Johnson Law assists its homeowner and construction professional clients with construction law, including mechanic’s liens and foreclosure cases. A lien is a legal right to the property of another until a debt is paid. There are many types of liens including those for unpaid taxes, mortgages, promissory notes, and judicial liens resulting from a judgment in a case. A mechanic’s lien is a statutory right that attaches an interest to the property of another for the non-payment of a debt owed to the party who improved the property of another through labor, materials, and equipment. See Johnson Law’s blog post regarding Mechanic’s Liens in Colorado.
While a mechanic’s lien is indeed a great tool in the tool box of every contractor, the mechanic’s lien must be enforced through a foreclosure action or the lien expires. Practically speaking, a contractor with a mechanic’s lien cannot take the mechanic’s lien to the debtor’s bank and get paid. Instead, the contractor must start a foreclosure case on the property identified in the mechanic’s lien to turn the mechanic’s lien into actual funds that will pay the outstanding debt.
A mechanic’s lien foreclosure case must start within six months after the later of the following: (1) the last date that work was performed; (2) the last date that materials were furnished; or (3) the date that the building or improvement on the property was completed. Mountain Ranch Corp. v. Amalgam Enters., Inc., 143 P.3d 1065, 1067 (Colo. App. 2005). The court will strictly apply the timelines for mechanic’s liens, which can get complex depending on the size and scope of each project. A contractor risks forfeiture of its mechanic’s lien rights should the mechanic’s lien or mechanic’s lien foreclosure action be untimely.
In addition to filing a case to foreclose on the real property at issue, the contractor must also record a notice of lis pendens in the real property records in the county where the property is located. The notice of lis pendens is a document that serves as notice to the public that a lawsuit is pending affecting interest in and/or title to the property. The notice of lis pendens must include the name of the court, parties, and a legal description of the real property at issue.
Starting a mechanic’s lien foreclosure action does not necessarily mean the property owner will lose title to his property, and potentially become homeless. The property owner has the ability to defend against a foreclosure action. The best immediate defense the property owner can take is to post a bond with the court in substitution of the mechanic’s lien. Such substitution bonds are typically 150% of the mechanic’s lien amount. The lien claimant then can substitute the bond for the mechanic’s lien that will clear up title to the real property. In other words, the case is no longer to force the sale of the home or property, it is now to get the bond money. If any defenses to the substance of the case still exist, those would still be presented in a future court trial or arbitration to determine if all or part of the bond money is returned to the person who paid for it.
Substitution bonds are recommended for property owners with mortgages on their property because the terms of the mortgage often require that the property owner not allow any liens to be placed on the property. Some mortgagors go so far as charging the property owner the mortgagor’s attorney fees incurred in defending the mortgagor’s interest in the property against the mechanic’s lien by adding that amount to the mortgage. By substituting a bond for the mechanic’s lien a property owner is safeguarding his interest and the mortgagor’s interest in the real property.
During the foreclosure action, the contractor must prove the mechanic’s lien was perfected, meaning it is valid in notice, time, and amount as required by law. At the end of the foreclosure action, the court must find the mechanic’s lien is valid before sale of the property is authorized. The property subject to the mechanic’s lien is then sold at auction and the funds from the sale go to payment of the lien. Many cases do not reach this part of the legal process, but a contractor’s mechanic’s lien foreclosure action must establish the necessary elements at the beginning of the case should the case reach the point where title to the property is transferred so that a sale can occur and funds be collected in satisfaction of the mechanic’s lien debt.
With the short and strict deadlines as well as making sure anyone who has an interest in the real property is named in the foreclosure action, Johnson Law encourages those with mechanic’s lien rights or defending against a mechanic’s lien to consult with one of Johnson Law’s attorneys to discuss the facts of your case as soon as possible.