Many folks who use the Levelset service to file a mechanics lien are confronted with a post-filing situation when the property owner or general contractor “threaten” to remove the lien with a mechanics lien bond. I put the word threaten in quotes because folks always describe this event as a threat, but really, it’s not a threat to the underlying claim. This post explains why.
Does bonding off a lien challenge your claim?
Earlier this year, we conducted a contractor survey on mechanic liens and found that over 64% of lien claims are paid within just 3 months of filing, and without the need for any further collection or legal efforts. Nevertheless, this leaves 36% of claims that meet a different fate.
While most of these remaining claims actually do get paid eventually, they fall into one of three categories:
- They undergo some type of soft out-of-court challenge;
- They require a push from a collector or attorney; or
- They are surrounded by serious project disputes and go into full-blown litigation.
Lien challenges are not to be immediately feared. In fact, lien challenges are simply a fact of life in the mechanics lien world. They are sometimes riddled with misrepresentations or misunderstandings of the mechanics lien law, and written to scare the lien claimant into removing the lien.
When you receive a “threat” from the developer or prime contractor to “bond off” your mechanics lien, however, you should not consider this a challenge or threat to your mechanics lien claim. Getting a lien release bond is a time-consuming, expensive process. But even if they do secure a bond, it can be a good thing for your claim.
What Happens When A Mechanics Lien Is Bonded Off A Property
To better explain why a “threat” to bond off a mechanics lien is not a threat to the claim at all, it is best to explain exactly what happens when a mechanics lien claim is “bonded off” the property. To do so, we may get into a bit of legal theory about lien claims.
When you file a mechanics lien you are staking claim to a legal right in the underlying property itself. Think about a brand new residential home getting built on a plot of land. If you supplied electrical materials to help construct that home and are unpaid, you can file a lien and claim a right to the property. Since the home is now a “component part” of the property, the law considers them (the property and the structure) to be one in the same. Your “right,” therefore, is against the entire property.
The property cannot be sold, refinanced or transferred unless it is done so subject to your mechanics lien claim.
This mechanics lien law does not give you a privilege against the property because it wants to tie up the property and cause problems for the owner, however. That is simply the effect of a law with the goal of simply getting tradespeople and material suppliers paid.
Accordingly, should the property owner or prime contractor elect, the law allows for a qualified bond to be substituted for the property. That way, your claim for payment is still secured (by the bond), but not tying up the property.
The bond actually takes the place of the property, and your lien claim lives on.
Threats To Bond Off A Lien Claim Signal Weakness
Want to know a dirty secret in the construction industry? Threats to bond off your mechanics lien are often a delay tactic. You can consider this a weakness for their position and not a strength.
While there are exceptions to the rule, it’s almost always the case that the GC is bonding off the claim because:
- The property owner is forcing them to do so
- The GC cannot afford to pay you, but can afford a temporary bond premium
General contractors have contracts with property owners, and subcontractors have contracts with general contractors, and so on down the line.
All of these contracts contain provisions requiring the contractors to pay all potential lien claimants and keep the property free and clear of liens. If a supplier or subcontractor files a lien against the property, those parties above them are in automatic breach of their agreements.
Therefore, these contractors are contractually required to immediately bond off or satisfy the lien claim. If they don’t, they could get terminated from the project, be back charged lots of money for attorneys fees and bonding premiums, and more. It creates a nasty situation for them, and of course, this is one of the reasons why mechanics lien claims are so effective.
A mechanics lien most often results in getting you paid pretty immediately. Other circumstances can exist where it results in getting your claim bonded off the property, however, such as if the contractor doesn’t have the funds to pay you but can afford a bond premium to postpone dealing with the debt.
Or, a worse situation because it usually leads to expensive litigation, if the contractor has a dispute about your workmanship or some other alleged contractual failure.
Lien Bonded Off? You’re Probably Better Off
This article has explained what a mechanics lien bond is and how the instrument works, and it has stated that these devices are not a “threat” to your claim. Let’s conclude this article by clarifying exactly why you don’t need to fear getting your mechanics lien “bonded off.”
It’s clear that prime contractors and developers sometimes act as if bonding off the mechanics lien will give them the upper hand. This is clear when they utter things like, “we’ll just bond off your lien,” hinting that the “bonding off” of the lien will make the underlying claim disappear. This is a huge myth.
Bonding off a lien brings in a bond surety company, who guarantees that your claim will be paid. Enforcing a lien requires the property to be sold and claims satisfied according to priority. Enforcing a bond claim is a court action – a successful bond claim will result in a payment from the surety immediately following the decision. Simple as that.
Did I just say “better than a lien?” I rarely say that, but yes, having your mechanics lien claim “bonded off” is actually better security than having a standard mechanics lien. You’re getting a surety on the hook to pay you, and sureties are usually 100 times more solvent than a construction project. Plus, they are cheaper to pursue than a full mechanics lien foreclosure.
Bottom line: When a contractor or developer threatens to “bond off” your mechanics lien claim, consider that to be awesome news.