April 19, 2012

Court of Appeals Recognizes Limitations to Relation-Back Doctrine

By Tim Gordon

Before a potential developer purchases property for a new project, it needs to secure financing.  Before the lender will agree to finance the project, it wants to be satisfied that the project has or will be granted the requisite entitlements.  And before the requisite entitlements can be obtained, preliminary design work must be performed.  As a result, design professionals often perform site planning and other design work before the developer even purchases the real property.  A somewhat-similar scenario happened in Oz Architecture of Denver, Inc. v. V3 Companies of Colorado, Ltd. (Colo. App. April 19, 2012) (not published pursuant to C.A.R. 35(f)).

Initial Soils Testing Work

Total Merchant Service (TMS), which is owned by Ed Freedman, planned to develop certain land for its headquarters.  On October 11, 2007, Freedman personally signed a real estate contract with the property owner, Glenwood-Meadows, to purchase the land, but neither Freedman nor TMS ever personally closed on the property.  On November 29, 2007, TMS hired Ground Engineering Consultants (Ground) to perform soils testing on the property, and Ground delivered its findings on January 15, 2008.

The Deeds of Trust are Recorded

On January 10, 2008, Freedman formed Freedman-Glenwood Meadows, LLC (FGM), wihch purchased the property on January 30, 2008.  Two deeds of trust were then recorded on February 4, 2008.

The Architect’s Work and Argument

In January of 2008, Oz Architecture of Denver, Inc. (Oz), along with other architecture firms, was asked to provide preliminary plans as part of an interview process.  Oz obliged, performing the preliminary work in January of 2008 for the interview process.  On February 15, 2008, Oz was notified that it was selected as the project architect.  On February 18, 2008, Oz entered into an oral contract with FGM, and on May 5, 2008, Oz and FGM entered into a written contract.  Oz performed work, but was not paid in full.  So it filed a mechanics’ lien.

Oz argued that its mechanics’ lien should have priority over the February 4, 2008, deeds of trust and relate back to either (1) the work performed by Groud in December 2007 / January 2008, or (2) its own preliminary work performed in January 2008 as part of the interview process.  Both the trial court and the Court of Appeals disagreed.

Analysis of the Relation-Back Doctrine

Pursuant to the relation-back doctrine, the priority date for mechanics’ liens “shall relate back to the time of the commencement of work under the contract between the owner and the first contractor . . . .”  C.R.S. § 38-22-106(1).  While it’s true that both Ground and Oz performed work for the project prior to February 4, 2008, that work was not “under the contract [with] the owner” of the real property when the work was performed.

When Ground performed its work, it did so under contract with TMS.  Also, Glenwood-Meadows owned the property at the time, and not TMS or FGM.  Additionally, the purchase contract at the time listed Freedman as the purchaser, and not TMS.  So Ground’s work was not performed for the property owner or for a party who had an option to purchase the property. In its analysis, the Court of Appeals relied on reasoning from Printz Services Corp. v. Main Electric, Ltd., 949 P.2d 77 (Colo. App. 1997), aff’d in part and rev’d in part, 980 P.2d 522 (Colo. 1999).

Although FGM did not hire Oz until after the deeds of trust were recorded, Oz argued that its preliminary work, performed as part of the architect selection process, should count as the “first work” for purposes of lien priority.  The Court disagreed, noting that “an architect’s work is only lienable if it is performed under contract.”  According to the trial court, the preliminary work that Oz performed was only part of its marketing efforts to secure the contract.

Although this case is unpublished, it’s worth reading for a primer on the relation-back doctrine, along with the cases cited therein and the recent Court of Appeals’ decision in Ferguson Enterprises, Inc. v. Keybuild Solutions, Inc. et al., (Colo. App. Dec. 22, 2011).