Protection for Contractors and Subcontractors:
How to Get Paid
Under Colorado law, there are several ways for a contractor to pursue payment for work done on a construction project or materials provided for the project. The contractor can sue for a judgment awarding him monetary damages from the party with whom he had a contract. He also has a lien on the property where the construction occurred and can, if he takes the steps necessary to preserve that lien, foreclose on the property and have the proceeds used to pay the lien. A subcontractor can send a notice to the disburser of construction funds and that notice will require the disburser to pay him directly. He may also have a right to sue the contractor for civil theft or issuance of a bad check. These remedies are discussed to some extent below, to give contractors and persons dealing with contractors an overview of the applicable law. Of course, an attorney should be consulted for advice on how to proceed in a particular situation.
1. Mechanic's Lien
What is it?
A mechanic’s lien is a lien that can be placed on real property by a person who has done work that enhanced the value of the property. The lien is for the amount due for the work. The right to the lien exists as soon as work is performed. If the owner of the property (or the contractor who contracted for the work) does not make payment, the person holding the lien can file the necessary documents to preserve the lien and then file suit to have the property sold and the proceeds used to pay the amount owed.
The statutes grant a mechanic’s lien to anyone who has supplied equipment, materials, machinery, tools or labor to be used in the construction, alteration, or repair of any structure or who makes an improvement upon the land itself. Obviously, this includes people who have actually performed construction work on a house. It also includes architects, engineers, and excavators.
What has to be done to preserve the lien on property?
The contractor, subcontractor or other person entitled to a lien must, within the time set by the statutes, mail a Notice of Intent to File Lien Statement. The statutes have very specific requirements for the content of this notice and also specify who must receive the notice. It is strongly advised that a person wanting to send such a notice consult an attorney to make sure the statutory requirements have been met.
After the notice is sent, the person wanting to preserve a lien has to wait at lest ten days and then record a Statement of Lien, as well as the Notice of Intent to File Lien Statement, at the County records office. Again, the statutes provide very specific requirements for what must be in a Statement of Lien and therefore an attorney should be consulted to prepare or review the Statement of Lien.
What is the deadline for filing a Statement of Lien?
The statutes require most persons or companies entitled to a lien to record the Statement of Lien no later than four months after the last day on which labor was performed or the last material or laborers were furnished by the lien claimant. There are two exceptions:
There is a different time limit for workers who performed labor by the day or piece. These workers must file a Statement of Lien no later than two months after the completion of the building, structure or improvement.
If the work was on a one or two-family home, the lien must be recorded within two months after completion of the construction project or the lien won’t be valid against a purchaser who buys the home without notice that the amounts due to lienholders have not been paid. The purchaser will only have notice if he or she has actual knowledge of the amount due, a lien is recorded before the home is sold or a notice for an extension of time in which to file a lien is recorded.
These deadlines are strictly enforced. If the deadline is less than ten days away and therefore there isn’t time to mail the Notice of Intent to File a Statement of Lien and then wait ten days to file the Statement of Lien, the party wishing to preserve his lien can record a Notice of Extension of Time to File Lien. If this notice is properly recorded, then the lien holder will have until four months after completion of the structure or other improvement to file the lien statement. If the lien statement is not filed within the required time and no notice extending the time is filed, the lien is lost.
What costs can be included in the lien amount?
The lien amount is for the value of the materials or labor. This usually means the amount of the lien is for the contract price less amounts that have been paid already. A contractor who provides labor may also be able to include the cost of payments required for fringe benefits paid on behalf of workers, such as insurance payments. However, the contractor should have a contract that includes these costs in the amount charged for the labor.
A party entitled to a lien can obtain interest at the rate provided under the contract or 12 per cent per annum, the rate provided in the statutes.
Late charges cannot be included in a lien.
Some costs incurred in the filing of a lien can be recovered. This would include the fee for filing a lawsuit. However, not all costs can be included and an attorney should be consulted about particular costs.
A lienholder cannot recover his attorneys’ fees incurred in filing the lien statement and foreclosure lawsuit and it is not proper to include such fees in the lien amount.
A lienholder must be careful to limit the stated lien amount to items that are properly included. The statutes provide that a court may cancel the lien of a lienholder who files a lien for an amount that is in excess of the amount that is reasonably due.
What is the deadline for the filing of a lawsuit to foreclose on a lien?
