As everyone who has ever taken on a substantial home remodeling project knows, the dream of a brand new kitchen, or of an addition to one’s home, can turn into a nightmare. The dust and almost inevitable delays, and the inconvenience of doing the dishes in the bathroom sink, however, will seem like small problems if the homeowner is hit with a mechanic’s lien.

What is a mechanic’s lien?
A mechanic’s lien is a remedy, available to contractors, subcontractors and suppliers, who have not been paid for materials and/or work provided to a real estate construction project – including home remodeling projects and new home construction. A mechanic’s lien, when recorded with a county recorder, becomes an encumbrance on your property (much like the deed of trust securing the payment of your home loan). The mechanic’s lienholder may be able to foreclose on your property.

Who is entitled to a mechanic’s lien?
For the most part, any person who adds value or performs work on a building, by providing labor, materials, equipment, or design or architectural services with respect to a construction, repair or remodeling project, will be entitled to a mechanic’s lien against the property, if such person is not paid for his or her services or materials.

How is a mechanic’s lien recorded and enforced?
The Colorado mechanic’s lien statute imposes strict time limitations on when a mechanic’s lien may be recorded. The statute is complex; however, typically the lien must be recorded within four months (or two months, depending on the circumstances) from either the last date the lien claimant performed work or supplied materials, or the date of substantial completion of the project. The lien claimant is required to provide the owner and the principal contractor a "Notice of Intent to File Lien Statement" at least 10 days before recording the lien with the county recorder. Failure to comply with the strict statutory notice requirements and deadlines for recording the mechanic’s lien will defeat the lien. If a lien claimant complies with the statutory requirements and records a proper mechanic’s lien against the property, the lien claimant then has six months, from the date of completion of the improvements, to commence legal action to foreclose the lien.

Why should I be concerned about mechanics’ liens, as long as I pay my contractor?
Under the mechanic’s lien statute, the greatest danger a property owner faces is not from mechanics’ liens that might be filed by the principal contractor for a project; rather, the property owner may face mechanics’ liens because the principal contractor does not pay the contractor’s subcontractors and suppliers. If such contractors and suppliers have not been paid, they may have mechanics’ lien rights against your property even if you paid the contractor. In other words, a homeowner may be liable to pay twice – for the same work.

In Colorado, the mechanic’s lien statute provides homeowners with some protection against this risk. A provision to the Colorado mechanic’s lien statute provides that a homeowner who contracts for work to his or her home, who "has paid an amount sufficient to satisfy the contractual and legal obligations of the owner, including the initial purchase price or contract amount plus any additions or change orders, to the principal contractor or any subcontractor for the purpose of payment to the subcontractors or suppliers . . .", will have a defense against an action to enforce a mechanic’s lien against the homeowner’s property.

However, this statutory protection for homeowners will not necessarily protect a homeowner who finds himself or herself facing mechanics’ liens for a project that has "gone bad". For example, you might enter into a contract with your contractor that provides for progress payments as work is completed, with the final payment due some time after the work is finished. What happens if your contractor runs into financial difficulties and abandons the project? Typically, in this "worst case" scenario", the contractor will have failed to make at least some of the payments owed to the contractor’s subcontractors and suppliers, thus putting your property at the risk of mechanics’ liens. Unfortunately, the statutory provision that was designed to protect homeowners who have paid their principal contractors from the liens of subcontractors and suppliers, would probably not be triggered in this scenario. When a contractor abandons a project, a homeowner is unlikely to have paid the full contract price at that point (and, for good reason, will refuse to make further progress payments for work that is not completed).

How can I protect myself (and my property) against mechanics’ liens?

• The most important thing you can do, when embarking on a home improvement project, is to hire a reliable, reputable contractor. Ask for recommendations from people you know who have completed home remodeling projects. Contact the Better Business Bureau and local consumer advocates, who might have information on both reputable contractors, as well as those contractors who are the subject of complaints. Interview several contractors; get three or more bids from different contractors; and ask for references.

• Once you select a contractor, insist upon a written contract that sets forth the stages of the work, lists the contractor’s subcontractors and suppliers for each stage of work, and provides for progress payments upon completion of each stage. Have an attorney review the contract.

• Do not rely on the principal contractor to pay the subcontractors and suppliers. Instead, insist upon writing joint payee checks. That is, for each progress payment under the contract, write a number of checks, each check being jointly made out to the principal contractor and the respective subcontractor or supplier who is to be paid with the funds from such payment. Writing a joint payee check ensures that both the contractor and the subcontractor/supplier will need to endorse it in order to cash it; this checkwriting technique helps to ensure that the subcontractors and suppliers are being paid.

• As a condition to making any progress payment, require the contractor to deliver to you lien waivers for that payment, signed by the subcontractors and suppliers who provided the work and supplies for the portion of the work for which you are paying with such payment. The lien waivers should include a certification that such subcontractors and suppliers have been paid in full for such work and supplies. The lien waiver requirement should be included in the original contract.

• For large projects, consider requiring your contractor to obtain a performance bond and a labor and materials bond, and to file a notice of such bonds in the office of the county recorder. This requirement may not be necessary for most home improvement projects. If you do insist upon such a requirement, the contractor will likely increase the contract price, passing the cost of the bond onto you.

• Actively supervise the project, and do not allow the contractor to deviate from the contract or do additional work without a written change order.