..., and Why Your Construction Lien May Be Worthless Under Current Michigan Law
The Michigan Construction Lien Act (“CLA”) provides lien rights to architects and engineers who provide “improvements” to the real property where the project is located. The definition of “improvement” under the CLA specifically includes architectural and engineering services.
However, in many cases the practical value of a construction lien hinges on whether or not the lien will take priority over a bank mortgage on the property. In a mortgage or lien foreclosure lawsuit, the property is ultimately sold and the proceeds distributed. Since real property values in the current economy are frequently less than the amount of the mortgages and liens recorded, obtaining distribution priority will often determine whether or not a design professional lien claimant is paid from the foreclosure proceeds.
In order to determine whether a construction lien has priority over a bank mortgage, the CLA looks to two key dates: (1) the date the bank mortgage was recorded, and (2) the date of the “first actual physical improvement” to the real property. If the mortgage was recorded before the “first actual physical improvement” then the mortgage will take a priority distribution from the foreclosure proceeds, often leaving no proceeds left for any lien claimants. However, if the “first actual physical improvement” occurred before the date the bank recorded its mortgage, then all lien claimants will take priority and be paid first from the foreclosure proceeds – and before the bank.
The problem facing design professionals arises when initial services are performed and the project does not go forward. The design professional has not been paid for its initial work, which could be significant, and there has not been any initial work performed at the project site itself yet – no clearing, grubbing, tree removal, etc.
On February 14, 2012, the Michigan Court of Appeals addressed a very similar situation in the case of William J. Lang Land Clearing, Inc. v Rizzo where an engineer performed initial services, including a topographical survey, property line staking and tree survey where metal tags were nailed to all trees at least six inches in diameter. The engineer followed all technical and timing requirements of the CLA and a foreclosure lawsuit was initiated in an attempt to collect payment.
A bank had recorded a mortgage on the property and the Court looked at whether the engineer’s lien had priority over the bank’s mortgage. The Court held that the engineer’s services were not an “actual physical improvement” as defined by the CLA. For purposes of determining priority the Court noted that an “actual physical improvement” requires a physical change in or alteration to the real property which is readily visible and would alert a person of the existence of an improvement. The improvement must be of a “permanent nature that alerts a person that construction has begun.” The Court found that the survey work, tree markers and other survey indicators were not “of a permanent nature.” So the bank’s mortgage took priority over the engineer’s lien in that case, which likely meant that the engineer was not paid for its work.
This scenario is troubling to many design professionals and particularly those who work on bank financed projects. In response to this dilemma, new legislation is being drafted which would specifically allow design professionals to enforce their lien rights despite the fact that there was no “actual physical improvement” to the real property itself. It is anticipated that this legislation will be introduced soon. In the meantime, design professionals should take extra care when working on bank financed projects.
Ben serves as the Professional Affiliates Director for the AIA Grand Valley Chapter of AIA Michigan. His practice involves working with design professionals in contract review and negotiation, mediation, litigation and arbitration. He also assists businesses with corporate needs and commercial litigation. Hilger Hammond, PC is located at 49 Monroe Center NW, Suite 200, Grand Rapids, Michigan, and Ben can be reached at (616) 458-3600, or hilgerhammond.com.