Michigan Construction Lending Requirements

Michigan Lien Law Overview

Michigan’s Construction Lien Act (MCLA) provides a robust framework to protect contractors, subcontractors, suppliers, and laborers who provide an improvement to real property. The MCLA applies broadly to all private construction projects.

A critical statutory distinction exists between commercial and residential projects. For residential structures (1-2 family dwellings), a contractor does not have a right to a construction lien unless the improvement was provided pursuant to a written contract that explicitly states the contractor is licensed and includes the contractor’s license number (MCL § 570.1114). Furthermore, Michigan utilizes a “Sworn Statement” mechanism that is legally intertwined with the lien waiver process, dictating how owners and lenders should track downstream payees to avoid double liability.

Mortgage Priority

In Michigan, a mechanics lien generally does not have priority over a pre-existing mortgage, provided the construction mortgage is recorded before any physical work begins.

Michigan utilizes a strict “first-in-time” rule driven by physical commencement on the site. Under MCL § 570.1119(4), a mortgage, lien, or encumbrance recorded before the construction lien arises has priority over the construction lien.

Establishing Priority: A construction lien arises at the time of the “first actual physical improvement” (MCL § 570.1119(6)). Therefore, to establish and maintain absolute first lien priority, the construction lender MUST record the mortgage/deed of trust in the county records before any visible construction, excavation, demolition, or delivery of materials occurs on the site (MCL § 570.1119).

Loss of Priority: If dirt is moved or materials are dropped off before the mortgage is recorded, all subsequent construction liens relate back to that initial visible commencement date, leapfrogging the construction loan and taking superior priority over the lender’s security interest.

Broken Priority / Early Commencement Protocol

Because Michigan is a strict “first-in-time” state, early visible work permanently compromises the lender’s first lien position. If a pre-closing site inspection reveals that work began before the mortgage was recorded, the lender should immediately take defensive action. Best practices to mitigate this risk include:

1. Halting the loan closing and disbursements.
2. Requiring the title insurer to provide specific affirmative coverage or an indemnity letter explicitly covering the early commencement.
3. Requiring the General Contractor to post a payment and performance bond to shield the property (and the lender’s collateral) from subsequent liens.
4. Collecting statutory Unconditional Waivers for the early work before funding any future draws.

Lien Document Timeline

Document Name	Responsible Party	Statutory Deadline	Consequence if Missed	Lender Benefit
Notice of Commencement	Owner / Designee	Commercial: Before physical work begins. Residential: Within 10 days of request.	Supply chain is excused from preliminary notice deadlines; drastic increase in hidden liens.	Establishes the project timeline and forces sub-tier parties to identify themselves via Notices of Furnishing, eliminating “hidden” supply chains.
Notice of Furnishing	Subcontractors / Suppliers / Laborers	Subs/Suppliers: Within 20 days of first furnishing. Laborers: Within 30 days of unpaid wages due.	Claimant loses lien priority against funds the owner already paid to the GC for that specific work.	Provides a direct roadmap of which sub-tier parties must provide statutory lien waivers before a draw is funded.
Sworn Statement	General Contractor	With every payment request	Lender/Owner becomes strictly liable for unpaid sub-tier claims, resulting in double payment.	Provides a sworn, itemized list of every downstream debt, allowing the lender to precisely reconcile waivers to dollars disbursed.
Claim of Lien	Any unpaid claimant	Within 90 days of last furnishing	The claimant’s lien is legally extinguished.	Defines the exact timeframe during which a lender’s collateral is at risk of being encumbered after work ceases.

Retainage Overview

Michigan law draws a sharp distinction between public works and private construction regarding retainage.

• Residential (1-4 Unit), Multi-Family, & Commercial: Michigan does not have a statutory cap on the amount of retainage that can be withheld on private construction projects. The percentage of retainage withheld (typically 5% to 10%), the conditions for its release, and any escrow requirements are governed entirely by the terms of the private construction contract between the owner and the general contractor. Lenders should align their loan holdbacks strictly with the private construction contract’s retainage provisions. (Note: Michigan’s retainage limits, which cap retainage at 10% and step down to 0% after 50% completion, apply strictly to public agency contracts under MCL § 125.1563, and do not apply to private lending).

