How to Avoid Construction Liens in Michigan Condominium Projects

Condominium associations hire contractors for capital improvements, repairs and for restoration work to the general and limited common elements, if appropriate. When a condominium association hires a contractor to provide labor, services or materials to the condominium and then fails to make payment for any reason, the contractor may record a construction lien against the condominium unit(s) in the condominium project or sometimes on the entire condominium project itself.

A construction lien in Michigan is a powerful hammer to force payment to a contractor. Once it is filed and recorded with the appropriate Register of Deeds, the lien often makes it impossible for condominium unit owners to sell or refinance, it costs the condominium association time and money (in legal fees) to defend, and generally embroils the condominium association in much unwanted litigation even if the contractor failed to perform quality work. Thus, before an association’s board of directors withholds payment in a dispute with the contractor, the association should weigh the relative risks and potential consequences.

Construction liens are statutory liens that allow certain types of vendors to place a lien against real property when they have created improvements to real property. Both the Construction Lien Act (“CLA”) and the Condominium Act (“CA”) contain provisions detailing when a construction lien may be recorded and upon which parts of the condominium project the lien may attach.

Quick Tips to Protect Against Construction Liens

There are many ways that Michigan condominium associations can protect against construction liens.  First, the association should enter into written contracts and not rely upon oral agreements or base work on a simple work order.  Without a well written and detailed contract, issues will arise as to the scope of the improvements, what happens if there is a default, what if the contractor does not timely do the work and/or finish the work, how are payments to be made, when are payments to be made, can the association withhold a percentage of the contract sum until the contractor completes the punch list, etc.  The association should have its counsel draft a written contract between the parties or at least add an addendum to the contractor’s proffered contract or quote that incorporates provisions that will protect the association and its members’ interest.

Second, the association should not make any payments, even progress payments, unless you are certain that the work has been completed and done properly.  For projects that are larger that will take six or more months and/or involve a large portion of the condominium project, associations should consider hiring construction managers or engineers to oversee the job.  Some community managers with relevant experience can also be hired to oversee the job.  These individuals will ensure that the job is properly done, that it is on schedule and that proper payments are made for the work that has been completed.

Third, if there are issues with the quality of work being performed by the contractor, ensure that it is addressed immediately rather than at the end of the project.  We see many issues arise where association attempts to have the contractor ‘fix’ the problems at the end of the job via the punch list.  Unfortunately, in many instances, the contractor has already been paid most of the contract price, has moved on to other projects and is not as ‘interested’ in completing the tasks up to the association’s standards as the contractor’s focus is elsewhere. Thus, to ensure that problems are properly addressed, they should be discussed with the contractor as they arise as the contractor will be incentivized to address and fix the problems to receive payment.

Fourth, the association needs to ensure that the contractor provides the association with sworn statements and lien waivers (partial and/or full).  In many instances, the lien issues arise because of the contractor’s supplier or subcontractor has not been paid.  Thus, to avoid potential disputes, as progress payments are being made to the contractor, the association must insist on being provided with sworn statements and lien waivers from the contractor’s suppliers and subcontractors.

Finally, the association should ensure that before it pays the contractor in full that it  has compiled a punch list, that the contractor has completed the punch list in full and that it is has received a final sworn statement and full unconditional lien waivers from not only the contractor but all the contractor’s suppliers and subcontractors.

Two prominent Michigan Cases interpreting construction liens in condominium projects

Two Michigan Court of Appeal cases give guidance to developers and associations on how construction liens will impact condominium projects when a contactor is not paid, which will be discussed in detail below.

In the first case, Stock Building Supply, LLC v Department of Energy, Labor and Economic Growth Homeowner Construction Lien Recovery Fund, et al, unpublished opinion per curiam of the Court of Appeals, 2011 WL 1816510 (May 12, 2011, Docket No. 295893), the court held that under the CLA, claims of lien on a site condominium development consisting of individual units must be filed within ninety (90) days of the last furnishing of labor or materials to each individual unit.[1]  When the contract between the contractor and developer does not define “improvement” to the property, a claim must be filed on each individual unit within the development and cannot be filed against the development as a whole, even if the description in the notice of commencement does not describe the individual units.

