Getting Paid Faster with Liens, Bonds, and Contractors - Colorado Webinar

In this webinar, presented by SunRay Construction Solutions, and Shannon Bell, Partner, Kelly Law Partners, LLC., we will break down the essential steps contractors, subcontractors, and suppliers must take to protect their payment rights and ensure they get paid on time in Colorado.

Contract Protections: What to Watch For

Whether you’re a general contractor, subcontractor, or supplier, the golden rule is to get everything in writing. Written contracts offer clarity and protection but can also contain clauses that could work against you. Here are two critical clauses to understand:

• Pay-When-Paid Clauses: These clauses delay payment to subcontractors until the general contractor receives payment from the owner. While this may seem like a straightforward timing issue, it’s important to note that most courts interpret these clauses as obligating the general contractor to pay subcontractors within a reasonable time, regardless of whether the owner has paid.

• Pay-If-Paid Clauses: These are more severe. They make payment to subcontractors contingent on the general contractor being paid by the owner. In Colorado, these clauses require explicit language where the subcontractor agrees to bear the risk of non-payment. Without such language, courts typically treat them as pay-when-paid clauses.

Both clauses can significantly delay payments and create cash flow issues. Be vigilant when reviewing contracts to avoid potential "gotcha" moments.

Prevailing Party Clauses: Don’t Skip These

In Colorado, the American Rule means that each party generally pays their legal fees in the event of a dispute. However, a prevailing party clause in your contract can allow the winning party to recover legal fees. Without this clause, legal costs could outweigh the amount you’re disputing, leaving you with little to no recovery. For example:

• If you’re owed $20,000 and incur $10,000–$15,000 in legal fees, your net recovery might only be $5,000–$10,000. Including a prevailing party clause ensures that if you win, you can recover your legal expenses.

Arbitration Clauses: The Pros and Cons

An arbitration clause specifies that disputes must be resolved through arbitration rather than in court. Arbitration can be quicker than court proceedings, but it comes with upfront costs, such as arbitrator fees and arbitration filing fees. While arbitration can resolve disputes faster, it’s not always the best option when lien rights are involved. Why?

• Arbitration cannot foreclose a lien. To enforce a lien, you’ll need to split the process—first resolving payment disputes through arbitration and then pursuing lien foreclosure in court. This bifurcation can complicate the process, so weigh the pros and cons carefully.

Mastering Lien Rights in Colorado

Liens are a powerful tool for ensuring payment, but they come with strict rules and deadlines. Here’s what you need to know about preserving your lien rights in Colorado:

Key Steps for Filing a Lien

Step 1 - Record Your Lien on Time:

• File your lien with the county clerk and recorder within four months of the last substantial work or material delivery. Note that this is based on calendar months, not days.

• Example: If your last day of work is January 11th, your four-month deadline is May 11th. However, if May 11th falls on a weekend or holiday, ensure you file before the last business day.

Step 2 - Give Proper Notice:

• Provide a notice of intent to lien at least 10 days before recording the lien. This must be sent via certified mail or personal service.

Step 3 - Initiate Foreclosure Within Six Months:

• After filing your lien, you have six months from the last substantial work date to initiate a foreclosure lawsuit. Missing this deadline invalidates your lien.

Common Pitfalls to Avoid

• Extending Lien Rights Improperly: Adding minor work or materials after your lien rights expire won’t reset your deadlines. For instance, delivering a few screws weeks after completing a framing project won’t extend your lien rights.

• Relying on Promises: Conversations about upcoming payments, no matter how promising, do not extend lien deadlines. Act promptly to protect your rights.

Exceptions to Lien Rights and Key Considerations

While lien rights provide a crucial mechanism to secure payments, there are several exceptions and nuances to be aware of, particularly in Colorado. Below, we’ll break down some key exceptions, unique scenarios, and practical tips to ensure you’re fully informed when pursuing your lien rights.

Public Land Projects

If you’re working on public land, such as a project owned by Denver Public Schools, lien rights do not apply. Instead, you must rely on other mechanisms, such as bond claims (discussed later). This is an important distinction, as subcontractors or suppliers often cannot pursue liens on government-owned properties.

