Any community association responsible for maintenance, repair, or replacement of the physical features of the community will eventually have to deal with contractors. It would behoove the board of directors to know something about the Michigan Construction Lien Act ("the Act") and how it applies to community associations. Failure to comply with the Act can result in paying for improvements twice.

In its simplest terms, a construction lien, known under the Act as a Claim of Lien, is a claim against real property for money due as a result of providing labor and materials to an improvement of property. Any contractor, subcontractor, laborer, or supplier who supplies labor or material to an improvement is entitled to claim a construction lien. If the contractor, subcontractor, or supplier is not paid, it can record the construction lien and start a lawsuit to foreclose on the property. The court can order a public auction of the property to satisfy the amount of the claim.

The association usually deals only with its general contractor; however, unless that contractor does all of the work himself and supplies all materials out of his paid-in-full stock, there will be subcontractors and suppliers who all expect to be paid. If the general contractor does not pay these "lower tier" people, they will have a right to claim a lien. Unless the association has complied with the relatively simple requirements of the Act, it will have to pay these people, even if the association has already paid the general contractor.

Although there is a certain amount of mystery surrounding the Construction Lien Act and strong resistance by some contractors to complying with it, the requirements are actually fairly easy to understand and implement. It is important to bear in mind that the Act applies to any construction job, regardless of whether the parties have agreed to it or not. The process revolves around 4 documents: the Notice of Commencement, the Notice of Furnishing, the Sworn Statement, and the Lien Waiver. The process begins with the Notice of Commencement.

A Notice of Commencement is nothing more than a notice to the world that the association has contracted for an improvement and work is about to commence. It is the association’s responsibility to prepare this document and record it with the Register of Deeds at the commencement of the project (i.e., shortly after the contract is signed but before work begins). The Notice of Commencement must state:

The name, address, and capacity of the owner or lessee of the real property contracting for the improvement. In the case of a community association making repairs or improvements, the association is the "owner," its capacity is the statutory representative for the community association, and its address is the association’s normal mailing address.

The name and address of the association’s designee. The designee is nothing more than the person the association appoints to receive any notices provided under the Act. The association should name some individual to act as the designee, rather than, for instance, its management company.

The name and address of the general contractor. This is the person or company with whom the association has a contract.

Certain notices required by the Act.

The legal description of the real property on which the improvement is to be made. Determining the correct legal description for the Notice of Commencement can actually be somewhat tricky.

To determine the correct legal description to use, the association must look at the nature of the work being performed. For condominiums, if repairs are being made on the general common elements only (such as repaving roads or repairing the clubhouse roof), the legal description should be "the general common elements of (name of project) condominium, according to the master deed thereof as recorded in Liber (number), Page (number) of Plats, (name) County Records, designated as (name) County Condominium Subdivision Plan No. (number)." If the improvements are being made to limited common elements appurtenant to less than all of the units in the project, the legal description should be "the limited common elements of units (number through number), inclusive, of (name of project) condominium, according to the master deed thereof as recorded in Liber (number), Page (number) of Plats, (name) County Records, designated as (name) County Condominium Subdivision Plan No. (number)." If improvements are being made to the unit or units itself, the association should not ordinarily be involved in the contract at all. A homeowner association, which is not governed by the Michigan Condominium Act and may or may not have vested ownership of the common areas it controls, should consult an attorney to determine the correct legal description to use in the Notice of Commencement.

In addition to preparing and recording the Notice of Commencement, the association must post and keep posted a copy of it in a "conspicuous place" on the project and also provide a copy, together with a blank Notice of Furnishing, to anyone who asks for it in writing.

What is the penalty for failing to prepare and record a Notice of Commencement, or to post it, or to provide a copy? Failure renders the association liable for all costs incurred by a contractor, laborer, or supplier in obtaining the information contained in the Notice of Commencement, and extends the time in which a subcontractor, laborer, or supplier may provide a Notice of Furnishing until 20 days after the Notice of Commencement is recorded and/or provided. If the failure to provide results in the subcontractor, laborer, or supplier recording a lien with a legal description covering less than all of the property subject under the Act, the lien nevertheless attaches to all of the property.

