Mechanic’s Liens:  A Powerful Tool for Colorado Contractors, Suppliers and Others

Construction project owners and lenders are often confronted with mechanics lien issues.  Colorado mechanic’s lien law provides a powerful tool for contractors, suppliers and design professionals to collateralize claims for payment.  A mechanic’s lien provides its holder with a security interest in the construction project and the real property, often significantly impacting the owner and lender.

Recorded Interest in Real Property

Like a deed of trust, a mechanic’s lien is a recorded interest in real property.  Mechanic’s liens may attach to any real property.  An important exception applies to single-family residential construction, specifically exempting new homes from liens if the buyer has paid the purchase price in full.  To qualify for this exemption, the owner must occupy the property as a primary residence.

Owners may be surprised that lien claimants need not have a contract or other agreement with the owner of the property to assert the mechanic’s lien claim.  Unknown claimants often surface, including surveyors, contract engineers and architects, subcontractors, suppliers and laborers.  The only requirement is that the claimant must have added value to the property, by either performing work or supplying materials, at the request of the owner or person in charge of the construction projection.   Owners should ensure that they are aware of the identity of all service and material providers and that they obtain lien releases from each no less than once a month.

Lenders face the risk that a mechanic’s lien may have priority over the lender’s deed of trust.  The priority date of every mechanic’s lien on a project may relate back to the date when the first labor was performed or the first materials were shipped.  If any lien claimant establishes that work was started on the project prior to the date that the lender recorded its mortgage on the property, every mechanic’s lien holder may have priority over the lender. 

Priority of Liens

The priority of liens impacts which liens will remain on the property after a mechanic’s lien foreclosure sale and also controls the order in which liens are paid from the proceeds of a foreclosure sale.  Mechanic’s liens are satisfied in the following order:

1. The liens of those providing labor by the day or piece, but not materials
2. Liens of all subcontractors or materialmen whose claims are for materials, machinery, or fixtures
3. Liens of all principal contractors.   Construction lenders should obtain subordination agreements from potential lien claimants.

Strict Deadlines

Lien claimants face two strict time deadlines. 

First, a claimant must record its statement of lien no later than four months after the last day on which the claimant performed labor or furnished material.  Claimants must also strictly adhere to the notice provisions prior to recording any lien.  Delivery of the requisite notice to the owner and general contractor must occur at least 10 days before recording the statement of lien.  In addition, the claimant must execute several requisite notarized affidavits of service—steps that claimants often fail to perform properly.

Second, mechanic’s lien claimants must file a lawsuit to foreclose on their liens within six months of the completion of work on the project.  Generally, this six-month period is generally triggered upon the substantial completion of the project as evidenced by the issuance of a certificate of occupancy.  A foreclosure lawsuit may only be filed in the district court of the county where the property is located. In addition to filing the lawsuit to foreclose on the mechanic’s lien, a notice of lawsuit pending, called a Notice of Lis Pendens, must be filed with the County Clerk and Recorder in the county where the property is located within the same six month period. 

Excessive liens are an unfortunate reality.  However, owners and lenders have some relief.  If a statement of lien reflects an amount greater than what was actually owed at the time the statement was filed and that the Statement was prepared in bad faith, a claimant’s lien rights are forfeited in their entirety and the owner can obtain attorney fees and costs.

Release of a Mechanic's Lien

Owners may substitute a bond and release a mechanic’s lien.  This process requires judicial approval and replaces the mechanics lien with a bond in the amount of one and one-half times the amount of the lien plus costs.  Once the bond is substituted, the owner may convey the real property free and clear of the lien. 

This legal update is for informational purposes only as a service to clients and other friends, is not a complete summary of the rules relating to the subject matter discussed above, and is neither to be construed as legal advice nor intended as basis for decisions in specific situations. For more information about this subject matter or other recent developments, please contact the attorneys in our Litigation practice group or any other attorney in our firm with whom you normally consult by calling (303) 825-4200.