In Stock Building, the owner of a condominium development project filed two notices of commencement containing a metes and bounds description of two parcels of land that became the first and second phases of the development.  Stock Building Supply, LLC (“Stock Building”) supplied the labor and materials to some, but not all, of the individual condominium units under an agreement that constituted a contract under the Construction Lien Act, but the contract “did not identify any particular project or define the scope of any particular improvement to any specific property.”  Stock Building recorded claims of lien as to Phase I and Phase II of the project within 90 days of the date it last furnished labor or materials to each phase of the condominium development and not on the date it last furnished labor or materials to every individual unit.  The claims of lien referenced the meets and bounds legal description covering the entire parcels of Phase I and Phase II of the project, as set forth in the notice of commencement.  Stock Building did not exclude the individual condominium units from the two claims of lien for which it did not provide any labor or materials.

Stock Building filed an action to foreclose on the two liens and the Defendants argued that Stock Building’s two liens were invalid because they were filed against multiple units and the CLA and the CA required that construction liens may only attach to the specific condominium units to which it provided labor or materials.  Defendants argued that because Stock Building had last supplied labor and materials to Defendants’ individual units outside the 90-day period of MCL 570.1111(1), the two liens were not timely filed.  Stock Building argued that the two liens were valid because the CLA entitled it to rely on the legal description of the property set forth in the notice of commencement which described the parcels used for each phase of the project and did not describe the parcels for the individual units.  Therefore, since each of the liens was filed within 90 days of supplying the last labor or materials to any unit in Phase I or Phase II, Stock Building asserted that the two liens were valid.

The Michigan Court of Appeals rejected Stock Building’s argument because the contract between Stock Building and Defendants did not set forth the scope of improvements to be done by Plaintiff and the labor and materials for each unit were ordered and billed separately.  Therefore, the court determined that the scope of the “improvement” was the labor and materials supplied to each individual unit and Stock Building was required to file its claim of lien within 90 days of the last furnishing of labor or materials to each individual unit. Thus, the Court found that each unit constituted a separate and distinct improvement under the CLA, requiring that a claim of lien be filed against each individual unit within 90 days of the last furnishing of labor or materials to that unit.  Under the plain language of the Construction Lien Act, “the commencement of the 90-day period for filing a claim of lien is determined by the scope of the improvement to be provided, as defined by the contract pursuant to which the labor or material are being furnished.”  Id.

In the other significant case, C.D. Barnes Associates, Inc. v Star Heaven, LLC¸ 300 Mich App 389; 834 NW2d 878 (2013), the Court held that “the scope of an ‘improvement’ is defined by the contract,” and that the contract between C.D. Barnes Associates, Inc. (“CD Barnes”), as the general contractor, and Star Heaven, LLC, the developer, addressed the entire project, not the individual condominium units, unlike that in Stock Building, where the Court held that the improvements were to each individual unit.  Thus, CD Barnes was entitled to use the metes and bounds legal description set forth in the notice of commencement to lien the entire project. Moreover, the court noted that the CD Barnes’ initial improvement to the project was done before the Master Deed had been recorded and which created the individual condominium units.

The CD Barnes case was a priority case between CD Barnes construction lien and Defendant Flagstar Bank’s first mortgage on the condominium project. Instead of entering into a fixed-price contract, CD Barnes and the developer entered into a time and materials contract requiring the CD Barnes to submit monthly invoices with supporting documentation to the developer for work performed at the site. In turn, the developer would pay each invoice within thirty days of receipt.

