Mechanic’s Liens in Colorado | Complete FAQ
What is a mechanics lien? How do you put a mechanic’s lien on a property? What is a notice of intent to lien? How do you file a mechanic’s lien? All of these are great questions. The guide below has all the answers.
Depending on which role you play, either as a contractor or as an owner, the law of mechanic’s liens can be your friend or enemy. The law gives contractors important and powerful remedies to enforce payment against owners who will not pay for work performed. At the same time, the law ensures that contractors cannot enforce these remedies if doing so would be unfair or if the contractor does not follow the legal requirements. The law is certainly advantageous to construction professionals. Although the law provides owners with protections, the protections are not quite as powerful as the ones given to contractors.
Below, we will provide a general overview of how mechanic’s lien law is used, as well as the benefits and pitfalls that the contractor or owner may encounter. As always, you should seek the advice of a competent attorney who has knowledge and experience in this field of expertise.
What is a mechanic’s lien?
First, some background on what a lien is. A lien is a right that another person on your property. A lien right can be given to the lienholder through a voluntary agreement or 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 that you need to purchase your property. As the property owner, you agree that the lender will have a lien over your property. If you default, the lender has the legal right to foreclose and sell your property to recover the amount that you owe. This agreement is recorded on your property at the clerk and recorder’s office in the county where your property is located. Here is a link to Denver’s Clerk and Recorder.
Many lien rights can also arise by operation of law (also referred to as involuntary or non-consensual liens). Common examples include:
- Judgment liens (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); and,
- Internal Revenue Service liens (for unpaid federal taxes).
All of these liens will be recorded at the clerk and recorder’s office. A mechanic’s lien falls into the second category and is a “non-consensual lien” that arises by operation of law.
Lien Priority: How does it work?
You should always record the document identifying the lien with the clerk and recorder’s office in the county where the property is located.
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 to your property. If you wish to sell or mortgage the property, 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 lienholder who first recorded its lien right has the first priority on payment of the amount owing under the lien. The lienholder who recorded its lien after the first lien holder has 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. The various lien holders are entitled to receive the proceeds of a foreclosure sale based on their order, or priority of recording. The holder of the first lien right, therefore, is in a much more advantageous position for payment in full compared to those lien holders who recorded their liens later. 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 bankruptcy where the rights of the creditors are usually determined on the priority status of their liens.
Additionally, 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.
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 that enhance the value of your property. The complete definition is found in C.R.S. 38-22-101.
Mechanic’s lien law favors the contractor over the owner. Colorado courts consistently hold that the mechanics’ lien laws are designed for the benefit and protection of the contractor. They also hold that they should be construed in favor of 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?
Contractors can only claim a mechanic’s lien if they perform the specific types of work that are specified in the statute. Types of work that would not qualify include 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. That same contractor, however, would not be entitled to a mechanic’s lien for its general maintenance work.
When and how does a mechanic’s lien arise?
A mechanic’s lien enjoys a privileged status under Colorado statutes. Earlier, we described the concept of lien priority and the need to record the lien documents with the clerk and recorder in the county where the property is situated to create the lien and gain priority.
This is not the case with a mechanic’s lien. Under Colorado law, the right to a mechanic’s lien arises at the commencement of the work. It is crucial to keep in mind that the commencement of work is not when the contractor starts to dig the dirt! The commencement of work can reach back as far as when the property owner hires professionals (architects, engineers, town planners, surveyors, etc.) to assist in the design of the project. The moment that a contract is executed with any of these professionals is when the work commences (whether it’s a new build, remodel, fix and flip, of whatever scope or size). The work that each of these professionals does falls under the statutory definition of work, and each one is entitled to a mechanic’s lien for the work which they perform.
Does a mechanic’s lien have any special priority?
Yes, a mechanic’s lien has a special priority. Contractors do not have to record a mechanic’s lien statement with the county clerk and recorder until they decide to enforce their lien. Contractors have lien rights from the first day that the work commences without any recording requirements. These lien rights are superior to any other interests and rights in the property. The contractor will prevail over anyone else who may record a lien, even if they do not know that the work was or is being performed.
