This article was written by Danielle Rodabaugh of SuretyBonds.com, an agency that issues surety bonds to contractors nationwide. As a part of the agency’s surety bond educational outreach program, Danielle writes informative articles that explain complicated bonding issues to contractors and their lawyers.
It’s no secret that filing a lien on a property is the most effective way for unpaid contractors to access due payment for services rendered on a private project. As a result, the project owner’s property and/or the prime
contractor’s finances become tied up in the lien. They must then consider the steps they can take to protect their assets.
The quickest and easiest way for a project owner or prime contractor to get rid of a lien is to just pay the claim. However, oftentimes the owner or contractor refutes the basis for the claim and refuses to pay for a lien
release. In such situations, mechanic’s lien bonds can be another way to remove a lien. However, they’re not easy to get.
What are mechanics lien bonds?
When construction professionals refer to mechanics lien bonds, they’re talking about the practice of bonding off a lien. When a project owner or contractor wants to bond off a lien, he purchases a surety bond that replaces the property value that the lien was originally filed against.
Removing a lien via bonding can be extremely valuable to those who stand accused of non-payment. Doing so keeps their property and/or assets from being tied up in litigation – and from potentially being foreclosed on – for a period of time.
In original project contracts, owners typically include a requirement that obligates the prime contractor to bond off any liens that might be filed against the project. This is done to protect project owners from prime
contractors who do not forward payments onto their subcontractors and suppliers. Otherwise project owners can be left paying for the same work twice (once to the prime contractor and once to subcontractors/providers who were never forwarded payment from the prime).
How do mechanics lien bonds work?
Project owners and prime contractors should be fully aware that bonding around a mechanics lien (or the release of a mechanics lien) is nothing more than a temporary release of the lien. Due to county statutory requirements, this release is only valid for a certain amount of time. During that time the dispute has to be settled. The owner or contractor then has two options.
- Take the contractor to court and and prove he doesn’t have the right to lien because he’s not owed the money.
- Pay the contractor whatever the disputed amount is.
Mechanics lien bonds are extremely hazardous for surety providers to write because the contractor seeking compensation can make a claim against the bond if the prime contractor fails to settle the dispute. If this happens, the surety company could be left footing the bill, which is why surety providers set stringent requirements for the bonded contractor to meet before releasing the lien.
Where can a contractor or supplier get a mechanics lien bond?
Those looking to get a mechanics lien bond should contact a surety bond company that works with contractor bonding. It’s typically easier for construction professionals to get mechanics lien bond through an existing surety provider that has taken care of their previous contractor bonding needs.
How do contractors get mechanics lien bonds?
The mechanics lien bonding process is one of the most difficult for a surety provider to navigate. To get a mechanics lien bond to release a lien, the bond’s principal usually has to provide collateral worth the bond’s full amount upfront. However, large contracting firms that already have an existing relationship with the surety company might not have to meet such stringent conditions.
Bonding off a lien can be extremely beneficial for a project owner or prime contractor looking to protect their best interests and avoid unwarranted claims. However, they must understand the delicate, and potentially expensive, nature of the product before making the decision to begin the bonding process.
We hope this primer on mechanics lien bonds. For more information on mechanics lien bonds, check out “Why Bonding Off Liens Is Good For Everyone” from Construction Executive Risk Management.