The purpose of this article is to clarify what a lien release bond is and how it works in Washington State.
Lien Release Bonds Generally
The typical scenario impacting contractors is one where your company, as a subcontractor, is not paid on time by the general contractor. If you are within 90 days of your last day of work, a mechanics lien claim is an important tool. It often goes a long way towards receiving payment.
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In reality, a lien release bond is great news for mechanic lien claimants. The lien statute in Washington says that the lien claimant must mail a copy of the lien by certified mail to the owner in order to recover attorney fees. Typically the owner receives your lien and immediately has a little “discussion” with the general contractor about it.
If there’s been a dispute between you and the general contractor, about the quality, character or timeliness of your work, the general contractor may paint your work in a bad light to the owner. The owner will still want resolution because the lien now encumbers his property.
This is particularly true when the owner has a construction loan, which demands that all liens be removed, or the owner quickly wants to sell the house in the immediate future. If not, the owner can wait to see if you file a foreclosure suit within the required period: eight months in Washington. If you wait longer than that the lien expires and you cannot “renew” it as many contractors often ask.
In any event, the general contractor will sometimes try to “bond around” your lien. Generals sometimes use lien bonds as a threat. They will call and threaten the sub and essentially say: “your lien is worthless; we are going to go right around it.”
In reality, a lien release bond is great news. First of all, getting a release bond isn’t an easy or inexpensive process. But further, the state law is on your side if they do secure a bond.
RCW 60.04.161 is the statute in Washington that authorizes a lien release bond “in lieu” of a lien. For liens of $10,000.00 or less, the bond must be twice the amount of the lien. For liens in excess of $10,000.00 the bond must be equal to or greater than 1.5 times the amount of the lien.
To qualify, a bond must be posted and recorded. The bond will name the lien claimant as the beneficiary. In other words, the bond will have your name on it. The effect of recording the bond is that your lien is released from the property itself.
What Do Lien Release Bonds Mean for the Lien Claimant?
So what does this mean for you and how is that good news?
It means that there is a bond on file, issued by a surety, and it has your name on it. You can no longer foreclose on the property, but if you win your foreclosure lawsuit, and the contractor does not pay, the surety must pay.
This is great news typically because you do not need to worry about the (often awkward and cumbersome) foreclosure property. You have the bond, which the surety must pay, waiting for you instead if the court orders it at the end of a trial.
So there’s no need to have a sheriff sell the property if you win. You still must prove during the trial that your lien was valid, timely and all other elements that would allow you to perfect a lien.
And here it’s important to remember how you “win” in a lien case, because the process works the same way for a lien release bond as an actual lien. You must file suit seeking to foreclose within eight months of the date your lien is recorded. That allows you to move towards perfecting your lien, and foreclosing on the property if there is no bond, or tapping the bond if a surety is involved.
After you win, you just present the court’s order to the surety and demand payment. The surety (rather than the property owner) will already be involved because you must now name the surety as a defendant in your timely foreclosure suit. Now you don’t have to worry about where you stand in relation to a lender who likely recorded a deed of trust (mortgage) that will come out ahead of your lien.
You also do not have to worry about what the property would sell for at a foreclosure sale. You know you will have enough to cover your lien and up to an additional 50% to cover costs and attorney fees, etc.
Until recently, it was not clear (because the lien law and cases get rather confusing) if, even when a lien release bond is posted, the owner must still be named as a party to the law suit. Washington courts clarified the issue in a case called CalPortland Company v. LevelOne Concrete, LLC, 180 Wn.App 379 (2014).
The owner no longer needs to be named as a party, at least in part of Western Washington (regions governed by Division II which surround Tacoma).
The CalPortland court’s decision was not only logical, but makes the process even easier during the litigation process. At least in Division II, the owner does not need to be served with the summons and complaint. Only the surety and the general contractor are typically the defendants in this situation.
But you still must prove during the trial that your lien was valid, timely and all other elements that would allow you to perfect a lien. Again, the bond is simply your security because the property has been released. If you win you get the bond proceeds rather than selling the property, which makes the process far easier, because the bond has your name on it. It is just for you, to secure your lien. If you win at trial you can collect on it.
Is There a Downside?
The only downside of a lien release bond is that you might be limited to 1.5 times the amount of your lien, even if you win after a long trial.
Let’s say you win, but on a $20,000.00 lien your attorney fees are also $20,000.00, or double the lien amount. Your judgment is for $40,000.00. The lien release bond will be posted for $35,000.00. The surety who issued the bond is only responsible for that amount.
The general is responsible for the full amount, but by that time the general may be out of business. So you may end up not being able to collect the final $5000.00 (but remember, as a subcontractor you can also sue the general’s contractor registration bond which can yield another $6000.00. That is a different topic, but could be very important in this type of situation, so we mention it briefly).
So it caps the upside. But overall, on balance, when a lien release bond is posted with your name on it, it’s great news. So if the general calls and tells you that your lien is now useless, just remember silence is golden – and a lien release bond is even better considering the price of gold has fallen lately.
Note: Lien laws vary from state to state. This article relates to RCW 60.04, Washington’s lien statute. Other states in the northwest typically have mechanisms that are similar, but not identical. It’s important to consult with an attorney in your state.