In the construction industry, project participants may file a mechanics lien as a powerful collection tool. It allows them to claim a legal right to the property itself. While this tool is indeed powerful, what happens when the contractor or property owner bonds off your mechanics lien? We’ll take a deep dive into what this means and also take a look at the benefits and disadvantages for both the subcontractor and the prime/property owner.
What is a Lien Release Bond?
A lien release bond is a surety bond that takes the place of a mechanic lien on a property. When the owner or general contractor purchases this bond, the claim is released from the property and attaches to the bond instead.
Lien release bonds can be a useful way for owners to free their property from lien claims, enabling them to refinance or sell the property. While this does not free them from their obligation to pay off their debt, it serves as a substitute of one form of payment security to another.
In a claims scenario, the claimant would have a surety bond claim against a surety bond or the mechanics lien bond. When the claim of non-payment arises, any proceeds from a claim will come from the bond itself. If a lien claim is threatened, best practice for a general contractor is to contact its bonding agent and attorney immediately to coordinate the bonding off of the lien claim.
Benefits of Lien Release Bonds
Claimants
- It prevents parties from having to navigate the lien foreclosure process, which can be tedious and expensive.
- When a lien is bonded, the surety steps in with funds to pay the claim.
- Is a more streamlined process than foreclosure.
- When a lien is bonded, the surety steps in with funds to pay the claim.
Owners and GCs
- It allows the project to continue without interruption from mechanics liens.
- An owner can also be sure the property title will be free.
- Mechanics liens are frustrating for GCs and owners because they put the project on hold and potentially put the property at risk for foreclosure.
- It allows the project to run smoothly.
- Mechanics liens are frustrating for GCs and owners because they put the project on hold and potentially put the property at risk for foreclosure.
Disadvantages of Lien Release Bonds
Claimants
- Just because a lien is bonded does not mean they are clear.
- It is important for claimants to understand that once a lien is bonded off, they will have to familiarize themselves with the process and what is required next (i.e., new deadline to file a claim against the bond).
Owners and GCs
- Bonding off a lien claim can be difficult and expensive. The bonded amount can be 1.5x the claim, but the premium on the bond would be a small fraction of that
- That money stays with the surety until the claim is settled. It also only provides temporary relief.
Key Takeaways
There are three key takeaways when it comes to breaking down lien release bonds:
- Most owners insist on GCs bonding off a lien. Most standard form contracts provide the owner the right to insist upon the bond. Most contracts require the bond off to occur very quickly.
- Bonding off a lien is not necessarily a good or bad method. It does however change the dynamic of the payment dispute.
- For claimants, having the lien bonded off does not mean that you should abandon the mechanics lien process. You will most likely have to handle both.
For more information regarding the lien release bond process and other surety solutions, please contact your RCM&D representative.