Prompt Payment Act

Michigan does not have a Prompt Payment Act applicable to private construction projects. While legislation has been repeatedly proposed in recent years, no private prompt pay act has been passed into law.

• Residential (1-4 Unit), Multi-Family, & Commercial: Payment deadlines, frequency, and penalties for late payments on private projects are dictated entirely by the terms of the negotiated construction contract. Draw administrators handling private loans should rely on the specific payment timelines negotiated in the borrower’s prime contract to avoid breach of contract claims.

Title Practices

Under Michigan law, state statutes do not require title companies to administer construction loan disbursements. Lender-managed disbursements (or third-party draw administration) represent the standard industry practice.

To maintain first lien priority, verifying title and monitoring for liens at each draw is the primary best practice. Construction lenders should utilize one of three primary options to achieve this:

1. Lien monitoring subscription services: Automated tracking of county records for filed liens.
2. Title updates: Routine checks of public records by a title agent (which identify encumbrances but provide no actual insurance).
3. Title endorsements: Obtaining actual insurance coverage for the lender.

Lender Risk Mitigation Strategy: It is highly recommended that lenders utilize ALTA 32 (Construction Loan) and ALTA 33 (Disbursement) title endorsements. Because Michigan ties lien priority to the “first actual physical improvement” (MCL § 570.1119), a hidden relation-back threat constantly exists. Obtaining ALTA endorsements shifts the liability of off-record “gap” liens and commencement date disputes from the lender to the title insurer. Regardless of the chosen method, leveraging these tools to clear encumbrances and verify public filings prior to releasing every single draw is crucial to mitigating risk.

Lien Waivers

Lien Waiver Summary

Michigan’s treatment of lien waivers is strictly regulated to protect contractors and the supply chain.

• Advance Waivers Prohibited: Under MCL § 570.1115(1), a person shall not require, as part of any contract for an improvement, that the right to a construction lien be waived in advance of work performed. A waiver obtained as part of a contract for an improvement is contrary to public policy, invalid, and void.
• Condition of Payment: Waivers are only effective upon actual receipt of payment. If a conditional waiver is executed and the check bounces, the waiver is void and lien rights remain intact.
• Residential Waiver Verification Rule: Under MCL § 570.1115, on residential structures, an owner/lessee cannot legally rely on a lien waiver provided by a person other than the claimant named in the waiver (e.g., a sub’s waiver handed in by the GC) unless the claimant has either filed a Notice of Furnishing or the owner/lessee independently verifies the authenticity of the waiver with the claimant in writing, by phone, or personally.
• Lender Best Practice: Because advance waivers are void, lenders should enforce a strict draw-by-draw exchange. Lenders should exclusively collect the statutory Conditional Waiver for the current draw request and the statutory Unconditional Waiver for the previously funded draw to legally prove that payment actually reached the claimant.

Lien Waiver Forms

Michigan strictly mandates the use of four specific statutory lien waiver forms. A lien waiver MUST be in substantially the same form as prescribed by the statute (MCL § 570.1115).

The four statutory forms are:

1. Partial Conditional Waiver
2. Partial Unconditional Waiver
3. Full Conditional Waiver
4. Full Unconditional Waiver

Substantial Compliance in Lien Waivers

Michigan statute states that a lien waiver MUST be “substantially in the following form” (MCL § 570.1115(1)).

• What “Substantially” Means: Michigan courts interpret this to mean that while minor typographical variances or basic formatting alterations are acceptable, material alterations to the legal effect of the document are strictly prohibited. You cannot alter the core statutory language or expand the scope of what is being waived.
• Prohibited Alterations (Case Law Context): Michigan jurisprudence, guided by the protective public policy of the Construction Lien Act (as analyzed in cases involving waiver validity such as Alan Custom Homes, Inc. v. Krol, 256 Mich. App. 505 (2003)), dictates that parties cannot use a statutory lien waiver form to secretly extract additional legal concessions. Adding broad indemnification clauses, waivers of breach of contract claims, or waivers for delay damages fundamentally alters the statutory form.
• What This Means for Lenders in Practice (Operational Risk)
• The “Trojan Horse” Risk: General Contractors frequently submit their own proprietary lien waivers embedded with extra legal jargon (e.g., “Subcontractor also waives any right to sue for project delays” or “Subcontractor agrees to indemnify the Owner and Lender”). If a Draw Administrator accepts this heavily modified document to authorize funding, a Michigan court can declare the entire waiver void as contrary to public policy. The result? The lender disbursed the funds, but the property remains 100% exposed to a valid mechanics lien because the waiver was legally unenforceable.
• Strict Rejection Protocol: Draw Administrators should be trained to visually verify that the text of incoming waivers strictly matches the Michigan statutory templates. If a GC submits a form containing additional clauses or broad liability releases, the Draw Administrator should immediately reject the waiver, halt the draw disbursement, and demand the pure statutory form.
• Proactive Setup: To prevent draw delays and disputes, lenders should provide clean, blank copies of the four Michigan statutory waiver forms to the General Contractor during the loan closing or pre-construction meeting, accompanied by a written policy stating that proprietary corporate lien waivers will never be accepted.

