A Primer on the Homeowner Construction Lien Recovery Fund

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A homeowner has moved into a newly constructed home in the perfect neighborhood. The mortgage is timely paid each and every month. Despite fulfilling all of their obligations a homeowner may become involved in a fight to prevent foreclosure proceedings on their home.

The above scenario can arises when a general contractor hired to build a home or perform a remodeling project fails to pay for work or materials provided for by the project. The subcontractor, supplier or laborers can file liens against the property and proceed with a foreclosure action against the homeowner. This scenario may occur even though the home owner has paid the full purchase price for the property improvement. Unfortunately, lien foreclosure actions have significantly increased as a direct result of the current economic downturn and contractors struggling to survive.

In 1982, the Homeowner Construction Lien Recovery Fund (“Fund”) was established under the Construction Lien Act (PA 497 of 1980) to provide a means of redress in the event that all debts owed on a home building or remodeling project were not paid by the license contractor. The Fund was created to protect both the homeowners who have contracted with a licensed builder or remodeler for construction or improvements on a home, and the subcontractors, suppliers and laborers who have provided materials or labor on the job. The Fund does not protect from losses on apartment buildings, “spec” homes or commercial construction.

In the past, if the homeowner had completely paid the contractor for the work done, but the subcontractors, suppliers or laborers were not paid for materials or labor they had furnished, the loss was often borne by the homeowner who had to pay twice to protect his or her property from a lien. Now, under the Construction Lien Act, unpaid subcontractors, suppliers or laborers may present their claims to the Fund for payment. Every licensed residential builder, electrical contractor, plumbing contractor and mechanical contractor is required to contribute into the Fund. Provisions in the law also allow subcontractors, suppliers and laborers to join and participate in the benefits of the Fund.

A homeowner can prevent the attachment of a construction lien by filing a statutory affidavit pursuant to MCL 570.1203 containing the following affirmations:

  1. That the full contracted price for improvements to the home have been paid by the homeowner to the contractor in full.
  2. The property is a residential structure.
  3. The homeowner has not colluded with any person to obtain payment from the fund, and
  4. The homeowner will continue to cooperate with fund and its attorneys in the defense of the fund.

Once a homeowner has filed the statutory affidavit mandated by the Fund then the homeowner is entitled to the full benefit of the Fund and the subject lien foreclosure action against the home is discharged. The Fund upon presentation of the homeowner statutory affidavit stands in the shoes of the homeowner and assumes all rights and defenses of the homeowner to the defense of lien foreclosure action. The Fund can then resolve all lien claims properly filed against the property as the result of the contractors failure to pay all debts arising from the construction project.