One of the more technical areas of real estate law concerns liens. The most common lien that people are familiar with is home mortgages. Mortgages give lenders the right to foreclose on property when the loans underlying the mortgage are not paid. Similarly, a construction lien on real estate may arise when the owner of the property fails to pay for work done to improve the owner’s property. In some circumstances the holder of the construction lien may also foreclose on the property.
Sometimes, where there are multiple lienholders, the lienholders will go to court and argue over which party’s lien has priority. In other words, if the property were to be foreclosed, which party should be paid first. In a recent case, ET Mackenzie Co. v Sutton Place-Raisin Twp, LLC, the Michigan Court of Appeals had to determine whether a bank or a drilling company had priority.
In ET Mackenzie, a land developer hired a drilling company to complete eight test wells on a 93-acre property. The property was going to be developed into a residential neighborhood. The wells were completed on 8 different lots. As a result of the test drills, PVC pipes stuck out of the ground over five feet high. The eight test wells were completed in August of 2006. Over one month later, the developer granted a mortgage to United Bank to secure a $2,000,000 loan.
The main issue to be determined by the Court was whether the test wells (PVC pipes) constituted a physical improvement on the land. If so, then the drilling company and not the Bank would have priority. United Bank argued that, because the wells were only for testing purposes, the wells did not constitute a first actual physical improvement on the land. The Court of Appeals rejected this argument because a physical improvement only requires a “readily visible physical change on the property. The Court ruled that because the PVC pipes rose 5 feet above the ground, the test wells were “readily visible and of a kind that would alert a person upon reasonable inspection of an improvement.” Additionally, the lien attached in August, when the improvement was completed. As a result, the drilling company, and not Untied Bank had priority.
Some have been critical of Michigan lawmakers and courts in favoring the interests of banks over the interests of others. This case shows that banks do not always have the upper hand. It is important to keep in mind that security interests, whether in real or personal property attach and are perfected in different ways. As a result, conforming to the technical requirements is critical.