Trends in Construction Law
What Happens in Vegas Doesn’t Stay in Vegas
By Aileen Leipprandt
Vegas, baby. The Bellagio. A bunch of attorneys talking shop on construction law. It could only be better if I actually won the slots.
I recently attended a conference in Las Vegas sponsored by the ABA Forum on the Construction Industry, a committee comprised of construction lawyers from around the U.S. The program focused on project delivery methods used across the country, including the pros and cons of Integrated Project Delivery (IPD), Public Private Partnerships (also known as P3 projects), Design Build, Construction Management, and Bridging (a hybrid approach of design build, conceptual design, and front end engineering as a precursor to the actual design build contract). Presenters outlined the risks associated with each delivery model and methods to balance those risks, including proposed contract language and the use of alliances in the unfortunate event of litigation. While IPD and P3s have yet to gain popularity in Michigan, stay tuned, because these delivery methods are gaining ground.
I also attended an interesting break out program on the use of letters of credit in lieu of project bonding. Included in this discussion was an evaluation of subcontractor default insurance, called Subguard. These alternate forms of financing project default risk, though not used widely in Michigan, are prevalent with projects in other countries.
One of the more technical programs I attended addressed the operation of federal contracting programs for small, minority and women-owned businesses, including a discussion of mentor-protégé programs. With tight competitive bidding on public projects, it is anticipated that there will be increased scrutiny and more challenges to those entities claiming to be disadvantaged and alliances that are created for the purpose of pursuing government set aside programs.
I also attended a program outlining the new AIA sustainable construction contracts and tips for modifying those contracts to meet the particular construction professional’s needs. While green construction is certainly not new, the construction trade groups continue to develop new contracts to address the allocation of risks and responsibilities presented by green construction. Have you considered provisions in your contracts to address sustainable construction?
While it’s oft said “what happens in Vegas stays in Vegas,” in this case, that’s not true. Hilger Hammond attorneys continue to study the trends in construction law issues across the country so that we can bring that information to our clients and assist our clients with the opportunities and challenges they face now and in the future. Stay tuned as we blog and lecture throughout 2012 on these and other emerging construction law issues.
Construction Lien Refresher for Design Professionals
Why Your Construction Lien May Be Worthless Under Current Michigan Law
By Benjamin H. Hammond
The Michigan Construction Lien Act (“CLA”) provides lien rights to architects and engineers who provide “improvements” to the real property where the project is located. The definition of “improvement” under the CLA specifically includes architectural and engineering services.
However, in many cases the practical value of a construction lien hinges on whether or not the lien will take priority over a bank mortgage on the property. In a mortgage or lien foreclosure lawsuit, the property is ultimately sold and the proceeds distributed. Since real property values in the current economy are frequently less than the amount of the mortgages and liens recorded, obtaining distribution priority will often determine whether or not a design professional lien claimant is paid from the foreclosure proceeds.
In order to determine whether a construction lien has priority over a bank mortgage, the CLA looks to two key dates: (1) the date the bank mortgage was recorded, and (2) the date of the “first actual physical improvement” to the real property. If the mortgage was recorded before the “first actual physical improvement” then the mortgage will take a priority distribution from the foreclosure proceeds, often leaving no proceeds left for any lien claimants. However, if the “first actual physical improvement” occurred before the date the bank recorded its mortgage, then all lien claimants will take priority and be paid first from the foreclosure proceeds – and before the bank.
The problem facing design professionals arises when initial services are performed and the project does not go forward. The design professional has not been paid for its initial work, which could be significant, and there has not been any initial work performed at the project site itself yet – no clearing, grubbing, tree removal, etc.
On February 14, 2012, the Michigan Court of Appeals addressed a very similar situation in the case of William J. Lang Land Clearing, Inc. v Rizzo where an engineer performed initial services, including a topographical survey, property line staking and tree survey where metal tags were nailed to all trees at least six inches in diameter. The engineer followed all technical and timing requirements of the CLA and a foreclosure lawsuit was initiated in an attempt to collect payment.
A bank had recorded a mortgage on the property and the Court looked at whether the engineer’s lien had priority over the bank’s mortgage. The Court held that the engineer’s services were not an “actual physical improvement” as defined by the CLA. For purposes of determining priority the Court noted that an “actual physical improvement” requires a physical change in or alteration to the real property which is readily visible and would alert a person of the existence of an improvement. The improvement must be of a “permanent nature that alerts a person that construction has begun.” The Court found that the survey work, tree markers and other survey indicators were not “of a permanent nature.” So the bank’s mortgage took priority over the engineer’s lien in that case, which likely meant that the engineer was not paid for its work.
This scenario is troubling to many design professionals and particularly those who work on bank financed projects. In response to this dilemma, new legislation has been introduced, Senate Bill 1038, which would specifically allow design professionals to enforce their lien rights despite the fact that there was no “actual physical improvement” to the real property itself. Stay tuned for further developments and, in the meantime, design professionals should take extra care when working on bank financed projects.