12.12.17 Mechanic's Liens

Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

Can the Construction Loan Mortgage have initial priority over mechanic's liens?

Practically in Colorado the answer is no. For priority purposes, such liens relate back to the "time of commencement of work under the contract between the owner and the first contractor, or if said contract is not writing, then . . . to the time of commencement of the work . . .". Mechanic's liens claimants have priority of the date when work was first commenced on the project. Colorado courts, however have extended this commencement doctrine to non-site work such as planning, surveying, superintendance or delivery of materials. See Sontag v. Abbott, 140 Colo. 351, 344 P.2nd 961 (1959), State Bank of Chicago v. Plummer, 54 Colo. 144, 120 P.819 (1913) and Bankers Trust Company v. El Paso Pre-Cast Company, 192 Colo. 468 560 P.2nd 457 (1977). The practical effect of this interpretation is that it is virtually impossible for the lien of a construction loan Deed of Trust to obtain legal priority over subsequently recorded mechanic's liens. The practice in other states of documenting noncommencement of work on the construction site by inspection and photographs immediately prior to recordation of the construction loan mortgage or Deed of Trust will not provide any benefit in Colorado. C.R.S. 38-22-106 and cases cited above.

Will initial priority as to future disbursements be retained only if certain procedures are followed?

No.

If priority is lost, can it be regained?

No.

Is there a difference between on-site and off-site work?

No.

Is priority the same for all contractors and subcontractors on the same project?

Yes. All lien claimants priority relate back to commencement of work. If there is more than one lien claimant priority is determined as follows: (a) the liens of all those who were laborers or mechanics working by the day or piece, but without furnishing material therefore, either as principal or subcontractors (b) the liens of all other subcontractors and of all materialmen whose claims are either entirely or principally for materials, machinery, or other fixtures, furnished either as principal or subcontractors (c) the liens of all other principal contractors and all funds realized in any actions for satisfaction of liens against the same improvements of structures shall be paid out in the order above designated. C.R.S. 38-22-108(1).

Time Limits

What are the time periods for recording lien claims by original contractors and subcontractors?

A mechanics' liens must be filed within 2 months after completion of work for laborers and 4 months after completion of work for all other. C.R.S. 38-22-109(4) and (5).

After what period of time can you waive a mechanics' liens if no suit is filed?

A properly filed mechanic's liens must be perfected by judicial foreclosure. The foreclosure must be commenced by filing of the complaint plus recording, in the county land records, a notice of Lis Pendens before the earlier of 6 months after completion of construction of the entire project or after last work is performed or materials furnished. The statute provides that if construction of the project is not complete within one year after the statement of lien is recorded, an affidavit stating that construction is not complete maybe recorded within 30 days after the annual anniversary of recording the lien statement. Because you cannot always determine the date of completion of construction for purposes of determining the 6 month period, it is common practice in Colorado to follow a general rule that mechanics' liens are valid for a period of 13 months after date of recording. If you are requested to waive a mechanics' liens before the expiration of 13 months from the date of recording you must obtain approval from Stewart Title Guaranty Underwriting personnel. C.R.S. 38-22-109(8).

Removing or Waiving Liens

Is there a statutory procedure for affidavits of completion or notices of completion?

No.

Can a statutory bond terminate the mechanic's lien as an encumbrance on the title?

Yes. Colorado statutes provides for filing a bond with the Clerk of the District Court of the county in which the property is located. This bond must be in an amount equal to one and on-half times the amount of the lien plus costs and shall be approved by a judge. Upon the filing of this bond the lien is discharged and then released in full by a certificate of release executed by the Clerk of the District Court. This certificate of release must then be recorded in the real estate records. C.R.S. 38-22-131 and 38-22-132.

Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanics' liens by general contractor and/or subcontractors?

No.

Can a bona fide purchaser or bona fide lender take free of mechanics' liens later filed for earlier work?

Yes. Under certain limited circumstances (See C.R.S. 38-22-125). However, do not rely on this section without specific approval of Stewart Title Guaranty Underwriting personnel.

Title Company Requirements

What are the customary requirements for issuing Loan Policies on construction loan mortgages?

Receipt of and review by the Company of the following documentation:

  • Detailed project cost breakdown, including hard and soft costs of the transaction;

  • Information regarding the type of control over loan funds (lien waivers, disbursement control, etc.);

    • Note: The Company reserves the right to disburse the loan itself pursuant to a disbursement agreement approved by the Company.

  • Financial statements and indemnification from the owner(s) and contractor (for our financial officers to review);

  • The name of the Contractor , whether said contractor is bonded, whether Stewart Title Guaranty Company is named as an obligee, and whether the contractor is subordinating to the insured loan;

  • The proposed pending disbursement language for review (if different language is proposed for the language shown in Exception __).

    • Note: Approval of mechanic's liens coverage must be approved by the counsel for this company.

Is it customary to add a "pending disbursement" clause or mechanics' lien exception in the Loan Policy insuring a construction loan mortgage?

Yes. The pending disbursement clause is as follows:

The following will appear on the lenders title policy when issued: Pending disbursement of the full proceeds of the loan secured by the Mortgage or Deed of Trust described in Schedule "A" hereof, this policy insures only to the extent of the amount actually disbursed but increases only to the extent of the amount actually disbursed but increases as each disbursement is made, up to the face amount of the policy. At the time of each disbursement of proceeds of the loan, the title must be continued down to such time for possible liens, including mechanic's liens, and other objections, intervening between the date hereof and the date of such disbursement.

Also subject to any bulletins relating to mechanic’s liens.