The second document in the process is the Notice of Furnishing. The Notice of Furnishing is simply a notice from a subcontractor, laborer, or supplier that it is providing labor and/or materials to the improvement. The Notice of Furnishing must be provided to the designee and the general contractor, either by personal service (handing them a copy) or by certified mail, within 20 days of the date the subcontractor or supplier first furnishes labor or material. In the case of certified mail, service is complete upon mailing. The Notice of Furnishing must state both the name and address of the subcontractor, laborer, or supplier and the name and address of the person to whom he is supplying labor and/or materials, as well as statutory warnings.

What is the penalty for failure to provide the Notice of Furnishing? The failure of a subcontractor or supplier to provide the notice defeats his right to a construction lien for work performed or materials furnished before service of the Notice of Furnishing to the extent that the owner makes payment pursuant to a Sworn Statement or lien waiver provided by the general contractor. It does not defeat his lien for work performed after he provides a Notice of Furnishing, and it does not defeat his lien if the owner does not request a Sworn Statement and/or waiver of lien from the general contractor.

The next document in the process is the Sworn Statement. The Sworn Statement is simply a list, under oath, of every subcontractor, laborer or supplier with whom the person issuing the statement has contracted relative to the improvement, together with the type of improvement furnished (i.e., labor or materials) the amount of the contract, the amount paid, and the amount owing. The Act provides that a contractor (or subcontractor or supplier) shall provide a Sworn Statement to the association whenever payment is due or whenever the association demands one. Note that the Act makes the providing of a Sworn Statement a pre-condition to paying a contractor, subcontractor, laborer, or supplier: until he provides one, he need not be paid and he may not sue for the balance due.

From the association’s point of view, the Sworn Statement is the heart of the process. It identifies who has and has not been paid, and how much is due them. Armed with the information provided in the Sworn Statement, together with any Notices of Furnishing provided, the association can determine whether it is safe to pay the contractor.

If the Sworn Statement indicates that all subcontractors, suppliers, and laborers have been paid in full AND the association has not received a Notice of Furnishing from anyone else not listed on the Sworn Statement, it is safe to pay the general contractor.

If the Sworn Statement indicates that there are subcontractors, suppliers, and/or laborers who are still owed money, the association may either pay those subcontractors suppliers, or laborers directly, and deduct the amount so paid from the balance due to the general contractor, or withhold payment of the amount indicated unpaid in the Sworn Statement until the contractor obtains lien waivers from those indicated. The association is obligated to give the contractor an accounting of the money so paid or withheld. Before making payment to these lower tier people, the association should also demand a Sworn Statement from them, to ensure that they have paid their subcontractors, laborers, and suppliers. There can be several tiers of subcontractors and sub-subcontractors, and at each level the association must demand a Sworn Statement.

If the association has received a Notice of Furnishing from anyone not listed on the Sworn Statements, the association should investigate with the furnisher as to their status relative to the project. There may be a tier of contractors, which is not revealed in the Sworn Statements. The association should continue investigating until it can draw a flow chart or family tree from the general contractor with whom it contracted down to the most remote sub-sub contractor. There will likely be many branches, but there should not be any "islands" of contractors (revealed by notices of furnishing) not connected in some way to the general contractor; if there are these islands, it indicates a missing link that needs to be investigated.

At the time of making the payment, the association should insist on trading the check for a lien waiver. This is not negotiable, and the association should not accept any "I’ll mail it to you" promises. If the contractor (subcontractor, sub-subcontractor.) wants his check, he will have to give the association a lien waiver to get it.

There are four kinds of lien waivers, and each has its proper use. The four kinds are full unconditional waivers, partial unconditional waivers, full conditional waivers, and partial conditional waivers. A full unconditional waiver is used at the end of the job–it means that the contractor (or subcontractor, or laborer, or supplier) is being paid everything he is due, and he acknowledges receipt of payment. A full conditional waiver is also used at the end of the job, but it means that, upon receipt of payment the contractor acknowledges he is paid in full for the job. The full conditional waiver together with the canceled check equals a full unconditional waiver.