Lien Waiver Notarization

Michigan law does not require lien waivers to be notarized to be considered legally valid and effective. However, it is critical to note that the statutory Sworn Statement, which traditionally must accompany these waivers with every draw request, IS required to be notarized (MCL § 570.1110). Please refer to the Sworn Statements (CRITICAL) section below for further details and implications.

Sworn Statements (CRITICAL)

Michigan law utilizes a unique and highly restrictive “Sworn Statement” mechanism that is legally intertwined with the lien waiver process. Under MCL § 570.1110, a general contractor MUST provide a Sworn Statement to the owner or designee whenever payment is due or requested.

This notarized document is arguably the most critical operational document for a construction lender in Michigan because it dictates how owners and lenders track downstream payees to avoid double liability.

• What it is: A Sworn Statement is a notarized affidavit from the General Contractor that lists all subcontractors, suppliers, and laborers, the amount of their contract, the amount paid to date, and the balance owing for the current draw request.
• Why it is Critical to Lenders: It provides the Draw Administrator with an exact, legally sworn “roadmap” of the supply chain. It tells the lender precisely who is owed money on the current draw, allowing the lender to demand statutory lien waivers from those specific sub-tier entities.
• Benefits if Followed: When a lender insists on a Sworn Statement, they can accurately reconcile the dollars disbursed against the lien waivers collected. If the GC claims they owe the plumber $10,000, the lender knows to collect a $10,000 Partial Conditional Waiver from that plumber before releasing the funds, effectively immunizing the property from a lien for that work.
• Implications if Missed (Double Liability): If a Draw Administrator or owner pays the General Contractor without first obtaining a Sworn Statement, they lose all statutory protection against claims from unpaid subcontractors. If the GC takes the money and fails to pay the sub-tier supply chain, the unpaid subcontractors can file valid mechanics liens against the property. The lender/owner will be forced to pay those subcontractors out of pocket to clear the title — effectively paying for the exact same work twice.

Notices

Notice of Commencement (or similar like event)

Michigan legally recognizes a Notice of Commencement to establish the project in the public record and formalize the preliminary notice process. The state utilizes two distinct statutory forms: one for Commercial and one for Residential projects, with different recording requirements.

Recognized by State?

Yes.

Who Files

The owner, lessee, or their designee.

When Must it be Filed

Commercial

It MUST be recorded before any actual physical improvements begin on the property (MCL § 570.1108(1)).

Residential

Recording is not legally required; however, the owner MUST provide a copy within 10 days of a written request from a contractor, subcontractor, or supplier (MCL § 570.1108a(5)). Failure to meet this 10-day demand strictly excuses the claimant from the 20-day deadline to provide their Notice of Furnishing.

Appoint a Designee

Yes. An owner can appoint a designee to receive all notices.

Posted on Jobsite

Yes. A copy of the Notice of Commencement MUST be posted and kept posted in a conspicuous place on the real property (MCL § 570.1108(13)).

Effect

Recording and posting this document establishes the project in the public record and explicitly identifies the owner/designee for the supply chain. If the owner fails to record or post it, sub-tier claimants are excused from the strict statutory deadlines to provide their Notice of Furnishing, drastically increasing the risk of hidden lien claims against the owner and lender.

