Beware of Lien Loopholes and Timing - Colorado Webinar

In this blog, presented by SunRay Construction Solutions and Shannon Bell, Partner, Kelly Law Partners, LLC, construction professionals in Colorado can learn about everything related to a mechanics lien and how to deal with them.

What is a Mechanics Lien?

Construction professionals frequently encounter the term "mechanics lien" while working on various projects. But what exactly is it?

• A mechanics lien or a construction lien is essentially a tool that allows contractors, subcontractors, material suppliers, and basically anyone who makes improvement on real property, to secure the debt that is owed to them by placing a lien on the property.

• Oftentimes, not every construction professional will have a direct contract with the owner of the real property. But the mechanics lien allows those professionals to go over to the general contractor and secure their rights to get paid on that real property.

• The mechanics lien is a statutorily created remedy which allows you to encumber somebody’s real property and put a cloud on the title of their ownership.

• A key point to remember here is that every state has its own specific requirements with regards to mechanics lien. And to protect your rights, you must ensure that you are diligently following those requirements.

Now that you have an understanding of what a lien is, let’s take a look at what isn’t a lien.

What are NOT Liens?

• First and foremost, a lien is not a guarantee of payment. You can perfect your lien, have all your notices out, get it recorded on time, etc., but it still does not mean that you will get paid on that lien.

• Depending on what type of project it is and the timing of it, a lien may have super priority which means that it’s going to jump ahead of all the other encumbrances on the property, including most likely their actual deed of trust for the mortgage.

• In some cases, you may not be able to jump over that priority line or it may just not be worth it to foreclose on the lien.  

• Also, a lien is something that cannot be rushed or done sloppily. If you don’t do it properly, you will end up losing your lien rights and the ability to get paid.

• A key point to be aware of is that your attorney’s fees are not part of the lien statute. So, if you hire an attorney to help you with it, you file your lien, foreclose the lien, and get paid on your lien, you do not automatically get your attorney’s fees paid to you as part of a lien claim.  

The Lien Form

The lien form is a crucial document because the form is what will help you in perfecting your lien. The lien form typically consists of two parts: the Notice of Intent to Lien and the Lien itself.

• The first thing to bear in mind is that although there are two parts to this, then the entire lien form is one document. You need to fill out all the required information to perfect it.

• There are two ways to work with the form. You can either do it front and back, meaning that it is a one-page document with the statement of lien on the front and the notice of intent to lien on the back of the page.

• The second option is to do it as a two-page document with the state of lien on page one and the notice of intent to lien on page two.

• So, remember that even though you have two different titles, it is considered as one document only.

How to Perfect a Lien?

A perfect lien is one that is valid in notice, time, and amount as required by the law. It is absolutely crucial to remember these primary things, i.e., notice, time, and amount because these three things are needed to perfect your lien. So, you need to ensure that you have all the required information included in that notice, you get everything out on time, and you have the correct amount that is owed to you listed on the form.

There are three main steps to do this:

Step 1 - Complete the Lien Form

First, you need to fill out the appropriate form.

Step 2 - Send Notice of Intent to Lien

Second, you need to send the Notice of Intent to Lien to the owner, reputed owners and the general contractor (if you are not the general contractor). This notice will let everyone know that you are giving them the notice that you haven’t been paid and you are ready to record a lien.

Step 3 - Record the Lien (If Unpaid)

Third, if nobody gets back to you after you send that notice of intent to lien, then you go ahead and record the completed lien with the appropriate county clerk, i.e., the clerk and recorder of the county in which the real property where you perform work is situated.  

Filling out the Form

Let’s take a detailed look at how to fill out the form and the necessary steps related to it.

• First and foremost, you need to identify yourself and your role in the project. This may be a redundant task, and you might end up putting in this information multiple times on the same form. However, it is a crucial piece of information, so make sure you identify yourself correctly wherever required.

• Next, you are making a statement of lien, and you need to identify your correct address.

• You need to identify the general contractor. Even if you are the general contractor, then you list yourself again.  