A lienholder must file suit to foreclose on the property no later than six months after the building, structure or other improvement is completed. Also, if the construction project is abandoned, then the lawsuit has to be filed within six months after the project is deemed to have been abandoned. The statutes say a project is abandoned when all labor, work, services has discontinued for a three month period.
How long will it take to get a court order requiring the property to be sold?
There is no specific time period for a lawsuit to be concluded. If the owner of the property doesn’t answer the complaint, then it might be possible to get a judgment in a few months. If the owner of the property defends the lawsuit, then it could take over a year to get a final order from the court.
How can the owner of the property defend against a claim of lien?
The owner can claim that the work was not done, not done properly or was paid for.
There is also a defense for the owner of a single family home who has paid an amount equal to the initial purchase price or contract amount for the home plus any additions or change orders. This defense applies in the following situations: 1) the owner contracted for the construction of the residence or for remodeling of the residence and occupies the residence as his primary residence, 2) the owner did not contract for the construction of the residence but bought it for his primary residence. Because of the statute providing this defense, subcontractors have to be careful when working on a single family home. They may find that even though their time for recording a lien has not expired, they cannot have a lien because the owner of the home has paid the contractor.
When the property is sold at a foreclosure sale, what happens if there is a deed of trust or mortgage on the property?
When the property is sold at the foreclosure sale, the proceeds are paid first to the party with first “priority,” and then, to the party with “second priority” and so on. If the sales price is not enough to pay all liens, the junior liens won’t be paid and will be extinguished by the sale.
In Colorado, the priority date for a deed of trust or mortgage is the date it is recorded. The priority date for a mechanic’s lien is the date any person began work on the project. This includes work by an architect or excavator. This is the priority date for all mechanic’s liens on the property. This means that all parties with a mechanic’s lien have the same priority.
It is usually possible to show that some work on the project began before a deed of trust for a construction loan was recorded. Thus, on many projects, the parties holding mechanic’s liens will have priority over a deed of trust on the property. However, a deed of trust recorded for a loan used to purchase the real estate may predate the date work began on construction and thus have priority.
In only a few cases, a party with a mechanic’s lien will be able to have priority over deeds of trusts or mortgages recorded before work began. When work is done on new construction , the lien for work done will be a first lien on the building. However, this is true only with respect to the building and not the real estate underlying the building. Also the lienholder will not have a prior lien to the construction loan if 1) the deed of trust for the construction loan was recorded before work began and 2) the proceeds from the construction loan have actually been applied to payment for the construction.
2. Notice to Disburser
There is a provision in the statutes that subcontractors, materialmen and laborers may use to insure that the owner or lender disbursing construction funds pays them directly, instead of making payments to the general contractor. A subcontractor, materialman or laborer can give written notice to the owner of the property or the financing institution (whichever is responsible for disbursing the construction funds) telling the owner or lender that he has performed labor or furnished materials for a principal contractor and the estimated or agreed amount in value of the work done or materials furnished. The subcontractor, materialman or laborer can also provide notice before doing the work stating that he has agreed to provide labor or materials. Then the owner or lender must withhold enough money to satisfy the claim of the subcontractor, materialman or laborer.
This can be a valuable tool for a subcontractor because he or she won’t have to rely on the principal contractor to pay the subcontractor out of funds paid to him by the owner or lender.
3. Suit for Money Due
Every contractor, subcontractor, materialman and laborer who is not paid an amount due for his work has the right to sue the party with whom he contracted for a money judgment for the amount due. This is a right that exists whether or not the worker has filed a mechanic’s lien or even has a right to file a mechanic’s lien. The lien is a way to recover the amount due from the value of the property on which work was performed. A suit for a money judgment is a suit to receive a judgment that can be collected from the party owing the money. If the judgment is not paid, the party with the judgment will have certain rights to seize property of the party owing the money, whether or not it is the property on which the work was performed.
4. SUIT FOR BAD CHECK
Sometimes an owner or contractor who is in financial trouble will issue laborers or materialmen a bad check. In Colorado, a party who receives a bad check can file suit against the person who wrote the bad check and collect treble damages and attorneys fees. There is a special procedure for this kind of lawsuit so a party wanting to pursue this remedy should consult an attorney.
5. SUIT FOR CIVIL THEFT
Another claim a subcontractor may have against a contractor is a suit for civil theft. This is a possibility when the owner has paid the contractor funds that should then be paid to subcontractors but the contractor uses the funds for another purpose. In this case, the subcontractor may have a claim against the contractor under a statute that authorizes the victim of theft to recover treble damages and attorneys’ fees.
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