Therefore, the mortgage or deed of trust of a lender who lends you money to purchase your property will be junior to the mechanic’s lien. In the event of a foreclosure, the mechanic’s lien holder will be senior to the lender and will retain its priority without being affected by the foreclosure.
Clearly, these special mechanics’ lien rules upend the concept of the recording statute and the priority of recording discussed earlier. The law provides contractors with a powerful weapon to use in collecting payment.
The fact that the lien dates back to the commencement of work is often described as a “secret lien” because there is no record of its existence. Colorado is unusual for allowing this “secret lien”. Most other states require the recording of some form of notice to signify that work has commenced so that third parties are on notice of the potential risk for a mechanic’s lien.
Another peculiarity of the “relation back doctrine” is that a contractor who is one of the last to supply work, labor, or materials on a project (such as the painter or carpet installer) still benefits from the fact that the priority of that contractor’s lien relates back to the commencement of the work. As a result, the contractor’s lien will be senior to any other lien.
How much can a contractor claim under a mechanic’s lien?
A contractor can claim a mechanic’s lien for the entire contract price of the project. A contractor is also entitled to receive interest at the rate specified in the contract, or in the absence of an agreed rate of interest, at the rate of twelve percent per annum.
A contractor cannot file a statement of lien for more than is due. If you can prove that the amount claimed in the lien exceeds the amount due, the contractor will forfeit its lien rights. The contractor will be liable to the owner for the costs and attorney’s fees in proving that the amount claimed was excessive.
If a partial payment on the contract price is made, the contractor must file an amended statement of lien to reflect the new amount owing.
Keep in mind that the contract must be in writing and signed by the owner and the contractor (unless the contract price is less than $500).
How do I know that there is a mechanic’s lien on my property?
The right to the lien arises on the commencement of the work and does not require the recording of any notice to this effect. Because of this “secret lien”, it may be difficult to determine if any contractor is entitled to a mechanic’s lien, especially if the work done is behind the scenes (like planning and surveying).
A number of situations should put you on your guard to the possibility of mechanics’ liens, such as recent construction or work done to the property. If you purchase a newly constructed house, or recently remodeled house, then the existence of a mechanics’ lien is very likely.
In contrast, in the typical residential sale, the seller may have contracted for repairs to the house (for example to repair recent hail and storm damage to the roof to replace carpeting or flooring, or to paint the house). This type of work is not as self-evident as the new build or remodel, but the work will still give rise to the possibility of a mechanic’s lien.
What steps must a contractor take to record a lien statement and what is the effect of the recording of the lien statement?
Colorado’s lien law arises from statute and the contractor filing the lien must strictly adhere to the specific requirements of the law. A contractor should record a statement of lien to (1) preserve its lien rights, and (2) to commence foreclosure of the lien, in the event of non-payment of any amount owed under the contract.
The contractor will first serve a Notice of Intent to File a Lien Statement on the owner of the property, at least ten days prior to the actual recording of the lien statement. This notice must be served on the owner by personal service, or by registered or certified mail, return receipt requested, addressed to the last known address of the owner. This document is sometimes abbreviated as the notice of intent to lien.
Once this 10-day period has elapsed, the contractor will then record the lien statement with the clerk and recorder. The contractor must include an affidavit of service as proof that the contractor complied with the ten day prior service period. Failure to serve notice and provide the affidavit will invalidate the lien statement.
The recording of the lien statement makes it effective for one year from the date of its filing. But, this is subject to the time limits imposed when the work is complete – more on this later.
A contractor may also record a Notice to Extend Time to File Lien Statement. This notice gives the contractor additional time to file the lien statement.
When will a mechanic’s lien terminate?
A mechanic’s lien does not go on forever. Its duration is limited by a number of different time frames, which can be confusing. The general rules for the termination of the mechanic’s lien are:
Payment in full or part:
The owner pays the amount due to the contractor in exchange for a waiver/release of the contractor’s lien rights. The waiver can be a complete waiver of all lien rights. This is usually done when the contract price is paid in full. If the owner makes a partial payment, based on the work done to date, the contractor will issue a partial lien waiver, and preserve its lien rights for work done, but not yet paid. The lien waiver usually will be conditional on the owner’s bank paying the check. Typically, these lien waivers are dated thirty days prior to the actual date of the payment to ensure that the contractor does not waive its lien rights without the security of payment.
