By: Bruce M. Gorosh, Esq. and Jason M. Milstone, Esq.
Bruce Gorosh and Jason Milstone specialize in all aspects of real estate and business law and litigation, including construction and landlord/tenant disputes. Mr. Gorosh graduated from Boston University School of Law, and has been practicing law in Michigan for 30 years. He has been named a “Top Lawyer” in Michigan by DBusiness Magazine in the areas of real estate and construction law for the past 3 years, and is also a licensed real estate broker. Mr. Gorosh can be reached at firstname.lastname@example.org  or 248-855-5508. You can also visit their website at www.lefkofskyandgorosh.com .
Homeowners are often shocked to discover, after completion of a home improvement project, that one or more construction liens have been recorded against their home. A construction lien secures payment for a subcontractor’s work. If unpaid, the subcontractor has one year after recording the lien to file suit to foreclose the lien. The recording of a construction lien typically happens when the homeowner’s contractor fails to pay his subcontractors for their work. The homeowner’s shock, however, quickly turns to outrage when the homeowner realizes that they already paid their full contract price for the renovations and are now being asked to pay twice for the same improvement.
In the past, a homeowner that paid their full contract price for renovations to their home would have a complete defense to a construction lien foreclosure lawsuit. By statute, if a homeowner established that he paid his entire contract price, he would be entitled to a discharge of the construction lien. This defense was available for new home construction as well as small renovation projects so long as the property involved was a residential structure.
In the past, subcontractors rarely challenged the homeowners’ full payment defense. There was no reason to do so. If the subcontractor was a member of the Homeowner Construction Lien Recovery Fund (the “Fund”), the subcontractor knew that they would eventually be paid regardless of the full payment defense. The Fund, which was set up by the State of Michigan, acted as a type of quasi insurance that would, if certain conditions were satisfied, pay a subcontractor for its work if the homeowner had already paid its contractor in full. Membership in the Fund was obtained by paying a relatively small fee each year. However, over the years, subcontractors took advantage of the insurance provided by the Fund and the claims eventually exceeded the Fund’s assets. By 2009 the Fund was effectively insolvent and unable to satisfy new claims. On August 23, 2010, a new law went into effect abolishing the Fund altogether.
The full payment defense, however, was not affected by the Fund’s demise. Instead, homeowners may still assert a full payment defense to avoid liability for a construction lien. Newly enacted law MCLA 570.1118a specifically preserved the full payment defense. The new law only requires that the homeowner, if sued by a subcontractor, file an affidavit with the court stating that they have fully paid for the improvement. Subcontractors, however, no longer have the protection of the Fund if the homeowner files the required affidavit. As a result, it is anticipated that homeowners will see subcontractors aggressively challenging the validity of their full payment affidavits as the subcontractors have no other avenue of recovery. Although the subcontractor may sue the contractor, the contractor often has either gone out of business or lacks the financial assets to satisfy the subcontractor’s bill.
Consequently, homeowners need to take additional precautions when having work done on their homes. As a starting point, a homeowner should always check with the State of Michigan to confirm that their contractor possesses a valid builder’s license. Any work agreed on should be reduced to a written contract, signed by the homeowner and the contractor, with a stated price. The homeowner should make sure they retain copies of all checks used to pay the contractor. Most importantly, if the contractor is using subcontractors on the project, the homeowner should demand that the contractor provide a sworn statement each time any money is paid to the contractor. The sworn statement identifies all subcontractors on the project, their contract price, how much they are presently owed, and how much they have been paid. If a subcontractor is identified on a sworn statement, and later files a construction lien, the sworn statement can be used to avoid liability to the subcontractor. The homeowner should also demand that the contractor provide partial lien waivers from each subcontractor identified in the sworn statement. While the process of using sworn statements and lien waivers may be time consuming, it is one of the best ways for homeowners to protect themselves from lien claims. Another option, although one that contractor’s frown on, is for the homeowner to demand a list of subcontractors and pay them directly.
The bottom line is that homeowners need to remain vigilant. The recent changes in the law may not have affected available defenses to construction liens, but it has made the homeowner’s ability to defend against construction liens harder.