WHEN CAN A MUNICIPALITY IMPOSE A TAX LIEN AGAINST PROPERTY FOR UNPAID WATER CHARGES?
Most people who own real estate obtain their water for the property from the local municipality. While the timing of billing and costs for water charges vary among municipalities, all municipalities are given the right under Michigan law to collect delinquent water charges through imposing a lien against the property. Specifically, MCL 123.162 provides:
A municipality that has operated or operates a water distribution system or a sewage system for the purpose of supplying water or sewage system services to the inhabitants of the municipality has as security for the collection of water or sewage system rates, or any assessments, charges, or rentals due or to become due, respectively, for the use of sewage system services or for the use or consumption of water supplied to any house or other building or any premises, lot or lots, or parcel or parcels of land, a lien upon the house or other building and upon the premises, lot or lots, or parcel or parcels of land upon which the house or other building is situated or to which the sewage system service or water was supplied. This lien becomes effective immediately upon the distribution of the water or provision of the sewage system service to the premises or property supplied, but shall not be enforceable for more than 5 years after it becomes effective.
Responsibility for payment of water charges is often shifted by landlords to tenants under lease agreements. However, this can become an issue if the proper measures are not taken with the local municipality. On September 3, 2020, the Michigan Court of Appeals issued a published opinion in the matter of Hartfiel v City of Eastpointe, ___ Mich App ___; ___ NW2d ___ (2020) (Docket No. 348642) which clarified the rights and obligations of landlords and municipalities with respect to delinquent water charges and tax foreclosures.
In Hartfiel, a landlord owned two homes in the City of Eastpointe that were being leased to tenants. Each of the lease agreements had initial terms of one year, and both leases stated the tenants were responsible for all water charges incurred during the term of the lease. The original lease agreements were filed with the City of Eastpointe, along with affidavits from the landlord and tenants confirming that the tenants were responsible for the water charges. The lease agreements included provisions that required the tenants to pay for water charges in an effort to comply with MCL 123.165, which provides:
The lien created by this act shall, after June 7, 1939, have priority over all other liens except taxes or special assessments whether or not the other liens accrued or were recorded before the accrual of the water or sewage system lien created by this act. However, this act shall not apply if a lease has been legally executed, containing a provision that the lessor shall not be liable for payment of water or sewage system bills accruing subsequent to the filing of the affidavit provided by this section. An affidavit with respect to the execution of a lease containing this provision shall be filed with the board, commission, or other official in charge of the water works system or sewage system, or both, and 20 days’ notice shall be given by the lessor of any cancellation, change in, or termination of the lease. The affidavit shall contain a notation of the expiration date of the lease. (Emphasis added).
Similarly, the lease agreements and affidavits were provided to the City of Eastpointe by the landlord in an effort to avoid the imposition of liens on the properties in the event of nonpayment of water charges pursuant to MCL 141.121(3) of the Michigan Revenue Bond Act, which provides:
Charges for services furnished to a premises may be a lien on the premises, and those charges delinquent for 6 months or more may be certified annually to the proper tax assessing officer or agency who shall enter the lien on the next tax roll against the premises to which the services shall have been rendered, and the charges shall be collected and the lien shall be enforced in the same manner as provided for the collection of taxes assessed upon the roll and the enforcement of the lien for the taxes. The time and manner of certification and other details in respect to the collection of the charges and the enforcement of the lien shall be prescribed by the ordinance adopted by the governing body of the public corporation. However, in a case when a tenant is responsible for the payment of the charges and the governing body is so notified in writing, the notice to include a copy of the lease of the affected premises, if there is one, then the charges shall not become a lien against the premises after the date of the notice. In the event of filing of the notice, the public corporation shall render no further service to the premises until a cash deposit in a sum fixed in the ordinance authorizing the issuance of bonds under this act is made as security for the payment of the charges. In addition to any other lawful enforcement methods, the payment of charges for water service to any premises may be enforced by discontinuing the water service to the premises and the payment of charges for sewage disposal service or storm water disposal service to a premises may be enforced by discontinuing the water service, the sewage disposal service, or the storm water disposal service to the premises, or any combination of the services. The inclusion of these methods of enforcing the payment of charges in an ordinance adopted before February 26, 1974, is validated. (Emphasis added).
