Friend or Foe
By: Griffiths Law
Depending on the part which you play, either as a contractor, or as an owner, the mechanic’s lien law can be your friend or enemy. It gives the contractor important and powerful remedies to enforce payment against a recalcitrant owner for the work done by the contractor to the owner’s property, while at the same time ensuring that the contractor cannot enforce these remedies to the detriment of the owner without complying with the stringent rules of the law. The law definitely works to the advantage of the contractor, but the owner is given some protections under the law, albeit not as many or as powerful as the contractor enjoys.
This article is designed to give a general overview of the way in which mechanic’s lien law is used and the benefits and pitfalls the contractor or owner may encounter. As always, seek the advice of a competent attorney who has the knowledge and experience of this field of expertise. You will see that the article covers some basic real estate law principles which underpin the workings of mechanic’s lien law and should provide some insight as to the reasons for treating a mechanic’s lien with great caution.
What is a lien and what is its effect on my property?
A lien is a right which another person may have on your property. This lien right can be granted to the lienholder through a voluntary agreement, or it can arise by operation of law. The most common example of a lien right arising through a voluntary agreement is a mortgage or deed of trust (also referred to as a voluntary or consensual lien). In this example, the lender will require security for the loan which you need to purchase your property. As the property owner, you agree that the lender will have a lien over your property. In the event that you default, then the lender has the legal right to foreclose and sell your property to recover the amount which you owe. This agreement is recorded against your property with the clerk and recorder for the county in which your property is situated. Many lien rights can arise by operation of law (also referred to as involuntary or non-consensual liens). Common examples include a judgment lien (where a creditor obtains a judgment against you for an unpaid debt, credit card debts being amongst the most common), homeowner association assessment liens (for non-payment of any assessments due to the homeowners association), Internal Revenue Service liens (for unpaid federal taxes). All of these liens will be recorded against your property with the clerk and recorder for the county in which your property is situated. A mechanic’s lien falls into the second category – more about this later.
The concept of priority of a lien - this is one of the most important reasons for a lien
The document evidencing the lien should always be recorded with the clerk and recorder for the county in which the property is situated.
This is one of the most important features of Colorado’s real estate law. The recording of a document (whether it is a mortgage, deed of conveyance, covenants and easements, or a lien) puts everyone on notice that another person has a right in your property so that if you wish to sell or mortgage the property, then the potential buyer or lender will have knowledge of this lien right and will require you to pay the lien holder before they will close on the purchase or loan.
Often there is more than one lien on a property, in which case, the rights of the lien holders will be determined by the date and time of recording of each lien right. The lien holder who first recorded its lien right is given the first priority on payment of the amount owing under the lien. The lien holder who recorded its lien subsequent to the first lien holder is given the second priority on payment of the amount owing under the lien (in legal parlance, in junior position). This order of priority of lien rights then continues to the other lien holders based on the date and time of recording.
This order of priority is very important in the context of a foreclosure of the property, when the various lien holders are entitled to receive the proceeds of a foreclosure sale based on their order of recording, or priority. It should be evident that the holder of the first lien right is in a much more advantageous position for payment in full compared to those lien holders who recorded their liens later and are junior to the senior lienholders. In many cases, the holders of a junior lien right may not receive any payment from a foreclosure sale.
As a brief note, the priority of a lien is also important in the context of a bankruptcy where the rights of the creditors are usually determined on the priority status of their liens.
The State of Colorado has a lien for unpaid real property taxes. This lien is automatic, without any requirements for recording, and is senior to all other liens.
What is a mechanic's lien and who is protected by the mechanic's lien?
A mechanic’s lien is a lien granted by Colorado statute to any person who supplies labor, materials, equipment, machinery, or services which enhance the value of your property.
The mechanic’s lien law favors the contractor over the owner. The Colorado courts have consistently held that the mechanics’ lien laws are designed for the benefit and protection of the contractor and should be construed in favor of the contractors. The purpose is to prevent the property owner from being unjustly enriched at the expense of the contractor by withholding payment for the work done.
Are there contractors who do not have the benefit of the mechanic’s lien laws?
Unless the contractor performs the specific types of work that are specified in the statute, the contractor cannot claim a mechanic’s lien. Examples include the periodic maintenance contracts for garden and lawn mowing services, house cleaning services, janitorial services. However, keep in mind that if, for example, a landscape company installs a new irrigation system, then this company will be entitled to a mechanic’s lien for that improvement,although its general maintenance work will not be so entitled.