A mechanics lien is an extremely powerful tool unpaid contractors and subcontractors can use to get paid. One of the ways in which a mechanics lien affects a property is that it can “cloud” the property’s title. In layman’s terms, a property with clouded title becomes extremely unattractive to potential buyers or creditors since there is always a risk that the property could be foreclosed on and sold in order to satisfy the mechanics liens. (Remember that a mechanics lien may remain on the property if sold, depending on the state and whether or not any state-specific requirements are met.) Therefore, property owners are usually motivated to remove a mechanics lien from the property as soon as they can.
“Bonding-Off”: One Way to Remove a Mechanics Lien
Although the Lien blog already has some excellent resources on what bonding-off a mechanics lien is and how it works, for the sake of this post the topic is worth recapping.
“Bonding-off” a mechanics lien is a procedure for replacing a mechanics lien with a payment bond. A real-life example may make this process easier to understand.
Let’s say a carpenter does $20,000 of work on a property. When the property owner doesn’t pay the carpenter’s invoices, the carpenter decides to file a mechanics lien on the property.
The property owner doesn’t like the fact that there’s now a mechanics lien on his property because he knows that the lien will affect his ability to sell the property or obtain further credit on the property (like refinance). Besides going to court to court to remove the lien, the property owner can substitute the right against the property with a bond. This procedure is called “bonding-off” a mechanics lien.
Besides going to court to court to remove the lien, the property owner can substitute the right against the property with a bond.
In essence, the property owner is agreeing that if he is liable to pay the carpenter’s unpaid invoice, the recovery will be against the bond money instead of the property potentially having to be sold to satisfy the debt. Additionally, if the owner has replaced the mechanics lien with a bond the owner can proceed to sell the property or get extra loans on it without having to worry that potential buyers or creditors will be turned off by the fact that there is a lien on the property.
States have different laws surrounding bonding-off, if they have them at all. For example, Texas law requires all property owners seeking to replace a mechanics lien with a bond to make the bond amount at least 1.5 times the amount claimed in the lien (when the lien claims more than $40,000) or double (when that amount is less). Therefore, if the property owner in the example above wanted to bond-off the carpenter’s mechanics lien, he would have to take out a bond worth $40,000, or double the $20,000 claimed in the lien.
Bonding-Off in Illinois
Illinois, unlike Texas, for example, does not currently have a bonding-off provision in its mechanics lien law. This statutory gap, however, may be filled by a piece of legislation currently working its way through the Illinois legislature, HB 2804.
The legislature has provided a synopsis of the bill:
[The bill p]rovides that an applicant may at any time file a petition to substitute a bond for the property subject to a lien claim under the Act 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 timely apply to become a party to the pending action at any time before a final judgment is rendered and file a petition to substitute for the property subject to the lien claim in the pending action.
In translation, the bill, if passed, would allow property owners to replace a mechanics lien with a bond at any time before a final judgment on the mechanics lien is issued. For example, even if a party has already sued to foreclose on the lien, the property owner may still substitute the lien with a bond. The party suing to foreclose on the mechanics lien would then have to sue on the bond instead.
Illinois’s HB 2804 is a substantial piece of proposed legislation that would add more nearly ten pages to Illinois mechanics lien law. The petition to bond-off the lien would have to include information such as the name and address of the owner and the lien claimant, a description of the property subject to the claim, a copy of the mechanics lien, a copy of the proposed bond, and even evidence that a second eligible surety is available in case the proposed surety ceases to provide a valid bond. The law even includes a template with the exact language the petition must include.
Will the Illinois Mechanics Lien Law Amendment Pass?
The bonding-off amendment to Illinois mechanics lien law is still in its very early stages. As of the March 22, 2013, the last time any action was taken regarding the bill, all that occurred was that the bill was re-referred back to the Rules Committee from the Judiciary Committee. Additionally, the bill only has one current sponsor who filed it more than a month and a half ago.
The bonding-off amendment to Illinois mechanics lien law is still in its very early stages.
Does the bill’s slow progress mean that it won’t get passed and subsequently signed into law? No. In fact, the Illinois legislature recently amended its mechanics lien law, so there’s no reason to believe the revisions to the lien law in Illinois will not continue.