontractor and verify the statements contained in the Statement are true? No. But, it might be a good idea. It smokes out the sub-subs to see if the information is correct. But, if you discover a sub-sub is still owed money or the information is inaccurate, the general cannot withhold money from the next payment to the subcontractor. However, under section (7), on written demand from the general, the owner must withhold further payments and pay those sub-subs directly. Under a recent case in 2008, the sworn statement should be notarized. Page 11 of 16

12 Be very careful about making a false sworn statement. It is a crime which carries stiff penalties. For example, if the payment you receive is for over $1,000.00, it is a felony, with jail time and there can be a fine of three times the amount of the payment or $10,000.00, whichever is greater. This is an obvious attempt by the state of Michigan to crack down on false statements that have prejudiced the rights of owners. If the general contractor or subcontractor fails to provide the sworn statement, this person will not be entitled to a mechanic=s lien. Proof of Service of Notice of Furnishing: A subcontractor or supplier must attach a Proof of Service of the prelien notice to the mechanic=s lien. It is therefore important to keep all such Proofs of Service so they can later be attached to the lien. Furnishing Information to Owner on Request: If an owner receive a mechanic=s lien, he or she may request the general contractor, subcontractor, or supplier to provide a written statement which contains the following information: (1) the amount of labor and materials furnished to the date of the statement; (2) any amount remaining due for labor and materials furnished to date; and (3) the balance on the contract to be performed. For this reason, it is important to keep good records. The owner or general contractor does not have to make payment until receipt of this information. Lien Recovery Fund: Residential owners, after receiving a mechanic=s lien, had been able to file an affidavit with the court stating they have paid everything under the contract with the general contractor. If this was done, lien claimants were no longer allowed to foreclose against the property but must go against the Homeowner Construction Lien Recovery Fund. Definition of ACompletion@: This was one the first funds set-up in the Nation in But because of budget restraints, it became insolvent in October of The governor finally put it to bed by abolising the fund as of August 23, The actual completion of the project is important because this starts the 90-day period for recording the lien. The time is not extended for warranty or Acall-back@ (going back and fixing what Page 12 of 16

13 you have already done) work. This is because warranty work is not considered an in that it does not confer any additional value to the property. Lien Waivers There is a fundamental difference between a lien waiver and lien release. You record a lien release after filing a mechanic s lien and receiving final payment. A lien waiver is signed after you receive a progress draw or final payment and ensures that you will not be filing a mechanic s lien in the future to the extent of the payment. The only problem with lien waivers is that there are times (the check bounces, joint checks, the amount is withheld and disputed, etc.) when you sign such a waiver but do not end up receiving the actual funds. To prevent this, Michigan law requires the owner, if you have sent out a Notice of Furnishing, to call or write you to verify you have actually received a payment reflected in the waiver. The owner cannot rely on the waiver form itself to prevent a later filing of a mechanic lien, if no contact is made. If you are mentioned in the Waiver and have signed it, the owner does not have to call you and verify. LAWSUIT TO FORECLOSE LIEN Introduction: Your lien is not valid forever. Because it directly affects the owner=s title, it has a limited shelf life and must be enforced within a short period of time. That enforcement is done by filing a lawsuit to foreclose. Just like the time deadlines for a Pre- Lien or Mechanic=s Lien, the courts strictly construe these time limits which are called statutes of limitation. Again, if you are literally one day late, the lien is ineffectual. The lawsuit to foreclose shall also allege that the lien claimant is properly licensed. When: Within one year of recording the lien. Where to File: Circuit court of the county in which the project is located. Page 13 of 16

14 Arbitration: Many construction contracts state that all disputes will be decided by binding arbitration, as opposed to a court proceeding by judge or jury. In fact, it has long been a tradition to do so in the construction industry. Arbitration is usually quicker and less costly, especially because it cuts down on expensive discovery. The decision is final and binding, with no right to appeal. You lose your right for a jury trial, but few contractors want that in the first place. You usually pick an experienced construction attorney or retired judge to hear the case in their conference room. It is just like a court proceeding with the same general rules of evidence, but more informal. On the other hand, you can only foreclose your lien through a court proceeding, not arbitration. So, how do you keep your arbitration rights and at the same time preserve your lien rights? Simple. You bring a lawsuit to protect the lien and then immediately request the court to stay the court proceedings. When arbitration is done, you go back to court and turn the arbitration award into a judgment. Need a Lawyer? In this country, every individual has the statutory right to represent themselves. This means they can prepare all necessary papers, appear at hearings, and actually try the case. In so doing, the court considers you to be acting either in pro se or pro per. Before making this decision, consider the following factors: 1. You are a professional and thoroughly know the ins and outs of not only the construction industry but of the project itself. The best lawyer on his or her best day will probably not know more than 50% of what you know. 2. How is your public speaking abilities? If you are uncomfortable speaking to a group, you will even more uncomfortable in court or arbitration. You could be the sharpest wit in town but may not be able to present your arguments. Remember, appearing uncomfortable is perceived as having deficiencies in your case. People usually think that if you are not comfortable about your own facts, then they must not be that strong. Page 14 of 16

15 3. If the other side has a lawyer, you might want to think twice about representing yourself. You will certainly know the facts quite well, but you may be blindsided by legal technicalities. 4. You may also want to think twice if this is a really nasty and emotional case. In other words, if the other side is going for blood. Having a lawyer can shelter you from this emotional trauma. No matter how strong you are, lawsuits are taxing not only on your time, but on your physical and emotional energies. 5. If you have a good case in which you have complied with technicalities and performed good work, you are essentially engaging in a collection action. These actions are typically very simple because there are few defenses or defects alleged by the other side. It makes it easier for you to represent yourself because it is more a question of when and how much they will pay as opposed to whether you will win at all. 6. If you have a binding arbitration provision, you may consider representing yourself. These proceedings are much more informal and the arbitrator tends to give you more leeway. There are also fewer rules and not they are usually not quite as strict. 7. You could consider representing yourself but get advice along the way from a lawyer. It is much cheaper that way. On the other hand, the lawyer cannot watch over every move and you might slip up. Many times lawyers can also help you with preparing the forms, simply putting your name on the pleading. You can also bring in your lawyer at the end to actually try the case. 8. Judges and courts do not give legal advice. They only help you with what forms to use. However, clerks can be invaluable in steering you in the right direction as far as where to file, time limitations, the nature of the form or pleading, etc. But, remember when it comes right down to the ultimate advice, they cannot help you. 9. Judges usually treat you the same as an attorney which means they expect strict compliance with the rules. Although some judges give you more slack, don t count on it. Page 15 of 16

16 10. The biggest dilemma is whether you should hire an attorney for a smaller case, typically in the $5,000 to $10,000 range. You have to watch this because you may eat up that amount in attorney s fees. You never make money on lawsuits, only lawyers do. Try to settle for the best price you can get and move on. Page 16 of 16