CD Barnes performed the first actual physical improvement on or about August 10, 2005 and filed a notice of commencement in accordance with section 108 of the CLA, MCL 570.1108, on October 4, 2005. On May 16, 2006, the developer recorded the master deed for the construction project, and subsequently, on May 23, 2006, the defendant bank and the developer closed on their loans, and the defendant’s mortgage was recorded on May 23, 2006.

The last day on which CD Barnes provided labor and materials was May 5, 2008. On May 8, 2008, CD Barnes recorded a total of nine claims of lien totaling $360,909.11. Six of the nine claims of lien referred to specific units within the project, whereas three of the nine liens were filed against the entire project.  The three claims of lien against the entire project used metes and bounds descriptions of the entire property (as described in the notice of commencement dating from 2005) but did not specify dates on which labor or materials were provided to any individual condominium unit within the project.

In examining the validity of CD Barnes’ liens, the Court stated that when CD Barnes “performed its first actual physical improvement,” it “was providing material and labor for a construction project [set] by the metes and bounds . . . [of] the notice of commencement.”[2] The court emphasized the importance that the CLA places on the date of the first actual improvement with respect to determining priority and noted that CD Barnes began working on the project nearly ten months before the master deed was recorded.[3]

Thus, the Court stated that CD Barnes’ liens substantially complied with the CLA because the notice of commencement had likewise utilized “a metes and bounds description for the entire property. The Court rejected Flagstar Bank’s argument that CD Barnes had to file a lien against the individual condominium units after the developer recorded its Master Deed as it would place an undue burden on contractors to monitor whether a property owner alters a project to a condominium project at any point and thus would run contrary to the remedial purpose of the CLA.

Emphasizing that section 111 terminates a construction lien created by the Act unless it is recorded within ninety days of “the lien claimant’s last furnishing . . . of improvement,” the court of appeals declared that this time limit is determined “pursuant to the lien claimant’s contract.”[4] Thus, the court ruled that the contract under which the labor or material is provided necessarily defines the scope regarding the timeliness for lien filings under the CLA.[5]  Here, the Contractor had no written contract regarding the labor and materials it was contributing as improvements.[6] But the CLA does not require a written contract; “it permits a contract ‘of whatever nature.”’[7]

The Court examined section 126 of the CLA, MCL 570.1126, and section 132 of the CA, MCL 559.232.  Section 126 of the CLA, MCL 570.1126 provides that a construction lien will attach as follows: 1) improvements furnished to a condominium or to a limited common element shall attach only to the condominium unit to which the improvement was furnished; 2) for improvements authorized by the developer and performed upon the common elements shall attach only to condominium unit owed by the developer at the time of recording of the claim of lien; 3) for improvements authorized by the association of co-owners shall attach to each condominium unit only to the proportional extent that the co-owner of the condominium unit is required to contribute to the expenses of administration, as provided in the condominium documents; and 4) if the work performed on the common elements is not contracted for by the developer or the association of co-owners, the lien shall not arise or attach to a condominium unit.

Section 132 of the CA, MCL 559.232, provides that: 1) a construction lien for work performed upon a condominium unit or upon a limited common element may attach only to the condominium unit upon which the work was performed or to which the limited common element is appurtenant; 2) for work authorized by the developer, residential builder or principal contractor and performed upon the common elements, the lien may attach only to units owned by the developer, residential builder or principal contractor at the time of recording of the lien; 3) for work authorized by the association, the lien may attach to each unit only to the proportionate extent that the co-owner of the condominium unit is required to contribute to the expenses of administration as provided in the documents; and 4) a lien may not arise or attach to a condominium unit for work performed on the common elements not contracted by the developer, residential builder, principal contractor or the association.