The contractor will file a release/partial release of the lien statement if it has been recorded. In fact, there is a penalty of ten dollars for every day that the contractor neglects or refuses to file the release of the lien. This penalty is due and payable ten days after the written request for the release of the lien.
The contractor completes the work required by the contract and 6 months elapses:
The contractor may file its lien statement if there is any dispute about the payment. If the work supplied was for labor and work by the day or piece, then the contractor must file its lien within two months after the day on which the last labor was performed. If the work supplied was for any other type of work, labor, or materials, then the contractor must file its lien within 4 months after the day on which the last labor, work, or materials are supplied.
In any event, the lien of all contractors terminates 6 months after the day on which the last labor, work, or materials are supplied, unless the contractor commences a court action to foreclose its lien.
Are there special rules for the termination of the mechanic’s lien where the property is a single or double family dwelling?
Yes, there are two special rules which provide protection to the homeowner. The first rule reduces the time limits to file a lien and the second rule provides a complete defense to any claim brought by the contractor. Each of these rules has its limitations.
The first special rule reduces the time within which the lien must be filed to 2 months after completion of the improvements. This rule applies to single- or double- family dwellings. The two month period is not applicable (1) if the buyer has actual knowledge that the contractor has not been paid, or (2) if the lien statement has been recorded prior to the conveyance of the property to the buyer, or (3) if a notice extending the time to file the lien statement has been recorded within one month subsequent to completion or prior to conveyance (whichever is the later).
For the purposes of this special rule, completion is deemed to occur when the property is conveyed and occupied by the buyer. You should be aware that the rule is not limited to the primary residence of the owner and therefore will apply to second and vacation homes (unlike the second rule below).
The second special rule provides the owner with a complete defense to the mechanic’s lien if the property is a single-family dwelling unit intended for the primary use of the owner. There are a number of requirements before the owner can make use of this defense: (1) the property must be an existing single-family dwelling unit; (2) the property must be a residence constructed by the owner, or under a contract entered into by the owner prior to occupancy as the owner’s primary residence, (3) the property must be occupied by the owner as their primary residence, and (4) the owner has paid or caused to pay all amounts required to satisfy the construction contract amount. If you can meet these requirements, then you will enjoy the benefit of this affirmative defense.
What happens if the contractor walks off the job and never returns?
A contractor may abandon the project and never complete the contract. Colorado statute defines “abandonment” as the discontinuance of all labor, work, services, and furnishing of laborers or materials for a 3-month period.
For purposes of the lien, abandonment of the work will constitute completion of the work, which triggers the 6-month period for the contractor to file a foreclosure action for non-payment of the work completed. This effectively creates a 9-month window before the property can be considered free of the possibility of a lien claim.
I want to sell or refinance my property. What options are available to me if there is a mechanic’s lien on my property?
Consider this: You are under contract to sell your property and the closing date is approaching. There is a problem with the work performed by a contractor you hired to get the property ready for the sale. You and the contractor are now in a dispute about the quality of the work and it is clear that this dispute will not be resolved by the closing date. What can you do?
Possible protection under a policy of title insurance
First, some background. The seller or buyer probably has hired a title insurance company to provide the closing and settlement services. The title insurance company will also issue the report on the title (commitment) and the policies of title insurance to the buyer and the buyer’s lender. This is usually part of the contract terms.
The title insurance policy insures that the buyer will be the owner of the property and that there are no defects, liens, or encumbrances which can affect the ownership. Any existing liens are cleared as part of the closing process. This means that the seller must pay these liens from the sale proceeds. A mechanic’s lien will be one of the liens cleared at closing and, almost certainly, the buyer and the title insurance company will require payment to the contractor before allowing the closing to take place.
Escrow by the title insurance company
Unless you are willing to pay the contractor, then you should request that the title insurance company withholds an agreed amount from your sale proceeds and to retain that amount in its escrow account. This is commonly called “escrowing” or “bonding” over the lien. In this context, both terms have the same meaning, but “bonding” over the lien can also have a very different meaning, as explained later.
