No Lien Clause in Contract

Validity and Enforcement of No-Lien Clauses in Construction Contracts

Materialmen’s and Mechanic’s Liens remain one of the best sources of obtaining payment without pressing forward with litigation in Colorado. The lien statute provides additional security to laborers and materialmen who improve/enhance real property and prevents unjust enrichment. However, the lien statute (C.R.S. § 38-22-101 et seq.) does permit parties to a contract to forfeit or waive their lien rights as codified under C.R.S. § 38-22-119. As a practical matter parties can waive or agree to forfeit lien rights arising in the context of construction contracts involving owner/contractor and the subcontractor which may substantially affect their decision to enter into the contract.

While the right to a lien can be waived in this Colorado, such no-lien clauses to be enforceable need to be supported by either (1) consideration or (2) estoppel in order to be enforceable. Woodcrest Homes, Inc. v. First Nat’l Bank, 11 B.R. 342, aff’d in part and rev’d on other grounds, 15 B.R. 886 (D. Colo. 1981). Generally speaking, consideration involves the exchange for value for relinquishing this particular right. By merely entering into the contract could be argued and may be deemed by a court not to be sufficient consideration. Estoppel occurs where a statement is made and the paying party relied on such statement to his detriment.

A common mistake made by owners and contractors is that after successfully negotiating such no-lien clauses, they fail to record such construction contract in the county where the real property is located. See C.R.S. § 38-22-101(3).

Furthermore, Colorado courts strictly construe and employ the rule of contra preferentem (construing such clauses against the draftor) in reading such “no-lien” clauses. If the court is able to find an ambiguity in the no-lien clause, such doubt results in the clause being generally stricken and in favor of allowing a lien. Bishop v. Moore, 137 Colo. 263, 323 P.2d 897 (1958).