The Court held that since all the evidence suggested that the defendant retained the Contractor as a general contractor, its improvements were deemed to be “in furtherance of the entire project.”[8] Accordingly, since the Contractor filed its claims of lien within ninety days of “its last provision of labor or materials to the project,” the claims of lien were considered timely and applied to the entire project.[9] However, the court’s opinion noted “that the circumstances of the instant case differ from instances in which the parties contract on a unit-by-unit basis.” [10]

Flagstar Bank also appealed the trial court’s ruling that the amount of the lien would not be reduced “for work and materials provided to units that were subsequently sold.”[11] Again, the court of appeals affirmed the trial court and held that under section 107, “‘a construction lien attaches to the entire interest of the owner . . . who contracted for the improvement.”’[12] Flagstar Bank maintained that section 126 of the CLA and section 132 of the Condominium Act required apportionment from the enforceable lien amount on the remaining property because an “improvement” had been “furnished to a condominium unit” within the meaning of those sections.[13] The court of appeals disagreed with Flagstar Bank and reiterated that “the scope of an ‘improvement’ is defined by the contract,” and as the court had previously resolved, the contract addressed the entire project, not the individual condominium units.[14]

Finally, the Court examined the award of attorney fees to CD Barnes. Defendant Flagstar Bank challenged the trial court’s award of attorney fees to CD Barnes.  It argued that section 118(2) of the CLA, MCL 570.1118(2), permits but does not mandate the award of reasonable attorneys’ fees to a lien claimant who is the prevailing party. [15]  Flagstar Bank argued that its defense of the priority action between CD Barnes’ construction lien and its first mortgage was justified.  However, the Court held that the only requirement needed for a trial court to award attorneys fees under its discretion was that the lien claimant be the prevailing party.[16]  Since CD Barnes prevailed, the trial court could award attorneys fees.  However, the court of appeals ruled that the attorneys’ fees could not be part of the amount of the construction lien but had to be awarded by a separate judgment apart from the lien as the CLA “expressly states that the amount of the lien is limited to the amount owed for the work performed”.[17]

In its last-ditch attempt to avoid the award of attorneys’ fees against it, Flagstar argued that if the award of attorneys’ fees was proper, it should have been against the developer as the contracting party with CD Barnes.[18]  However, the Court held that the developer never challenged CD Barnes’ lien, but Flagstar Bank did so.[19]  Thus, CD Barnes prevailed against Flagstar Bank and thus, it was proper for the trial court to award attorneys’ fees against it.

Conclusion

When issues arise with a contractor’s work and whether to pay the contractor, it is important for associations to understand the contractor’s rights under the CLA and the CA to file a construction lien if it is not paid and under which circumstances a construction lien may be recorded and upon which parts of the condominium project the lien may attach.  Although, construction liens can be troublesome, most issues can be avoided by following the proffered steps above.

[1] A contractor, subcontractor, laborer or supplier can obtain a construction lien if, “within 90 days after the lien claimant’s last furnishing of labor or material for the improvement, pursuant to the lien claimant’s contract, a claim of lien is recorded in the office of the register of deeds for each county where the real property to which the improvement was made is located.  A claim of lien shall be valid only as to the real property described in the claim of lien and located within the county where the claim of lien has been recorded.”  MCL 570.1111(1).

[2] See Barnes, 300 Mich App at 413.

[3] Id.

[4] See Barnes, 300 Mich. App. at 418 (emphasis omitted) (quoting MCL 570.1111(1)).

[5] Id. At 419.

[6] Id.

[7] Id. (quoting MCL 570.1103(4)).

[8] See Barnes, 300 Mich App at 419.

[9] Id. At 420.

[10] Id.

[11] Id.

[12] Id. at 421 (omission in original) (quoting MCL 570.1107).

[13] Id. (emphasis omitted) (quoting MCL 570.1126(1)(a)).

[14] Id. at 420.

[15] Id. at 425.

[16] Id. at 427 (citing Vugterveen Sys., Inc. v Olde Millpond Corp., 454 Mich 119, 133; 560 NW 2d 43 (1997).

[17] Id. at 428.

[18] Id.

[19] Id.