How is the escrow done? The title insurance company will require you to enter into an agreement with them. This agreement usually sets out the terms of the escrow, such as the duration of the escrow, disbursement of the escrow on completion. The agreement will also include an indemnity from you in favor of the title insurance company. This indemnity essentially holds the company harmless and ensures that you agree to reimburse them for any loss they may incur as a result of the enforcement of the mechanic’s lien.
The amount of the escrow will likely be based on 150% of the face amount of the lien. This percentage is taken from the amount required to bond over a lien under the mechanic’s lien statute. Some title insurance companies may require more than this percentage. The term of the escrow will be based on the same statutory time limits, as discussed above.
At the end of the applicable time period, the title insurance company will return the amount escrowed, unless the contractor has commenced a foreclosure action.
However, there is a serious pitfall in using an escrow. If you cannot resolve the dispute, then the contractor’s most powerful weapon is to start the foreclosure of the lien. This court-based action immediately puts the ownership of the property at risk and will force the seller, the buyer, and the title insurance company to respond.
Problems with the escrow procedure
The escrow agreement probably will authorize the title insurance company to use the escrowed funds to pay the contractor to prevent the threat of foreclosure. This is the duty of the title insurance company anyway under the terms of the title insurance policies. This is contrary to your intention to hold the escrow to buy time to resolve the dispute post-closing.
Finally, the buyer, and potentially the buyer’s lender, should agree to this arrangement. In many cases, they will refuse to allow the escrow and demand payment of the mechanic’s lien.
Substitution of Bond (“Bonding Over”)
This is not the same procedure as “escrowing” over the lien described above. This is a procedure authorized by the mechanic’s lien statute.
A court action must be commenced by the owner to apply to the court for the acceptance of a bond in substitution for the lien over the property. If satisfied that the bond provides the required collateral, the court will issue an order directing that the mechanic’s lien claimant obtain satisfaction of its lien from the issuer of the bond. At the same time, the court will order a release of the mechanic’s lien from the property.
Often the contractor has already commenced a court action to foreclose a mechanic’s lien, in which case the owner can file the motion for substitution of bond in the same case.
The owner must deposit cash in the amount of 150% of the face amount of the lien, or, alternatively, obtain a bond for this amount. The bond will be issued by a reputable insurer who will require the owner to provide some type of collateral security to the insurer, and the payment of a fee for issuing the bond.
If you have established an escrow with a title insurance company, then you may be able to request the company to pay the escrowed funds into the court registry in exchange for the court-ordered release of the mechanic’s lien.
What about a tenant’s improvements?
Be careful when allowing a tenant to construct improvements on your property. Although the tenant will enter into the contract with the contractor, the owner is deemed to have been party to that work and the right to a mechanic’s lien will attach to the property, even though the work is for the tenant.
The effect of this stringent rule can be avoided if the owner gives notice either (1) to the contractors, or (2) by posting it in a conspicuous place on the land and buildings. This notice must be given within five days after the owner has knowledge of the tenant’s proposed improvements. Once the notice has been given, the owner’s property will not be subject to a mechanic’s lien arising out of the tenant improvements. You may have seen these notices frequently posted in the entrances and lobbies of commercial buildings.
If I don’t pay the contractor, what will happen to my property?
The answer to this question goes to the heart of the special status given to mechanics’ liens.
If you fail to pay the contractor, the contractor will exercise its rights under the mechanic’s lien law to file a statement of lien (after giving you the statutory notice and in accordance with the applicable time periods) and then commence an action to foreclose the lien.
This immediately places the owner in a defensive position, forcing the owner to respond to the complaint and to go through the court process. The owner, of course, can defend the action, but this is time consuming and costly, involving depositions, discovery, and eventually a trial.
A feature of the mechanic’s lien statute is that if a contractor commences the foreclosure action, all other contractors are brought into the same action, resulting in multiple parties, and greatly increasing the size, scope, and cost, of the action. You are strongly advised to consult your attorney about this and not to go it alone.