Construction Liens: What General Contractors Need to Know to Get Paid

Running a commercial construction company involves big risks. General contractors often put forward substantial resources in materials and labor, trusting their customers to honor their real estate improvement contracts. When they don't, you may need to fall back on construction liens to get paid. But collecting construction costs through the Michigan Construction Lien Act depends on having the right paperwork in place, even before you start the project.

How the Michigan Construction Lien Act Works

Michigan's Construction Lien Act helps general contractors and subcontractors enforce their construction contracts. When a property owner fails to pay, a company with a properly registered construction lien can collect proceeds from the sale of the property, or even foreclose on the property to get the money they are owed. However, the law will not work unless you follow the proper steps and provide the proper notices to your customers and the state.

Step 1: Prepare and Sign the Commercial Construction Contract

Construction companies should always have a written construction agreement, either through a signed bid form or a fully negotiated construction contract. This contract should lay out the:

  • Scope of work to be performed
  • Estimates of materials and labor costs
  • Payment schedules and amounts
  • Agreement that the contractor may seek enforcement through a construction lien

While a contractor can sometimes take advantage of the Michigan Construction Lien Act without a formal contract, doing so makes it far more difficult to prove that the project is complete, and the property owner has failed to pay in full.

Step 2: File a Notice of Commencement with the Register of Deeds

Before your teams begin any improvement of the property, the property owner is required to record a Notice of Commencement with the Register of Deeds office. This notice should list the:

  • Legal description of the property
  • Names and addresses of the owner and/or lessee of the property
  • General contractor
  • Specific language included in the Construction Lien Act

Property owners may not realize they need to file this notice, so it may be up to you to provide the form.

Step 3: File Notice for Professional Service Contract for Designer Subcontractors

If you are a "design and build" team, your designers may also file a Notice of Professional Services Contract with the Register of Deeds. The notice can be filed at any time after the contract is signed until 90 days after that phase of the work is complete.

Step 4: Begin Work and Send a Notice of Furnishing to the Property Owner

Once work begins, each subcontractor or supplier who provides labor or materials on the project must serve a Notice of Furnishing to the property owner's designee, and the General Contractor within 20 days after the first delivery or day of work.

Step 5: Provide Sworn Statements to the Property Owner

When it is time to collect payment, the General Contractor needs to provide a sworn statement describing each contractor, supplier, and laborer who worked on the project, and an itemized list of amounts due to each person. This notice should reflect payments made to date, and the amount currently owed to each person in the project.

Step 6: Record a Claim of Lien if Payments are Missed

If the property owner doesn't pay on time, you can begin collections efforts. This starts by recording a Claim of Lien at the Register of Deeds' office within 90 days of the last improvement on the property. General contractors, subcontractors, and laborers can all file Claims of Lien.

Step 7: Enforce Construction Lien Through Foreclosure Action in Court

A construction lien is an effective way for general contractors to get paid because it allows them to file a foreclosure action in state court if property owners fail to make payments. These lawsuits must be brought within one year after the claim of lien is recorded and served on the property owner. Often there will be a countersuit for breach of contract if the property owner believes the construction was not completed properly and on time, that is why it is essential to hire an experienced real estate attorney to file and enforce your construction lien.

Step 8: Discharge the Construction Lien Upon Payment or Foreclosure Sale

Often, simply threatening the foreclosure lawsuit is enough to get a property owner to pay off their balance. In other cases, after you win your foreclosure action, the property will be sold at a Sheriff's sale, and you will be paid from the proceeds. No matter how you receive payment, the final step is to discharge the construction lien by sending written confirmation to the owner and anyone else making payments. This will allow the property to be sold or financed in the future.

Assisting General Contractors and Subcontractors in Preparing, Perfecting, and Enforcing Construction Liens

Perfecting and enforcing construction liens can be difficult. That is why every general contractor should have a relationship with an experienced real estate attorney who knows the process and can help ensure your next contract is paid. At Lachman King, our team works with general contractors, subcontractors, and suppliers, helping them with any construction law and litigation challenges. Contact us today to set up a meeting.