• In the next section, you need to identify the owner and the property address, including the legal description of the property. When we say owner, it can also refer to reputed owners. So, basically you will want to identify anybody who is in on that chain of titles owing the property or claiming to own the property.

• The legal description is another key piece of information because you need to give notice to the clerk and recorder about the property at issue. They should have sufficient information to get this recorded in such a way that it's going to show up on the property records for the property where the work is performed.

• You must name the property correctly because a lien clearly cannot attach to property other than that mentioned in the lien statement. So, if you name a wrong property or if you don’t name the property, you will lose your lien rights.

Now that you have completed the ‘notice’ part of perfecting your lien, let’s look at the ‘amount’ requirements.

• Under no circumstances should you overestimate the amount owed to you.  

• An exaggerated lien will be void and make the claimant liable for any court costs and attorney fees. Remember that we had earlier mentioned that the attorney fees are not covered by the lien statute.

• So, as per the lien statute in Colorado, as a lien claimant, you are legitimately owed money, you have recorded your lien, you filed your lien, and you got paid for that lien. But your attorney fees are not covered under the lien statute. You might be able to recover them under a contract but not under the statute.

• However, an owner who has had an excessive lien paid on their property, automatically gets their attorney's fees if they're successful in demonstrating that it was overstated and getting that removed. This is why it is important to put in the correct amount.

• For example, if you are owed $100,000 and you have been paid $50,000. Your lien amount should only be $50,000. If you enter $100,000 as your lien amount, it means that you have exaggerated the amount, and it can end up causing a problem for you.

• And then, you must sign and notarize it.  

Now that you have filled in all the required information on page one, let’s look at what is required on page two.

• On page two, you are going to verify all the ‘notice’ elements and put in all the mailing certificates.

• So, you will state that you are giving a notice and sending it to the owner, reputed owners or their agents, you will mention all the addresses, sign and notarize it, then you are going to send them out via certified mail, return receipt requested. You can also deliver them personally. If so, you're going to change that certificate of service to represent how you're sending it.  

• You will perform the same process when sending it to the prime contractor and their agents.

• You can also send it via regular mail. Because often when you have a general contractor or an owner who is getting behind, they know this is get nervous when they get certified mail. They do not want to sign for it.  

• So, if you send regular mail and it is not returned, that's good evidence if you must go to court to foreclose on this, that they rejected that certified mail. You sent it via certified mail, you did what you are supposed to, but you also did regular mail and that was not returned demonstrating that was a good address for the owner or the contractor.

Now there is one important section of the notice that you need to pay attention to.

• So, even though you are filling in details on the front and back page of the document and the front of the page has the title statement of lien, all of this is just your notice of intent to lien. You must fill the details on both the pages to send it out.

• The ‘timing’ part of perfecting your lien means that you are mailing the notice of intent to lien to the owner and the general contractor, and you are saying that if you do not get paid in 10 days, then you will go ahead and record the lien.

• The bottom part of page two or at the back of the statement of lien is something you must fill out after waiting for the requisite 10 days. This means that after the 10 days have expired, you will go back to that affidavit of service on the bottom and complete it. The section also clearly states that the notice of intent was served as evidenced by these certificates of service above at least 10 days.  

• If you fill in that affidavit of service at the time of mailing it, you can lose your lien rights.  

To summarize, before you go ahead and mail that notice, do a thorough check.

• Do a final review to check if you have all the correct information, ensure that you have mentioned the correct dates, and whether the document has been signed and notarized in all the right places.  

• Once you have verified that everything is correct, you can mail a copy of the form. Keep the original Notice of Intent to Lien with you because after that 10 days have expired you need to fill in the affidavit of service section and take the original to have it recorded at the appropriate county clerk’s office.

• Once you have mailed the copy of the form, there is nothing else for you to mail out.

How to find Ownership Details in Colorado?

Sometimes it can be difficult to find out ownership details or to find out if you are sending them to the right people for the general contractor. Here are a couple of tools that can help you in finding this information.