General Laborers’ Tight Timeframes

General laborers have a shortened timeframe to record a lien—within two months. It’s essential to act quickly to protect your rights.

Waiver of Lien Rights in Contracts

Certain contracts may include a waiver of lien rights. While these waivers can sometimes be invalidated as against public policy, their enforceability often depends on factors like the sophistication of the parties involved. Always review your contract carefully before signing to avoid surprises later.

Homeowner’s Exception

If you are working on a homeowner’s property—for example, a custom-built home—the homeowner may invoke a special exception to prevent a lien. Here’s how it works:

• Let’s say you’re a subcontractor owed $100,000 for work on a custom home.

• The homeowner can present proof that they paid the general contractor in full for the project (e.g., $1 million as per their contract).

• In this case, the homeowner’s property cannot be liened because it would be unfair to make them pay twice. You would need to pursue the general contractor instead.

This exception does not apply to commercial projects.

Notice Extending Lien Rights

If you’re nearing the four-month deadline to record a lien and resolution is close but not guaranteed, you can file a Notice Extending Lien Rights with the county clerk. This extension:

• Provides additional time without upsetting project relationships (since it doesn’t need to be mailed to anyone).

• Offers a discreet way to protect your rights until you receive payment or decide to take further action.

Substantial Completion and Project Abandonment

The four-month timeframe for recording a lien is tied to the project’s substantial completion date. If a project is abandoned, substantial completion is deemed three months after the abandonment date. Be aware of this nuance when calculating your deadlines.

Notice to Disperser

If you know who is financing the project (e.g., the bank or lender issuing payments), you can send a Notice to Disperser. This step ensures that before funds are released to the general contractor, your payment is prioritized. A lender who ignores this notice can become directly liable for paying your claim. This strategy is particularly effective in getting the attention of both the lender and the general contractor.

Bond Claims: An Alternative to Liens

On public projects or private projects with a payment bond, bond claims replace lien rights. Here’s what you need to know:

• When Bonds Apply: For Colorado state projects over $100,000 or local projects over $50,000, bonds are typically required. Private projects may also use payment bonds, especially for high-value contracts.

• Claiming Bond Payments: Instead of recording a lien, you file a notice of claim under Colorado statutes (e.g., 38-26-106 and 107) and send it to the bond agency.

• Deadlines: You have six months after project completion to initiate legal action on a bond claim. Make sure to adhere to this deadline to preserve your rights.

Understanding Lien Waivers

Lien waivers are common in construction projects and come in two main forms:

1. Conditional Waivers: These are tied to payment. For example, a subcontractor may waive their lien rights once they receive payment for completed work. This type of waiver protects both parties and ensures lien rights are only waived when payment is confirmed.

2. Unconditional Waivers: These waive lien rights regardless of payment status. Exercise caution with unconditional waivers, especially during ongoing projects. Only sign them once you’ve been fully paid for completed work to avoid waiving future rights unintentionally.

Always review the scope and terms of any lien waiver, especially for final payments, to ensure your rights are protected.

Common Questions Contractors Ask

1. Do lien deadlines change if the lien is contested?

No, lien deadlines remain the same regardless of disputes. If your lien is contested, it’s even more critical to record it promptly and initiate foreclosure actions within the required timeframe.

2. Can I refile a lien if I cancel one to allow a customer to receive their next draw? -

Yes, you can refile a lien. However, you must restart the entire process, including filing a new Notice of Intent. Alternatively, you may amend the lien to reflect partial payments without starting over entirely.

3. Do I need to send a lien notice to all unit owners in a condominium project?

Yes, if you’re working on a condo project, notices must be sent to all unit owners, not just the condo association. However, the scope of the lien (e.g., a blanket lien or specific units) depends on whether the work can be reasonably allocated to specific units.

4. Is monthly service work lienable in Colorado?

It depends. Routine maintenance or general service work is unlikely to qualify as an “improvement to real property,” which is the standard for lien rights. However, work that directly enhances the property’s value or functionality may qualify.

Key Takeaway

Lien rights and bond claims can be complex, but understanding the nuances can make all the difference in securing payments and protecting your business. Always stay aware of deadlines, exceptions, and the specific requirements for your project type. If in doubt, consult a legal expert to ensure your rights are preserved.

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