It’s surprising how often I encounter disappointment when I explain that a traditional mechanic’s lien cannot be filed against a state, county or federal project. The terms “mechanic’s lien” and “lien” get thrown around so much in the construction industry, that they’ve acquired a mystic existence. If there aren’t “lien rights,” disappointment ensues.
As I’ve explained in the past, there are never traditional mechanic lien rights on state, county or federal projects. And sometimes (such as in the state of Florida), lien rights on private projects are eliminated by the posting of a payment bond. However, while payment bonds eliminate traditional mechanic lien rights, that’s not a reason to get upset. In many ways, payment bond claims are preferable to a traditional mechanics lien claim.
Surety Bonds Are Rarely “Over-Mortgaged”
If you aren’t paid on a private construction project and file a mechanic’s lien, things can go fantastically, and most frequently do go fantastically. The mechanics lien is an awesome remedy and usually results in getting contractors and suppliers paid. However, there are some circumstances when a contractor, property owner and/or project goes completely belly up, which leaves mechanic lien claimants to fight amongst themselves (and with mortgages and construction lenders) over how the value of the property will be split between them.
If a property has $100,000 of equity and $500,000 of claims…well, you can do the math.
This problem very, very, very rarely happens with surety and payment bonds. In most cases, payment bonds must be posted in an amount equal to the contract amount. Thus, there is very rarely a situation when the amounts due to contractors and suppliers exceed the value of the bond. As a result, the bond claim is actually more secure, because it’s virtually guaranteed that the money will be there. No selling of hte property and competing with other lien claims required – just make the claim, and that’s that.
The Claims Process Can Be Quite Smooth
There are always exceptions, but filing a bond claim can turn out to be a pretty good experience. The bonding company is going to review your claim and the backup materials and make a determination about the validity of your claim. There are many occassions when the bonding company determines your claim is valid, and pays it.
The result of this is that your claim gets an “independent” decision pretty early. If the bonding company refuses to make payment and denies the claim, you can still file a lawsuit to enforce your claim and force payment. As such, the bonding company’s decision is not final. However, it is a benefit to have the bonding company review your claim and potentially pay it. This type of experience never happens with a traditional mechanic’s lien claim, however, and so there is never a similar opportunity like this to get paid and avoid litigation.