SBM Real Property Law Section eNewsletter

March 2012

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Howard A. Lax, Lipson, Neilson, Cole, Seltzer & Garin, PC

Patricia Paruch, Kemp Klein Law Firm

Well-Testing Due Diligence Destroyed Bank Priority

By Bonnie L. Beutler, Kemp Klein Law Firm

The Court of Appeals recently found that 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.

Under the Construction Lien Act, MCL 570.1191, et seq., 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 or soil tests. In E.T. MacKenzie Company v. Sutton Place-Raisin Twp., L.L.C. (Mich. App. No. 297864, Nov. 22, 2011), 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 reversed, holding that the wells were the "first actual physical improvements" and the construction lien attached prior to recording the mortgage.

Practice Pointers: When closing, lenders and title insurance companies should ask whether buyer's due diligence included well drilling and testing and/or other activities that may have created an "actual physical improvement." If so, lender may want a subordination. In addition, such a disclosure should also be made in an Owner's Affidavit at closing.

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March 15–17, 2012
Winter Conference 2012
Loews Portofino Bay Hotel at Universal Orlando Resort, Florida

April 19, 2012
Groundbreaker Breakfast Roundtable Unexpected Recourse Liability in a Non-Recourse World
7:30–9:30 a.m.
Detroit Athletic Club (DAC)

May 3, 2012
Homeward Bound
Commercial Lease Defaults and the Remedies of Landlords, Tenants, & Lenders
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Inn at St. Johns, Plymouth

July 18-21, 2012
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Interested in writing a future article for the e-Newsletter?
Please contact co-editors:
Howard Lax at or Patricia Paruch at

Foreclosure by Advertisement Law Amended

By Jeffrey D. Weisserman, Trott & Trott, PC

House Bills 4542, 4543, and 4544 amend MCL 600.3200 et seq. effective February 1, 2012:
  • Within 30 days after a statutory notice is mailed to the borrower, the borrower may contact his/her lender/servicer (through their designee) directly or through a housing counselor to request mediation.
  • The statutory notice must state the number of days in the redemption period, and that the borrower will be liable to the purchaser for certain property damage during the redemption period.
  • The lender must request financial information from the borrower within 10 days of being contacted by the borrower or housing counselor. The borrower must provide this information within 60 days after the statutory notice was mailed or the lender/designee may proceed with the foreclosure.
  • Publishing a notice of the borrower's mediation rights is no longer mandatory.
  • The lender/designee must decide whether to modify a loan, and provide calculations supporting its decision, within 90 days after the statutory notice was mailed, or 10 days after meeting with the borrower, whichever is later. If not, the foreclosure must proceed judicially.
  • Acting as a housing counselor without HUD approval is a misdemeanor (practicing attorneys are exempt).
  • Mortgages on property used for agricultural purposes that fall under the Federal Farm Credit Act or the Consolidated Farm and Rural Development Act are not subject to mediation if they are subject to restructuring under those Acts.
  • The redemption period following foreclosure of any residential property is six months if the amount due exceeds two-thirds of the original indebtedness. The redemption period for property used for agricultural purposes is one year. The statute presumes that property is used for agricultural purposes if certain criteria are met.
  • These loan modification/mediation provisions sunset on December 31, 2012.