The first one is the Colorado Secretary of State website.

• You can access it through, https://www.sos.state.co.us/ or you can go to your preferred search engine and just type Colorado Secretary of State and it will take you to the right website.

• Once you are on the homepage, you can click on Businesses, trademarks, trade names and then type in the business name.

• You can navigate through the page which will bring you to the summary page where you will find information about the principal office street address, registered agent’s name, and address, etc.

• This is a great tool to use to fill out the mailing certificates to make sure that you are getting the notice out to all the right people.

The second tool which is great for finding out the legal address of the property is the Clerk and Recorder’s websites.

• You can go into the specific city and county and search for the required records.

• You can play around a little to get access to the required records.

Utilizing other tools and simple searches may yield results.

Timing is Everything

We mentioned earlier that it is crucial to be perfect in three elements, i.e., notice, amount, and time. However, the court may give you leeway about your notice and amount. So, if you have not exaggerated an excessive amount or if the owner has received the notice but the address was not right, you will still have some leeway. However, one element where you have absolutely no leeway is timing. If you miss the timing on your lien rights, then it is gone forever. Here are a couple of things to consider regarding timing.

• You must record the lien within four months of the day on which the last material or labor was furnished. Remember that you cannot record unless you have given notice of intent to lien and the requisite 10-day notice has expired.

• However, you need to keep an eye on when you have finished substantial work on the property and then within four months of that you have to record your lien. Punch list items cannot extend this timeline.

• You must serve the notice by certified mail or personal service at least 10 days before the four-month deadline. So, let us say you finished your substantial work on January 11^th, then your four-month deadline would be May 11^th. This means that your notice should be out by May 1^st.

• You must look at your county requirements in advance. In some counties, you may be able to file the final statement of lien online. You will need to pay money to set up the account and there are some additional steps associated with it. Some of the clerk’s offices are open three days a week. So, you need to know all these requirements in advance to ensure that you can record the lien on the day you want to.

• You must initiate your lawsuit to foreclose within 6 months of your last work or completion of the project, whichever is later.

• For example, you finished your substantial work on January 11^th, which means you want your lien recorded by May 11^th. This means that you need to mail it out on May 1^st.

• Everything looks correct but you realize that May 11^th falls on a Saturday. That is going to be a problem because you cannot record your lien on Saturday, Sunday, or a court holiday.

• So, if you send your notice on May 1^st, you have lost your lien rights because you cannot record 10 days later. You will be able to record only on May 13^th which means you are past your four-month deadline.  

• This is why it is extremely important to look at all these dates and look at them early.  

Lien Exceptions

Here are some lien exceptions that you should be aware of.

• If you are doing work on a governmental entity or public land, you cannot lien it. Instead, you will be able to file a bond claim.

• If you are a general laborer, then you must record your lien within two months of finishing your work and not four months.

• If you are under a contract, maybe you waived your lien rights in the contract. So, if you do a notice of intent to lien and the general contractor comes back saying that you have waived your rights to lien the property and they end up being right, then you will be in a position where you are paying attorney's fees for the other side to release that lien.

• There is a possibility of notice extending. If you realize that you may not be able to record your lien within the four-month deadline, then you can record a notice extending with the Clerk and Recorder’s office. It is just a document which will allow you to extend your time to record your lien rights.  

• In terms of substantial completion, if the project is abandoned, then the substantial completion is deemed three months after abandonment.

• The homeowner’s exception only applies to residential property. So, for example, you have a homeowner who hires a general contractor to do a $500,000 worth project and he pays the general contractor in full. However, the general contractor doesn’t pay downstream and then you as a subcontractor goes to record a lien, the homeowner comes back saying that you cannot encumber the property because they have already paid the general contractor in full. This is a valid defense in the state of Colorado.

• If they have a legitimate homeowner's exception and you record the lien anyway, or you try to pursue, you now are going to pay that homeowner their legal fees to get that lien released.

