4 Creating and Perfecting the Construction Lien - ICLE · Cumulative Coverage Election §4.32 3. ... Creating and Perfecting the Construction Lien §4.1 55 ... 4.4 Waiver of Lien—Partial

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4Creating and Perfecting the Construction Lien

I. Overview of the Billing and Payment Process §4.1II. Required Documents §4.2

III. Notice of CommencementA. Commercial Construction

1. Purpose §4.32. Required Contents §4.43. Recording and Posting Requirements §4.54. Provision of Copies to Subcontractors, Suppliers, and Laborers

a. By the Owner §4.6b. By Contractors and Upstream Subcontractors §4.7

5. Availability §4.8B. Residential Construction

1. Comparison to Commercial Construction Notice §4.92. Request for and Provision of Notice §4.103. General Contractor’s Notice Requirements §4.114. An Owner’s Failure to Respond to a Notice Request §4.12

IV. Notice of FurnishingA. Parties Who Must Provide Notice §4.13B. Timing of Notices of Furnishing §4.14C. Consequences of Failure to Provide Notice

1. Subcontractors and Suppliers §4.152. Laborers §4.16

V. Sworn StatementA. Provision of the Sworn Statement to Owners, Lessees, and General

Contractors §4.17B. Effect of a Failure to Provide a Sworn Statement on the Statute of

Limitations §4.18C. Required Contents §4.19D. Reliance on a Sworn Statement; Criminal Penalties §4.20E. Direct Payments to Subcontractors, Suppliers, and Laborers

1. In General §4.212. Impact on Surety Obligations §4.22

VI. Lien WaiversA. In General

1. Introduction §4.232. Comparison of Conditional and Unconditional Waivers §4.24

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3. Provision of Lien Waivers to Owners, Lessees, or Designeesa. Lien Claimants in General §4.25b. Waivers Signed by Agents §4.26c. Failure to Provide a Waiver §4.27

4. Effectiveness of Lien Waiversa. When a Waiver Becomes Effective §4.28b. Rescission of Lien Waivers §4.29

B. Partial Conditional Waivers1. In General §4.302. Required Contents

a. Waiver Amount §4.31b. Cumulative Coverage Election §4.32

3. Effectiveness of Waivers §4.33C. Partial Unconditional Waivers §4.34D. Full Conditional Waivers

1. Required Contents §4.352. Implications of the Form’s Provisions

a. Full Payment Provision §4.36b. Property Description Provision §4.37

3. Payment Adjustments §4.38E. Full Unconditional Waivers §4.39F. Advance Waivers of Lien Rights §4.40

VII. Claim of LienA. In General §4.41B. Required Contents §4.42C. Location for Filing a Claim of Lien §4.43D. Source of the Property Description

1. Reliance on a Notice of Commencement §4.442. Inaccurate Notice of Commencement §4.45

E. Amount of the Lien1. Consequences of an Overstatement of the Amount §4.462. Inclusion of Extras §4.473. Work Outside the Scope of the Contract §4.484. Determining the Amount of a Claim Before the Completion of

the Contracta. Ongoing Contracts §4.49b. Termination of Partially Performed Contracts §4.50

F. Time Limitations for Filing a Claim1. When a Claim Must Be Recorded §4.512. When Labor or Materials Are Last Furnished §4.523. Impact of Warranty Work §4.534. Substantial Compliance with the Limitations Period §4.545. Filing a Claim Before Work Is Completed §4.556. Need to File a Claim Before the Last Possible Date §4.56

G. Service of a Claim §4.57H. Residential Liens §4.58



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VIII. Practical Tips for PartiesA. Lien Claimants §4.59B. Owners and Lessors §4.60

IX. Overview of Selected Construction Lien Documents §4.61Forms

4.1 Notice of Commencement—Residential/Nonresidential4.2 Notice of Furnishing (Improvement to Real Property)4.3 Sworn Statement4.4 Waiver of Lien—Partial Conditional4.5 Waiver of Lien—Partial Unconditional4.6 Waiver of Lien—Full Conditional4.7 Waiver of Lien—Full Unconditional4.8 Claim of Lien4.9 Proof of Service of Notice of Furnishing4.10 Proof of Service of Claim of Lien

