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Subcontractors and suppliers can get a lot of pushback when they send a notice of intent to lien, or actually file a mechanics lien claim. The GC or property owner will often threaten to bond off the lien. As a result, many subs are reluctant to file a claim or protect their lien rights, because they think it’s a waste of time. If it’s just going to get bonded off, what’s the point? That’s a dangerous fallacy. Getting a mechanics lien release bond is never a guarantee. It’s actually much harder and more expensive than you might think.
Recently I was discussing the prelim process with Brad Sledge, a commercial interior contractor here in Washington. Brad told me that, in his opinion, the mechanics lien process isn’t that powerful. “Even when you follow the process completely and ultimately file a lien, the GC just ‘bonds around it,’ and you never get paid anyway.” I’ve heard from other subcontractors that don’t like to send preliminary notice for similar reasons.
Still curious about an option to “bond around” a mechanics lien, I decided to do some research to learn more.
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Bonding around a lien isn’t easy or cheap
Jenna from Surety1, a contractor’s bond and insurance provider here in Washington, gave me the rundown on this “magic bullet” for mechanics liens.
According to Jenna, “Yes, there is a completely legal way to ‘bond around’ a mechanics lien. But we don’t issue many of them, as they are expensive and time-consuming for a GC or owner to use. And that bond is known as a Release of Mechanics Lien Surety Bond.”
I was curious as to why such a bond exists. And according to Jenna, “There have been cases where a contractor/supplier has submitted unauthorized change orders/price increases to a project and then filed a mechanics lien, including the unapproved costs in the lien amount.”
In the case of an erroneous lien amount, this lien release allows the owner to sell, trade, or refinance the property before the lien is satisfied.
“So a GC or owner can ‘bond around’ any mechanics lien that gets filed against their project?” I asked.
“Technically, yes, they could,” Jenna replied. “But they don’t ‘bond around’ due to the costs involved, and the process is very involved and requires an attorney as well.”
Understanding the mechanics lien release bond process
So here is an overview of the process and costs. A GC doesn’t just call up their bonding company and ask for them to issue the release bond, and then send them a check.
First, the GC must be able to provide surety (cash or other assets) equal to 1.5 times (liens over $10K) the lien amount to the bond company.
Then the GC must petition the court and attend a hearing to determine the cost of getting the bond issued. The judge reviews the lien paperwork and determines the fee the bonding company will charge.
Once the bond rate is known, and the surety and fee paid, the bond can now be issued and recorded. However, the cash or assets remain held until the payment issue gets resolved.
The court typically requires proof of payment, such as signed affidavits, copies of checks or payment transfers, and the certified copy of a mechanics lien release from the original lien filer. The court decides when the lien has been satisfied and then orders the bond collateral returned to the GC. The longer the payment resolution takes, the longer the assets remain on hold, entirely unavailable for the GC.
Mechanics lien release bonds aren’t very common
Now I understand why this mechanics lien release bond doesn’t get used very often. The process requires a pile of cash, an attorney, and at least two different court appearances to be successful. This process is not a strategy I foresee GCs/owners using en masse, to simply avoid paying their subcontractors.
If you have ever had a contractor tell you that your lien isn’t worth the paper it’s printed on because he will “bond around it”, now you know it’s not so simple or easy to do.