An owner hired a contractor to make improvements on real property, but the contractor failed to pay its subcontractors or suppliers. What happens next? Under Michigan’s Construction Lien Act, contractors, subcontractors, suppliers and laborers have a powerful tool to secure payment for their work through construction liens. Once a construction lien is recorded, the lien attaches to a landowner’s property and secures the contractor’s right to payment. Owners can remove these construction liens from their property in two primary ways:
- The landowner can contact the county clerk to facilitate its removal if no lawsuit is filed within a year to foreclose the lien.
- An owner can remove a construction lien through a bonding-off process.
Bonding off a construction lien means replacing the property used as security for the underlying debt with a bond and discharging the lien from the property. Governed in part by Michigan’s Construction Lien Act, the bonding-off process involves several considerations that should be carefully evaluated.
First, the bonding-off process requires the posting of one of two types of bonds. Under MCL 570.1116, a bond can either be a cash bond executed by a principal or a surety bond executed by a principal company authorized to do business in Michigan. In the bonding-off process, there are three parties:
- The principal, who is responsible for obtaining the bond and fulfilling the obligation.
- The surety, who ensures that the principal makes payment.
- The obligee, who is the creditor.
A cash bond involves just the principal, who deposits sufficient cash to meet the bonding requirement. Conversely, in a surety bond, the surety pays the required bonding amount, and the principal agrees to reimburse the surety for any payments made. Unlike surety bonds, cash bonds typically do not involve legal actions afterward because the bond amount is immediately fulfilled with cash by the principal. Despite these differences, both cash and surety bonds must be issued for twice the value of the lien sought to be discharged.
Second, MCL 570.1116 requires that, within 10 days after receipt of a surety bond, the county clerk where the property is located must notify each obligee that the bond has been recorded. The clerk must also indicate the amount of the bond and the name of the surety. The obligee has 10 days after receipt of the notice to file an objection to the sufficiency of the surety. For a cash bond, the county clerk is not required to notify each obligee that the bond has been recorded. However, it is often in the best interest of the principal to notify the obligee, as without notification, they risk the obligee filing an action to foreclose on the lien and filing a notice of lis pendens encumbering the title of the property.
Third, the limitations period for a party attempting to foreclose on a construction lien and attempting to enforce a surety bond are different. Under Michigan’s Construction Lien Act, a lien claimant has one year to file a suit to foreclose on a construction lien. In E.R. Zeiler Excavating, Inc. v. Valenti Trobec Chandler Inc., though, Michigan’s Court of Appeals explained that the one-year limitations period should not apply to obligees attempting to enforce surety bonds. Instead, the six-year limitations period for contract actions under MCL 600.5807 applies. The practical implication of this ruling is that unlike a construction lien, a landowner cannot escape potential financial liability after just one year if no lawsuit is initiated following the issuance of a surety bond.
Fourth, although MCL 570.1118 allows a court to award reasonable attorney fees to a successful lien claimant, there is no analogous provision for lien replacement bonds, and Michigan courts have thus far refused to extend § 1118 to bond enforcement actions. In the unpublished decision Landmark Const. Co. v. R. Lockwood Const., Inc, the Michigan Court of Appeals held that MCL 570.1118(2) does not authorize the recovery of attorney fees in an action for bond enforcement. This was reinforced in Fed. Ins. Co. v. Landmark Contracting Co. when the court held that MCL 570.1118(2) was not applicable to an action for bond enforcement. Although neither decision is binding, they preview how a trial court may treat a claim for attorney fees in bond enforcement actions.
In sum, the bonding-off process under Michigan's Construction Lien Act allows owners to protect their property by replacing a construction lien with a bond. However, it is critical to understand the fundamentals of this process before undertaking such an action. Contractors also need to know that the processes of enforcing a lien replacement bond and a construction lien have important differences.
If you have any questions concerning bonding off a construction lien, please do not hesitate to reach out to a member of Warner Norcross + Judd LLP’s Construction Practice Group.