Many lien claimants are worried about a lien claim being “bonded off”. This is usually because parties don’t understand how bonding-off a mechanics lien works and, as a result, fears it, or fears the “loss” of their mechanics lien security. The substitution of the bond for the interest in the property is just another way to get paid. How and when a bond arises can differ by project. Most contractors that work on public projects are well aware of the ability to make a “bond claim” in order to pursue payment. Since mechanics liens are not allowed to attach to publicly owner property, a bond against which claims can be made is required to provide security for payment. Bonding-off a mechanics lien works in much the same way, by replacing a claim against the property itself with a claim against the bond. However, in order to force a mechanics lien off a property and on to a bond, there needs to be a statutory provision that authorizes that. Illinois joins over 35 other states by adding by amendment a “bonding off” statutory provision.
Illinois “Bond Off” Amendment
On July 29, 2015, Illinois’ Governor approved an amendment that will add to the Illinois Mechanics Lien Act. The provision will go into effect January 2016. This addition to the Act allows owners and other parties with interests in property to “bond off” mechanics lien claims. In other words, when a lien is filed against a property, the owner and other interested parties may replace the property with a pile of money. The provision reads as such.
An applicant may file a petition to substitute a bond for the property subject to a lien claim with the clerk of the circuit court of the county in which the property against which the lien claim is asserted is located, or if there is a pending action to enforce the lien claim, an applicant may at any time prior to 5 months after the filing of a complaint or counterclaim by a mechanics lien claimant to enforce its mechanics lien claim.
The petition to bond off a mechanics lien is required to include a copious amount of information including the name and address of the applicant and applicant’s attorney, name and address of the lien claimant, name and address of the property owner, description of the property, a copy of the lien claim, a copy of the proposed surety bond, and a copy of the surety’s certificate of authority. All parties involved must receive notice of the petition being filed. The petition must be approved by the court before the surety bond can be substituted for the property. If the bond is found eligible and notices have been handled correctly, the court will approve the petition. The entire provision can be found here.
Pile of Money vs. Property
In some cases, a claim against a bond is a more efficient path to payment than enforcing the mechanics lien itself. Bonding off a mechanics lien can be a benefit to all parties involved. While, at first glance, it may appear that this is really just improving the options of property owners and other interested parties – by allowing projects to continue and allowing properties to wiggle out of being encumbered by mechanics liens, that is not necessarily the case. According to the amendment, the bond posted in place of the interest in the property must amount to the money owed plus interest and fees. Therefore, lien claimants will receive the same amount whether the claim is against the bond or a property. There is no reason to fear a bond. In fact, as noted in a previous post on the issue of bonding off lien claims:
If a contractor threatens to bond off your mechanics lien, you can likely consider this as a weakness for their position and not a strength. While there are exceptions to the rule, it’s almost always the case that the contractor is bonding off the claim because: (i) The property owner is forcing it to do so; and (ii) The contractor cannot afford to pay you, but can afford a temporary bond premium.
In some cases, a claim against a bond is a more efficient path to payment than enforcing the mechanics lien itself. The reason is because the practical reality of foreclosure actions. If a mechanics lien enforcement action finally requires a foreclosure on the property to pay the claim, that is a long and tedious path to take – and, the lien claimants are not paid until the property is sold. Further, in the (admittedly rare) situation where a sale of the property is required, there are likely multiple lien claimants or multiple parties with encumbrances on the property, all fighting for priority. Since the priority rules can be complex, difficult to determine, and result in a significant consequences in terms of which parties actually get paid, these priority battle can lead to even more time-consuming and expensive litigation. It can be easier and quicker to go after a bond set aside for the specific purpose of providing security for payment.
“Bonding off” a mechanics lien is not necessarily a bad thing, and parties on construction projects in Illinois may eventually determine that the process is not to be feared. While nobody likes losing an interest in real tangible physical property in order to make sure they are paid what they deserve in a fair manner, the potential to make a more streamlined claim against a bond provided for that purpose is not always undesirable. While the best case scenario is always for all the parties on a construction project to be fair, when payment disputes arise claims against a bond can still provide the protection necessary.