“‘Actual physical improvement’ means the actual physical change in, or alteration of, real property as a result of labor provided, pursuant to a contract, by a contractor, subcontractor, or laborer which is readily visible and of a kind that would alert a person upon reasonable inspection of the existence of an improvement. 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. Actual physical improvement does not include supplies delivered to or stored at the real property.”
In the E.T. MacKenzie Co. v. Sutton Place matter, Sutton Place was seeking to purchase property. Before the sale was to take place, Sutton Place performed well testing. After the well testing was completed, Sutton Place purchased the property, obtaining a mortgage to do so. Over 6 months later, E.T. Mackenzie was hired to provide storm sewers, retention basin beds, road construction and other services. When E.T. Mackenzie was not paid in full for the work, it filed a construction lien and later sought to foreclose on the claim of lien it filed. On motions for summary judgment, the trial court ruled that the bank’s mortgage had priority because the well testing performed by the original contractor did not constitute an “actual physical improvement.”
On appeal, the lender argued that because the wells were installed for testing purposes only, the wells fit within the due diligence exception to the first actual physical improvement. In support, the lender relied on another recent decision from the Michigan Court of Appeals. See Mich. Pipe & Valve-Lansing, Inc. v. Hebeler Enterprises, Inc., 292 Mich. App. 479 (Mich. Ct. App. May 3, 2011). The Mich. Pipe court held that when making a determination as to what constitutes an “actual physical improvement,” the inquiry is whether the act results in a permanent presence on the property, not whether the action itself constitutes a form of testing. Because the drilling of the well in Mich. Pipe resulted in a permanent presence, the court held that the due diligence exception was not implicated.