Liens on Multi-Ownership Properties

If you are working on townhomes, condominiums, etc., then you have some different lien rights.  

• Blanket Lien – A blanket lien consists of a single lien claim, for the entire contract debt, against all units or properties that benefited from the work. Blanket liens are valid where the cost or value of the labor or materials cannot be readily and definitely divided or apportioned.

• Several Lien – A several lien, which consteists of separate lien claims against each of the units or properties that benefitted from the work. The amount of each of the several lien must be in proportion to the value of the labor and or materials furnished for that unit.

• Entire Lien – An entire lien, which consists of a single lien claim for the entire contract debt against only one of the units or properties that benefitted from the work. An entire lien is valid only if all of the units or properties are solely owned by the debtor and the cost or value of the labor or materials cannot be apportioned.

So, what’s the risk involved if you are working on multi-units? Well, once the units start getting sold, you will not have your lien rights and you cannot apportion it. So, you will need to start chipping down what you can recover.

• If you are going to do one of these multi-ownership liens, it's really important to describe all the properties that can be liened because as explained earlier, you can only lien property that is listed.

• If possible, do allocate the value of the work among all the individual units or properties that benefited from the work. This is because if you fail to do so, the Court may use its equitable discretion to apportion the claim, and this is not something to leave up to the Court.

• Make sure that you maintain all the records sufficient to apportion costs between various units.  

All is not Lost

Although we have mentioned the importance of notice, amount, and timing for perfecting your lien and how failing to adhere to them can result in you losing your lien rights, you need not worry because all is not lost.  

If you have lost your lien rights, then you still have common law rights for breach of contract, unjust enrichment, or other applicable common law claims. However, you can sue only the party that hired you.  

Key Takeaways

So, to summarize, the key action items when dealing with a mechanics lien include:

• Paying attention to deadlines.

• Keeping good records.

• Being careful with the forms.

• Ensuring that you are not sitting on your rights. Do not wait until the fourth month, if possible, to record your lien.

For further guidance or assistance with complex situations, consulting experts at SunRay, who specialize in Colorado lien laws, is always a smart choice. We offer personalized advice to protect your rights and ensure a successful project outcome. Call us today on 800-403-7660 to get the payment you deserve!

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Common Questions Contractors Ask

1. What are the most common mistakes contractors make that can invalidate their lien rights in Colorado?

The most frequent errors include:

• Missing Deadlines: Colorado has strict deadlines for sending preliminary notices and filing liens. Missing these by even a day can invalidate your rights.

• Incorrect Property Descriptions: If the property description on the lien isn't accurate and complete, the lien may be unenforceable.

• Improper Service of Notices: Notices must be sent to the correct parties in the proper manner (certified mail, etc.) to be valid.

• Incomplete Lien Statements: The lien statement itself must include all required information, such as the amount owed, a description of the work, and the property owner's name.

• Failing to Send Preliminary Notices: In many cases, sending a preliminary notice is a prerequisite to filing a valid lien.

2. What are some "hidden" or lesser-known lien loopholes in Colorado that contractors should be aware of?

Here are a few nuances to be mindful of:

• Partial Lien Waivers: Be cautious when signing these, as they can waive your rights to a portion of the amount owed.

• Change Orders: Change orders can affect lien deadlines, so make sure to track them carefully.

• Public Projects: These often have unique bonding requirements and notice procedures that differ from private projects.

• Notice of Intent to Lien: Sending this notice before filing a lien is not required, but it can be a helpful strategy to encourage payment.

3. How can I protect my lien rights in Colorado if a project has multiple subcontractors or complex payment structures?

Complex projects require extra diligence:

• Conditional Lien Waivers: Use these to ensure you're only waiving rights to amounts you've actually been paid.

• Track Payments Meticulously: Keep detailed records of all invoices, payments, and outstanding balances.

• Multiple Liens: If you're working for a subcontractor and not being paid, you may need to file a lien against both the property and the subcontractor's bond.

• Communication: Maintain open communication with the general contractor and property owner about payment issues.