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Michigan's Homeowner Lien Fund to be Terminated?

There is legislation working its way through both the Michigan House and Senate that would eliminate the Michigan Homeowner’s Lien Fund.

The fund was initially created as a mechanism to prevent homeowners from being forced to pay twice or more for improvements on their home. In most situations a homeowner hires a contractor to do some work on their property. As an example we could look at a contractor doing a roof install. The contract with the homeowner typically calls for the contractor to do the labor and provide all of the supplies that are necessary to complete the project with the homeowner putting down a portion of the cost associated with the project. The contractor then goes to either his local supply house or perhaps a home center to purchase the necessary shingles and other materials. Many times the transaction between the contractor and the supplier is done on credit. The project is then completed for the homeowner and the homeowner pays the contractor in full for a completed job thinking that he or she doesn’t have to worry about the roof for 20 years.

Sometime after paying for the project the homeowner gets a letter in the mail from the supply house asking for payment for the materials that were provided for the project. Under Michigan law the supply house has the right to file a lien against the home for the cost of the materials. Unfortunately the homeowner was not aware of this fact and did not ask for proof that the supplier had been paid before paying the general contractor. The homeowner now is in the position that he or she may be forced to pay for the materials twice. This was typically where the homeowners lien fund would come into play. Essentially it would come in to make a partial payment to the supply house and presumably to pursue the contractor that made off with all of the funds.

Historically the fund was financed through assessments paid by licensed contractors. During years with a good economy the fund was able to replenish its assets because there were contractors constantly renewing their licenses and therefore paying the assessments. In recent years however the fund has consistently lost money because of the economic downturn and is now essentially insolvent.

The new legislation contains a provision which will allow homeowners to avoid the double payment problem by filing an affidavit with proof of payment with the Circuit Court. This procedure solves half of the problem in that the homeowners are not placed in a position where they might have to pay twice if they can prove that they have paid the general contractor for the entire project.

The approach taken by the legislature however does nothing for the legitimate and unsuspecting subcontractors that will inevitably be caught up in situations with unscrupulous general contractors. In years past the supply houses at least understood that the lien fund would be available to cover part of their expenses in those situations where an unscrupulous contractor had off with all of the money from a project. Under the approach taken in the legislation passed by the House and presently pending before the Senate the supply houses will have to bear the burden of collecting the funds taken by the unscrupulous contractors. One can only speculate the impact this will have on the construction industry. For example, it may put suppliers in a position where they require only cash. This may result in contractors that do not have cash available being removed from the market which may force a rise in the costs of construction projects.

Whether Michigan’s approach to this problem is the appropriate course of action or not is yet to be seen. Unfortunately, as with many problems without an easy solution, we will have to wait to see how the industry adapts to these new rules before a judgment can be made.