Wednesday, February 29, 2012

Test Wells Count as "Actual Physical Improvement" for Lien Priority, Michigan Court of Appeals Rules

Test wells installed by a potential buyer prior to closing constituted a physical improvement, allowing a construction lien to attach prior to buyer’s closing and giving the lien priority over a mortgage granted at closing. The Michigan Court of Appeals reached this conclusion in a recent unpublished case. See, E.T. MacKenzie Company v Sutton Place-Raisin Twp, LLC (Mich. App. No. 297864, Nov 22, 2011) (slip opinion). 

Under Section 119(4) of  the Michigan Construction Lien Act (MCL 570.1119(4)), a construction lien has priority over a mortgage recorded after the “first actual physical improvement.” MCL 570.1103(1) states that an “actual physical improvement” does not include preparation for a change or alteration, such as surveying, soil boring and testing. 

In E.T. MacKenzie, the  buyer’s contractor drilled eight test wells prior to closing and left PVC pipes extending five feet above ground. In 2006, the buyer closed and granted United Bank a mortgage. Eight months later, the buyer contracted with E.T. MacKenzie Company for demolition and grading. The Court of Appeals opinion does not discuss the relationship of the well contractor and MacKenzie. In January 2008, MacKenzie recorded a claim of lien for unpaid services and asserted priority over the mortgage.

The trial court found that the wells were not the first “actual physical improvement,” and that the first improvement occurred after the mortgage was recorded. The Court of Appeals disagreed and reversed. 

Relying on Michigan Pipe & Valve-Lansing, Inc v Hebeler Enterprises, Inc, 292 Mich App 479, lv app denied, 490 Mich 874; 803 NW2d 688 (2011), the Court of Appeals held that the wells were the “first actual physical improvements” and the construction lien attached prior to recording the mortgage:
As defined in MCL 570.1103(1), an “actual physical improvement” does not “include that labor which is provided in preparation for that change or alteration, such as surveying, soil boring and testing, architectural or engineering planning, or the preparation of other plans or drawings of any kind or nature.”We do not dispute that these acts may suggest that the definition in effect recognizes a “due diligence process” that involves the specific procedures stated in the definition of “actual physical improvement.” Nor does the plain language of the statute, which states “such as,” suggest that the list is exhaustive. However, none of the procedures stated in the definition equates to the digging of a well, or any other act, which makes a “readily visible” “physical change” to the property. To the contrary, the acts identified in the statute are all of a nature that none of them will leave a permanent presence on the property. Consequently, we find [the defendant’s] assertion that the exception encompasses all acts done in the “due diligence process” is not supported by the plain and unambiguous language of MCL 570.1103(1). [Michigan Pipe at 486.]

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