In the construction industry, a mechanics lien is a powerful collection tool. A mechanics lien allows project participants to claim a legal right to the property itself. But what happens when the contractor or the property owner “bonds off” your mechanics lien?
And why would a general contractor or property owner want to bond off a mechanics lien in the first place? This article explains what bonding off a mechanics lien means and will look at the benefits for both the project participant and the prime contractor/property owner.
What is a lien release bond?
A lien release bond is a type of surety bond that takes the place of a mechanic lien on a property, also known as a lien discharge bond, a mechanics lien bond, or release of lien bond. When the owner or general contractor purchases a lien release bond, the claim is released from the property and attaches to the bond instead.
Lien release bonds can be an effective way for owners to free their property from lien claims, enabling them to refinance or sell the property. However, it doesn’t free them from the obligation to pay the debt. It simply substitutes one form of payment security for another.
How “bonding off” a mechanics lien works
Bonding off a mechanics lien is the process of purchasing a lien release bond from a surety company. The bond takes the place of the underlying property in a mechanics lien claim.
In other words, instead of a mechanics lien claim against the property, a claimant would have a surety bond claim against a surety bond, also known as a mechanics lien bond.
The process of bonding off a mechanics lien starts after a claimant has filed a mechanics lien. After the claim is made, a general contractor or a property owner can contact a surety bond company to purchase a surety bond that replaces the value of the lien that was filed against the property.
After bonding off a mechanics lien, this bond is substituted for the owner’s property – it is now the subject of the claim for non-payment instead of the project property. When a lien is bonded off, any proceeds recovered from a claim will come from the surety bond instead of the sale or foreclosure of the property.
Pros & cons of bonding off a lien
Bonding off a mechanics lien has pros and cons for all parties on a construction project.
Benefits for claimants
One advantage is that it prevents parties from needing to navigate the lien foreclosure process, which can be time-consuming and expensive for everyone. When a lien is bonded off, the surety company steps in with funds available to pay a claim. Instead of a potentially lengthy enforcement action on the horizon, a relatively streamlined bond claim process may make life easier.
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Benefits for owners & GCs
On the other side of the table, it also allows the project to continue without interruption from mechanics liens, and an owner can rest assured that their property title will be free and clear.
Bonding off a lien claim on your project will benefit both a general contractor and an owner of the property. Mechanics liens are frustrating for general contractors and property owners because the liens can put the project on hold and potentially put the property at risk for foreclosure. Bonding off a lien claim allows your project to progress smoothly for all parties!
Disadvantages for claimants
Just because a lien is bonded off doesn’t mean a claimant can relax. Commonly, a lien claimant will have to take extra steps after a lien is bonded off, even while continuing the mechanics lien process. Once a lien is bonded off, it’s important for a lien claimant to familiarize themselves with what will be required next – such as a new deadline to file a claim against the bond.
Disadvantages for owners & GCs
But general contractors and property owners should be aware that bonding off a lien claim can be a difficult and expensive process. The owner or GC will need to pay up to 1.5 times the amount of the claim in order to get a lien release bond, and that money stays with the surety until the claim is settled.
In addition, it only provides temporary relief from the lien. During this temporary relief, the general contractor or the property owner can try and resolve the dispute, fight the lien in court, or pay the contractor the disputed amount.
What happens if your lien claim is bonded off?
Contractors sometimes use the ability to bond off a lien as a threat. They may make it sound like your lien will just disappear. In reality, having your lien claim bonded off could be welcome news.
Bonding off a lien is not necessarily a threat to your claim. Instead, a surety bond will replace the property that the lien was filed against. Ultimately, it may be easier to receive payment after the lien is bonded off. A successful bond claim will result in payment from the surety, which has guaranteed that funds will be available for valid claims. A valid lien claim still faces a long and potentially nasty lien foreclosure process.
Further Reading : Extra requirements for claimants when a lien is bonded off
Considerations For General Contractors
For general contractors, it is a good idea to bond off lien claims on your project. First, keeping the property free from liens is often required by the contract between a GC and the property owner.
Plus, some states actually require a contractor to step in and defend bond claims made by subs and suppliers. In order to comply with contract or statute, contractors often don’t have any choice – liens must be bonded off. Even where not required, though, it may be a good idea for a contractor to bond off lien claims — it’s likely the best way to appease the owner, keep the project moving, and buy more time to resolve the dispute.
Lien Bond Considerations For Property Owners
For property owners, the benefit of bonding off a lien is obvious. Bonding off a claim prevents your property from being the subject of litigation or being foreclosed on! Instead of your property being at stake, a surety bond will be substituted. Plus, an owner might not even be the one purchasing the bond! Even when a contractor isn’t required to bond off a lien by statute or contract, an owner can likely use their leverage against the GC to force them to bond off a lien.
Bonding off a lien isn’t necessarily a good or a bad thing. It just changes the dynamics of the payment dispute. For lien claimants, having your lien bonded off doesn’t mean that you should abandon the mechanics lien claim process — you’ll probably have to manage both.