When an owner contracts with a general contractor for the construction of a residential structure, is it not uncommon for the general contractor to in turn contract with subcontractors for various aspects of the job. Those subcontractors will often purchase materials and hire laborers to perform the work. To assure that all of the contractors, suppliers and laborers are paid, Michigan law gives them the right to a lien on the owner’s property. A lien provides the contractors, suppliers and laborers additional security in the event it becomes difficult or impossible to collect payment for the improvements made to the property.
It is conceivable that an owner of a construction project fully pays the general contractor, but that subcontractors, suppliers or laborers do not get paid. If a subcontractor, supplier or laborer then files a lien on the owner’s property, the owner may have to pay twice to discharge that lien. In an attempt to prevent the owner from having to pay twice while still protecting the security of the contractors, suppliers and laborers, the Michigan legislature has passed a detailed set of laws known as the “Construction Lien Act”. It is this Act that as a general rule gives each contractor, supplier and laborer a lien on real property.
There are exceptions to this general rule. A person required to be licensed as a residential builder does not have a lien unless he is properly licensed. Even a licensed residential builder does not have a lien unless there is a written contract between the owner and the builder and any amendments or additions to that contract are also in writing. A contract between a residential builder and the owner must state that the contractor is licensed and provide the contractor’s license number. Finally, before a residential builder has a right to a lien, his contract with the owner must provide language to the effect that a residential builder is required to be licensed, an electrician is required to be licensed, a plumber is required to be licensed and a mechanical contractor is required to be licensed.
For an owner to protect himself against having to pay twice on a construction project, the owner must have some method of knowing who was working on the project and who has been paid. The Construction Lien Act provides a mechanism by which the owner can obtain this information. Contractors, suppliers and laborers who have not contracted directly with the owner may provide the owner with a notice that he is furnishing labor or materials for the construction project. This notice is called a “Notice of Furnishing”. Contractors and suppliers should provide the owner with this notice within 20 days after first furnishing labor or materials for the project. Laborers should provide this notice within 30 days after wages were due but not paid.
Since subcontractors, suppliers and laborers may not know how to contact the owner, the Michigan Construction Lien Act requires an owner to prepare a “Notice of Commencement”. The “Notice of Commencement” will provide the contractor, supplier or laborer with the name and address of the owner so they can provide the owner with the “Notice of Furnishing”. Although the “Notice of Commencement” does not need to be recorded for the construction of a residential premise, it should be posted in a conspicuous place. Upon request, an owner must provide a contractor, supplier or laborer with a copy of the “Notice of Commencement” along with a blank “Notice of Furnishing”. If a contractor, supplier or laborer fails to provide the owner with a prompt “Notice of Furnishing”, he may lose the right to assert a lien on the property. It is the “Notice of Furnishing” that provides the owner with information about who is working on the project.
Once a contractor, supplier or laborer provides an owner with a “Notice of Furnishing”, the owner has the obligation to make sure they are being paid. Any time payment is due to the general contractor, the general contractor must provide the owner with a sworn statement which identifies every subcontractor, supplier and laborer with whom the general contractor has contracted. Likewise, when a subcontractor seeks payment from the general contractor, the subcontractor must submit a similar sworn statement. It is by reviewing carefully these sworn statements that the owner can be assured that the subcontractors, suppliers and laborers are being paid. If for any reason a owner discovers they have not been paid, the Construction Lien Act allows the owner to withhold from the payment due to the general contractor an amount necessary to pay the subcontractors, suppliers or laborers.
At the time an owner makes a payment, he should also receive Waivers of Lien from the general contractor, subcontractors and suppliers. These waivers may be either full, partial or conditional depending upon the circumstances. By carefully reviewing the sworn statements and making sure he has Waivers of Liens, an owner can be fairly sure that the subcontractors, suppliers and laborers are being paid, thus protecting his property from any liens and protecting himself against the possibility of having to make a double payment.
The Michigan Construction Lien Act is very detailed and must be read carefully before drawing conclusions in any particular factual situation.