The leases for both properties were extended beyond the initial one year terms, however the landlord did not file new affidavits with the City of Eastpointe setting forth the new expiration date for each lease, which is required by MCL 123.165. The tenants at both properties eventually became delinquent in the payment of water charges for their respective rental properties. Less than sixty days after the water charges became delinquent, the City of Eastpointe transferred the unpaid water charges for both properties to the landlord’s property tax bills.
The landlord sued the City seeking to invalidate the City’s liens for water charges and seeking to remove the charges from the tax rolls. As an initial matter, the Court of Appeals held that the landlord failed to comply with MCL 123.165 by failing to provide a new water affidavit with each lease each time there was a renewal or extension of the original lease term. Because the landlord only filed the original affidavits, but failed to renew the affidavits each time a lease was extended, the Court of Appeals held that the landlord was fully responsible for all water charges incurred after the expiration of the initial lease terms. The landlord could have avoided liability for the water charges if new affidavits and updated lease forms were provided to the City in a timely manner.
Although the landlord was held liable for the unpaid water charges due to his failure to comply with MCL 123.165, the Court of Appeals also held that the City violated MCL 141.121(3) by unlawfully transferring the unpaid water charges to the property tax rolls before the expiration of the statutory six-month period. As set forth above, MCL 141.121(3) states that unpaid water charges may transferred to the property tax rolls if unpaid for at least six months. The City transferred the water charges to the landlord’s property tax bills less than sixty days after the charges became delinquent. Although the landlord paid the delinquent water charges to avoid the properties from being foreclosed by the municipality, the Court of Appeals ruled that the landlord was entitled to a refund for the water charges paid because the liens were unlawfully placed on the tax rolls before the expiration of the statutory six-month period.
In closing, several takeaways from the recent Hartfiel are important for landlords who own residential properties. First, if landlords are unaware of their ability to avoid liability and liens for unpaid water charges when a tenant is occupying a property, landlords should take advantage of the statutory protections offered by MCL 123.165 and MCL 141.121(3) and incorporate the relevant terms into their lease agreements. Landlords should be sure to strictly comply with all of the requirements of both statutes by including the proper language in all lease agreements. Landlords should also ensure that new affidavits and updated lease forms are provided to the municipality each time a lease is modified or renewed, and this is something that may need to be communicated clearly to any property management company. Finally, landlords should be aware of their rights and responsibilities if a municipality seeks to impose a lien or foreclose for unpaid water charges or property taxes.
The value of having experienced legal counsel review and draft lease agreements, for both commercial and residential properties, cannot be overstated. Landlords should carefully review their existing lease agreements through the assistance of legal counsel to confirm that the maximum amount of protections are being included and to ensure that all statutory requirements are complied with. If a current lease does not include the required language, an amendment may be required and at the very least should be considered when the current term of the lease expires. In addition, landlords should review their current portfolios and ensure that updated lease forms and affidavits are provided to the applicable municipalities to protect against avoidable liens for unpaid water charges.
Brandan A. Hallaq is an attorney with Hirzel Law, PLC where he frequently litigates cases involving construction defects, contract disputes, shareholder/member disputes, quiet title actions to determine interests in property, and enforcement of restrictive covenants. Mr. Hallaq is also a licensed Real Estate Broker in the State of Michigan and leads the real estate transactions department at Hirzel Law, PLC where he negotiates and prepares the necessary documents for business and real estate transactions, including purchase agreements, loan/financing documents, mortgages, land contracts, and commercial and residential leases. In each year from 2018 through 2020, he has been recognized as a Rising Star in the area of real estate law by Super Lawyers Magazine, a designation that is given to no more than 2.5% of the attorneys in the State of Michigan each year. He was also recognized in the inaugural issue of the 2021 Best Lawyers in America: “Ones to Watch” List for his outstanding professional excellence in real estate law. Mr. Hallaq obtained his Juris Doctor degree, cum laude, from Wayne State University Law School where he served as an editor on the Wayne Law Review. He can be reached at (248) 478-1800 or at [email protected].