I. Overview of the Billing and Payment Process§4.1 The Construction Lien Act (CLA) operates on principles of

notice and self-protection. The documentation the act requires is intended to pro-vide information to those involved with a project who need to preserve lien inter-ests or who need to learn about potential lien interests in the property. Theinformation gives those parties the means to initiate self-protection measures.Moreover, the documentation is designed to work in the context of the typicalprocess by which projects are financed and progress payments are made alongchains of contracts. The documentation can accommodate the notice require-ments of even those who are not involved with the project, including lenders whoare the source of the monthly draws that start the flow of payments along the dif-ferent layers of project participants.

The logic of the CLA’s notice and documentation requirements is evidentwhen examined in light of the payment procedure followed on many projects.Typically, the construction is financed through a construction loan advanced by abank or other financial institution. A lender usually secures its interest in theproperty and its advances of construction funds by a mortgage on the propertythat is to be the construction site. Since the priority of all later construction liensrelates back to the date of the first actual physical improvement to the property,MCL 570.1119, the lender must have its mortgage interest perfected in the prop-erty before construction starts to take priority over later asserted constructionliens. The lender also wants assurances of clear title before each progress paymentto retain priority. See MCL 570.1119(4). See chapter 3 for a discussion of priorityissues.

The owner of the project typically retains the services of an architect or adesigner for the project and then contracts with a general contractor or construc-tion manager for construction services. The general contractor or constructionmanager then contracts with various specialty contractors for the different compo-nents of the work. These specialty contractors themselves enter into subcontracts



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with other contractors and suppliers of materials to be incorporated into theproject. Payments on the various contracts are typically made monthly and arebased on a percentage of the work completed during the billing period. Thus, ifthe contract is for $1 million and 10 percent of the work is completed during agiven month, the contractor is allowed to bill for 10 percent of the work($100,000) in that monthly progress billing, minus whatever retention has beenagreed to in the contract. Most construction contracts provide that a percentage ofthe amount billed during construction, usually between 5 and 10 percent, will bewithheld pending the completion of all or a significant portion of the construc-tion. This retention (also known as retainage) is intended to ensure that the con-tractor will complete the last details of the construction or provide the owner withfunds to pay someone else to complete the project.

Subcontractors and suppliers generally submit monthly invoices to the partywith whom they have entered into contracts (the party above them in the chain ofcontracts on the project). Those parties in turn provide invoices for their ownmaterials or services, along with the invoices they have received from parties belowthem, to the upstream contractor (the next higher party in the chain) or theowner. The construction manager or general contractor ordinarily accumulates theprogress billings of all of its subcontractors and suppliers into a single invoice,adds its own billings, and then submits the overall invoice to the owner for pay-ment.

As each set of invoices is submitted up the contracting chain, the party towhom they are submitted usually has the responsibility of ensuring that the per-centage billed represents the actual percent completed in the billing period. Whenthe general contractor or construction manager submits its invoice to the owner,either the owner itself or its design professional also ensures that the overall per-centage complete is accurate through a physical inspection of the project duringwhich progress is measured against discrete billing categories. The owner thensubmits the invoice to the lender.

Note that the owner’s or its agent’s determination of the percentage com-pleted has implications for both the loan arrangement and any payment and per-formance bonds that have been issued on the project by a surety. For example,overpayment by the owner to the general contractor when the general contractoris the principal on a bond gives the surety a defense to payment up to the amountof the overpayment to the general or construction manager. See §8.35. Therefore,an accurate assessment of what proportion of the project has been completed isessential.

After ensuring that the billing is in order and obtaining all appropriate liendocumentation, the lender releases the monthly draw that will start the flow offunds downstream through the contracting chain. Often the lender engages a titlecompany to certify that the lender’s mortgage is secure by representing that thereare no liens on the property. The title company makes this representation byensuring that appropriate lien waivers have been obtained from those whose workhas been incorporated into the property.