Preliminary Lien Notifications

• Who Must Send: Any subcontractor, material supplier, or laborer who does not have a direct contract with the property owner or lessee MUST provide a Notice of Furnishing (MCL § 570.1109). General contractors do not send this notice.
• Deadline (Subcontractors & Suppliers): The Notice of Furnishing MUST be served via personal delivery or certified mail within 20 days after the first date the claimant furnishes labor or materials to the project (MCL § 570.1109(1)). Proof of Service: The notice MUST be accompanied by a notarized proof of service (MCL § 570.1109(4)).
• Deadline (Laborers): A laborer MUST provide a Notice of Furnishing within 30 days after wages were contractually due but not paid (MCL § 570.1109(2)).
• Implications of Failure: If a claimant fails to provide the notice within their statutory window, it does not entirely defeat their lien rights. However, their lien is legally reduced by the amount the owner has already paid the general contractor for that specific subcontractor’s work before the late notice was received (MCL § 570.1109(6)).

Notice of Completion (or similar like event)

Michigan does not utilize a statutory Notice of Completion (or similar event) to truncate the mechanics lien filing window. Consequently, claimants MUST record a Claim of Lien within 90 days after their own respective last furnishing of labor or material (MCL § 570.1111(1)). Crucially, within 15 days of recording the claim of lien, the claimant MUST serve a copy on the owner/designee and retain a notarized proof of service (MCL § 570.1111(4)), otherwise the lien is defective.

Additional State-Specific Notices

• Owner’s Affidavit of Payment (Residential Only): Under MCL § 570.1118a, for residential structures only, a claim of construction lien does not attach to the property to the extent the owner has paid the general contractor. If a lien is filed, the owner can file an affidavit with the court proving they paid the GC. The statute explicitly requires the owner to attach copies of the contract, any change orders, and evidence of payment (e.g., canceled checks, credit card statements, or receipts) to validate the affidavit (MCL § 570.1118a(1)). This shields the residential homeowner from having to pay twice.

Document References

• Notice of Commencement: A statutory notice recorded by the owner. For lenders, ensuring this is filed protects the project by forcing subcontractors to send preliminary notices, eliminating “hidden” supply chains. (MCL § 570.1108 for commercial; MCL § 570.1108a for residential).
• Notice of Furnishing: A statutory preliminary notice sent by subcontractors/suppliers. It provides the lender and owner a direct roadmap of who needs to be paid. Failure to serve it protects the owner/lender from double payment for work already compensated. (MCL § 570.1109).
• Sworn Statement: A statutory, notarized document provided by the GC with every draw request, detailing all downstream debts. It provides the lender with the exact list of entities from whom statutory lien waivers should be collected. (MCL § 570.1110).
• Statutory Lien Waivers: Four mandatory forms (Partial/Full, Conditional/Unconditional) used to legally release lien rights. Utilizing these exact forms guarantees the waiver is legally enforceable in Michigan. (MCL § 570.1115).
• Owner’s Affidavit of Payment: A residential-specific defensive affidavit filed with the court by a homeowner. It shields the home from mechanics liens if the owner can prove they already paid the GC for the disputed work. (MCL § 570.1118a).
• Claim of Lien: The formal encumbrance recorded with the register of deeds. It MUST be recorded within 90 days of the claimant’s last furnishing (MCL § 570.1111(1)). If not recorded timely, the lien is extinguished.

Contractor Licensing & Bond Requirements

Michigan manages general contractor licensing primarily for residential builders at the state level, while commercial general contractors are managed at the local municipality level.

• Residential Builders: Anyone engaged in the construction, replacement, or alteration of a residential structure MUST hold a Residential Builder or Maintenance & Alteration Contractor license issued by the Michigan Department of Licensing and Regulatory Affairs (LARA) (MCL § 339.2401).
• Commercial General Contractors: Michigan does not issue a statewide commercial general contractor license. However, local cities and counties frequently impose their own municipal licensing and permitting requirements.
• Specialty Trades: Electricians (MCL § 339.5737), mechanical contractors (HVAC) (MCL § 339.5807), and plumbers (MCL § 339.6107) MUST hold state-issued licenses through LARA under the Skilled Trades Regulation Act, regardless of the property type.
• Surety Bonds: Michigan does not have a blanket statewide surety bond requirement for all contractors to operate; however, local municipalities often demand compliance bonds.

License Lookup: Lenders should verify state-level credentials via the official LARA portal: Michigan LARA License Verification.