A typical construction job is set in motion by the property owner. It may be the homeowner of a residential property, or the developer of a commercial property. But in some cases, a tenant may hire you to perform a project on property that they lease. What happens if the tenant doesn’t pay the contractor or supplier? Do they still have the right to file a mechanics lien in Colorado?
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Construction projects are often commissioned by the tenant
Commercial property is often developed to lease office, warehouse, or other space to a business. Think of a strip mall or shopping mall: Each business rents retail space from the development company that owns the property.
However, even though they’re renting, the tenants must develop the space themselves to suit their particular business needs. A restaurant is another good example. They business owner often doesn’t own the property that their business is located in, but they still need to build out the kitchen, bathroom, and seating areas.
Many commercial buildings are rented on a triple net basis, where the tenant pays property taxes, insurance, and maintenance on the property. This leaves the tenant responsible to perform all repairs and improvements on the property.
On residential property, the landlord is typically still responsible for construction projects, especially major repairs. But tenants oftentimes commission repairs or small improvements to a property they don’t own.
Colorado mechanics lien rights on tenant projects
Colorado’s mechanics lien rules give a lot of power to contractors and suppliers. If they aren’t paid for the work or materials they provide on the property, they can file a lien. The mechanics lien attaches to the property itself, making it difficult for the owner to sell or finance their real estate.
Because a lien has such a big impact on the property owner, it seems like it would be unfair for a contractor was actually working for the tenant.
Colorado gives special consideration to this scenario. In effect, the state created two types of mechanics liens. The regular mechanics lien is for projects commissioned by the property owner. On tenant projects, the law gives the property owner the chance to avoid liability entirely, effectively killing a contractor’s lien rights. This shows up in Section 105 of Colorado’s mechanics lien statute. Hence, a lien filed on a tenant project is known as a Section 105 mechanics lien.
Section 105: Filing a mechanics lien on a tenant project
Under a Section 105 mechanics lien, the law gives Colorado property owners a step to avoid liability and kill mechanics lien rights on a tenant project.
In order to avoid liability, property owners must post a “notice of non-liability” within 5 days of becoming aware that construction is being performed on their property. This is a fairly small window. Upon learning of the project, the owner must already know about the notice requirement, or they must learn about it very quickly.
If this notice is not posted — or is posted late — the contractor or supplier has the right to file a mechanics lien as usual.
Fortunately for unpaid contractors and suppliers, these notices are very often overlooked. At the beginning of a project — when the owner is likely to become aware of it — a payment problem doesn’t exist yet. No one is expecting the construction work to go unpaid. As a result, even if property owners have heard of the notice requirement, they may shrug it off as an extra and unnecessary rule.
By the time payment is overdue, it’s too late for the property owner to do anything to protect their property. Unpaid contractors and suppliers will usually have perfect and full mechanics lien rights when working on a Colorado construction project commissioned by a tenant.
When the owner posts a notice of non-liability
If the property owner does actually post the notice within the 5-day window, then the contractors immediately lose their lien rights. Fortunately, there are a number of steps to speed up and secure payment that construction businesses already have available.
If the tenant fails to pay, the construction company won’t be able to file a mechanics lien. But they will still have other options. The tenant is still subject to the requirements and deadlines in Colorado’s Prompt Payment Act. And the unpaid party can always file a civil lawsuit for a breach of contract, unjust enrichment, or other non-payment claims. If the dispute gets to this point, it’s best to contact a trusted construction attorney. You can search our list of active construction attorneys in Colorado here.