Colorado Real Estate Journal - January 2016
Your tenant has been making improvements to his leased premises and everything seems to be moving along smoothly until you receive a notice of intent to file a mechanic’s lien in the mail. If you have taken those steps necessary to insulate yourself from liability, this could be of minimal concern to you. If not, you could find yourself responsible for the payment of those obligations not honored by your tenant. A mechanic’s lien is a statutory lien on real property and improvements that secures payment for labor or materials used in improving, repairing or maintaining that particular property and its improvements. It is a powerful, long-standing and well-recognized tool used by general contractors, subcontractors and suppliers of materials to collect monies due to them. It might surprise some to learn that mechanic’s lien rights apply to a property even in those circumstances where a tenant, not the landlord, directly contracts for the improvements. The theory is that the property value is enhanced by the improvements notwithstanding who contracted for or requested them. Consequently, a contractor or supplier of materials is permitted to collect what is owed by enforcing a mechanic’s lien against the owner of the property. A landlord’s first line of defense is to protect himself by including the following language in the lease: 1. Requiring a tenant to pay all costs incurred in connection with its improvements to the leased premises; 2. Indemnifying the landlord from any claims resulting from default of that obligation; 3. Requiring a tenant to obtain lien waivers from its general contractors, subcontractors and material men at the time payment is tendered; and 4. Requiring a tenant notify the landlord in advance of any work being performed so that the landlord will have ample time to post a notice of nonliability prior to commencement of any work. A landlord also might consider lease provisions requiring a tenant to obtain a payment or performance bond in advance of any proposed work or to bond around any lien that might be asserted at any time during the term of the lease. Perhaps one of the most effective tools in a landlord’s arsenal is the posting of a notice of nonliability pursuant to C.R.S. § 38-22-105, stating that the landlord’s property will not be subject to any lien. Ideally, the notice of nonliability should be posted in a conspicuous place at the leased premises in advance of the work being initiated by the tenant’s contractors but to be effective, in no more than five days after the landlord obtains notice that work is being performed. The notice of nonliability should remain posted at the leased premises until the work is completed. The posting of a notice of nonliability frequently serves as an effective affirmative defense to a mechanic’s lien foreclosure and, oftentimes, a mechanic’s lien claimant will dismiss such a foreclosure upon receipt of documentation showing that the notice was timely posted and remained posted for the duration of the work. With that in mind, it is recommended that a landlord keep records detailing the date on which the notice was first posted and records confirming that the notice was posted for the duration of the work. Dated photographs can prove to be a useful tool. Relying on a tenant to post the notice of nonliability is not advised. At the end of the day, a contractor is under no duty to confirm whether a tenant has authority to contract for work, and the burden of notifying lien claimants that its interest in the property is not subject to a lien ultimately rests on the owner of the property. It also should be noted that a notice of nonliability is only effective if the tenant, not the landlord, contracts for the work. If the landlord contracts for the work, the posting of a notice of nonliability will not insulate the property from a mechanic’s lien claim. Next Steps So, what should you do if you receive a notice of intent to file a mechanic’s lien from a contractor hired by your tenant? First, review your lease and put your tenant on notice of its obligations to indemnify you from claims and to timely pay whatever amounts may be due. Next, contact the lien claimant and provide it with documentation that the notice of nonliability was posted in compliance with applicable statute. Be sure to use or direct a lien claimant to any payment or performance bonds that may have been obtained in connection with the work. And, perhaps most importantly, contact your attorney. The statutes governing mechanic’s liens contain rules, requirements and specific time frames that must be strictly complied with. A lien claimant’s failure to fully and timely comply with each and every one of those requirements could render a mechanic’s lien claim invalid. In most instances, an experienced attorney should be able to quickly advise you whether a lien claimant has missed one of the deadlines. Although there is no method by which to completely insulate an owner from mechanic’s lien claims asserted in connection with tenant improvements, by following the suggestions described here, you may be able to avoid some of the headaches and expenses associated with mechanic’s lien claims and litigation.