This post was originally written in 2011 and was updated with all new information in 2018.
In the construction industry, a mechanics lien is a powerful collection tool. A mechanics lien allows project participants to claim a legal right to the property itself. But what happens when the contractor or the property owner “bonds off” your mechanics lien?
And why would a general contractor or property owner want to bond off a mechanics lien in the first place? This article will explain what bonding off a mechanics lien means and will look at the benefits for BOTH the project participant and the prime contractor/property owner.
What Is “Bonding Off” a Mechanics Lien?
Bonding off a mechanics lien describes the process of substituting a surety bond for the underlying property in a mechanics lien claim. In other words, instead of a mechanics lien claim against the property, a claimant would have a payment bond claim against a surety bond, also known as a mechanics lien bond.
The process of bonding off a mechanics lien starts after a claimant has filed a mechanics lien. After the claim is made, a general contractor or a property owner can contact a surety bond company to purchase a surety bond that replaces the value of the lien that was filed against the property.
After bonding off a mechanics lien, this bond is substituted for the owner’s property – it is now the subject of the claim for non-payment instead of the project property. When a lien is bonded off, any proceeds recovered from a claim will come from the surety bond instead of the sale or foreclosure of the property.
Bonding Off a Mechanics Lien — Good or Bad?
It can be both!
It can be good for all parties involved, even including the original claimants. Rather than potential foreclosure, when a lien is bonded off, a payment bond is available to pay a claim. Instead of a potentially lengthy enforcement action on the horizon, a relatively streamlined bond claim process may make life easier.
On the other side of the table, it also allows the project to continue without interruption from mechanics liens, and an owner can rest assured that their property title will be free and clear.
Of course, just because a lien is bonded off doesn’t mean a claimant can relax. Commonly, a lien claimant will have to take extra steps after a lien is bonded off, even while continuing the mechanics lien process. Once a lien is bonded off, it’s important for a lien claimant to familiarize themselves with what will be required next – such as a new deadline to file a claim against the bond.
What Happens If Your Lien Claim Is Bonded Off?
Contractors sometimes use the ability to bond off a lien as a threat. They may make it sound like your lien will just disappear. In reality, having your lien claim bonded off could be awesome news! Bonding off a lien is not necessarily a threat to your claim. Instead, a surety bond will replace the property that the lien was filed against. Ultimately, it may be easier to receive payment after the lien is bonded off. A successful bond claim will result in payment from the surety, which has guaranteed that funds will be available for valid claims. A valid lien claim still faces a long and potentially nasty lien foreclosure process.
GC’s and Owners — Should You Bond Off a Lien Claim on Your Project?
Bonding off a lien claim on your project will benefit both a general contractor and an owner of the property. Mechanics liens are frustrating for general contractors and property owners because the liens can put the project on hold and potentially put the property at risk for foreclosure. Bonding off a lien claim allows your project to progress smoothly for all parties!
But general contractors and property owners should be aware that bonding off a lien claim is only temporary relief from the lien. During this temporary relief, the general contractor or the property owner can try and resolve the dispute, fight the lien in court, or pay the contractor the disputed amount.
For General Contractors
For general contractors, it is a good idea to bond off lien claims on your project. First, keeping the property free from liens is often required by the contract between a GC and the property owner. Plus, some states actually require a contractor to step in and defend bond claims made by subs and suppliers. In order to comply with contract or statute, contractors often don’t have any choice – liens must be bonded off. Even where not required, though, it may be a good idea for a contractor to bond off lien claims – it’s likely the best way to appease the owner, keep the project moving, and buy more time to resolve the dispute.
For Property Owners
For property owners, the benefit of bonding off a lien is obvious. Bonding off a claim prevents your property from being the subject of litigation or being foreclosed on! Instead of your property being at stake, a surety bond will be substituted. Plus, an owner might not even be the one purchasing the bond! Even when a contractor isn’t required to bond off a lien by statute or contract, an owner can likely use their leverage against the GC to force them to bond off a lien.
Bonding off a lien isn’t necessarily a good or a bad thing. It just changes the dynamics of the payment dispute. For lien claimants, having your lien bonded off doesn’t mean that you should abandon the mechanics lien claim process — you’ll probably have to manage both.