The partial waivers are used when the contract requires progress payments during the progress of the work. The partial unconditional waiver indicates that the contractor has been paid for work performed up to the cutoff point for which payment is made, and receipt of payment is acknowledged. Again, the partial conditional waiver together with the canceled check equal a partial unconditional waiver. A Sworn Statement and a partial waiver of lien should be obtained each time a progress payment is made. In addition to protection from liens, the Sworn Statement and partial waiver act somewhat as status reports for the project. If the contractor is requesting a progress payment and the Sworn Statements indicate that he is spending more than he is receiving, the association knows there may be a problem with the project.

The Sworn Statement and the waivers of lien mesh together. For instance, if the general contractor produces his Sworn Statement indicating that there is one subcontractor who is owed money, the association should obtain a full unconditional waiver of lien from the general contractor, who may in turn provide the association wth a full conditional waiver of lien and a "clean" (no other lower tiers revealed) Sworn Statement from the subcontractor. The association can cut a check to the subcontractor for the amount due it and a check to the general contractor for the amount due it less what is paid to the subcontractor and know that, when the checks are cashed, the job is paid without a potential lien still lurking. Various combinations can appear depending upon the complexity of the flow chart, but the important thing to remember is that the bottom-most tier of Sworn Statements must be "clean" statements and, if final payment for the project is being made, that all lien waivers are full waivers.

On a small job, the paperwork is not particularly involved: one or two Sworn Statements, and a couple of lien waivers. On a large job, there may be many hours involved in tracking Notices of Furnishing, comparing them to sworn statements, and tracking down lien waivers. The larger the job, the more critical it is to comply with the Act, because the stakes are higher. It is important to have someone knowledgeable about the Michigan Construction Lien Act in charge of compliance.

Construction liens pop up with a fair degree of regularity. The recording of a lien is usually (but not necessarily) a warning sign that there is a problem with the project. The strategies in defending against liens is beyond the scope of this article, and the association should immediately consult an attorney if it is notified that a contractor has recorded a lien. However, there are a couple of matters to be aware of.

For condominiums, since a lien for an improvement contracted for by the association attaches to every condominium unit in accordance with its precentage of value for an improvement contracted by the association, the title of every unit in the condominium project is clouded when a construction lien is recorded. In a project of even medium size, one or more units will be in the process of being sold. The co-owner will not be able to complete his closing unless the lien is paid or removed. If the association is disputing the lien with the lien claimant, it will not want to pay the amount of the lien. Fortunately, there is a remedy: the Act provides that a construction lien can be discharged if the party against whose land the lien has been recorded posts a bond for twice the amount of the lien. The bond is posted with the county clerk who then issues a discharge which can be recorded in the chain of title, effectively removing the cloud. The bond may be either a cash bond or a bond backed by an insurance or bonding company. In case of a dispute with a contractor, and upon request of a co-owner, the association should be quick to post the bond to protect the interests of its co-owners. The association does not want to subject itself to secondary claims from co-owners claiming loss of profits from lost sales.

Second, all claims of lien recorded under the Act dissolve automatically one year from the date they are recorded, unless the lien claimant files suit to foreclose the lien. Thus, if there are no title problems, the association can simply sit back and wait out the year. If no suit is filed, it is a relatively simple procedure to obtain a certificate from the county clerk that no suit has been filed and record that certificate to clear title.

Third, liens cannot be waived in advance. In other words, the association cannot require a contractor to waive his right to a lien in advance of doing the work. Such attempted waivers are against public policy (and look bad to a judge). Once the work is done, the lien can be waived.

Finally, community associations should be aware that the Michigan Construction Lien Act allows a lien claimant who is successful in foreclosing its lien to recover its costs and attorney fees. As with condominium lien foreclosures, the attorney fees can sometimes equal or exceed the amount of the underlying claim, so litigating construction lien claims can be exceptionally costly. If a lawsuit is filed, serious settlement negotiations should be taking place right alongside the actual defense of the matter. A lien claimant who has filed suit to foreclose his lien cannot thereafter be required to accept the amount of the lien only, but can hold out for recovery of his attorney fees.

The construction and payment process under the Michigan Construction Lien Act is nothing more than correctly completing the paperwork, but it is extremely important paperwork. The larger the project, the more important the paperwork becomes. While the tendency is to say that the contractor can be "trusted" and therefore the association does not need to bother with the paperwork, the Act is there to protect the association as much as it is to protect the contractor. A board member who ignores the law may find himself facing personal liability for breach of a fiduciary duty to the co-owners.