Mechanics liens are a powerful way for construction participants to practically assure payment.
Because of this, and the way liens work, making the decision to file a lien can have significant consequences other than the claimant getting paid, very few of which are desired by the property owner and other project participants. In order to mitigate the potential issues arising from a significant delay in the project, or to protect the owner’s interest in the property itself, a lien may be “bonded off.” But what does that mean? And how can it help everybody?
What Does ‘Bonding Off’ a Lien Mean?
A mechanics lien provides a legal right in the underlying property itself to the extent the claimant furnished labor or materials for the improvement of the property. This security interest functions like collateral for the money owed. If the lien claimant is not paid, the claimant can force a sale of the property to satisfy the debt, just like a bank can foreclose on a house if the mortgage payments are not made. Because the lien claimant has an interest in the property itself, it is difficult, if not impossible, for the property to be sold, transferred or financed until it the lien is satisfied and released. Likewise, mechanics liens gum up the works for the project as well as the property.
This power works wonders for getting project participants paid, but can be frustrating and expensive for the general contractor, the property owner and for others on the project. If the project grinds to a halt because the lender won’t disburse more funds until a lien against the property is resolved, no one gets paid. This means that there needs to be some sort of balance between the ability of the mechanics lien to encumber the property to make sure the claimant gets paid, and allowing the project to continue and/or the property be transferred or financed.
This balancing act is accomplished by the “bonding off” of a lien. When allowed, a qualified bond (of an amount generally set by statute) may be substituted for the property. That way, the claimant still has security from which to recover payment (the ability to recover from the pile of money represented by the bond), but the lien is no longer tying up the property. In a sense, the bond steps into the shoes of the property.
Why Is Bonding Off a Lien Good for the Claimant?
While direct contractors and developers sometimes act as if bonding off a mechanics lien will give them the upper hand, or otherwise lessen the effect of the claimant’s lien, this is untrue. In fact, a general contractor that bonds off a lien is likely doing so for one of a few reasons:
- it is under pressure from the property owner to get the lien off the property;
- it can’t currently pay the claim for the money due but can afford the bond premium; or
- it understands that getting rid of the encumbrance on the property by substituting alternate security is good business.
Here’s the kicker, though: Contrary to popular belief, having a lien bonded off is a very good thing, and here’s why. When the lien is bonded off, the surety company (or, in the case of a general contractor bonding off the lien itself, the general contractor) is guaranteeing payment of a claim if the claimant prevails in court enforcing the claim. It may even be better than the original lien because it doesn’t require the sale of the property in order to get paid. In the case of a lien that has been bonded off, a successful claimant is paid directly from the bond amount at the conclusion of the enforcement action.
Why Is Bonding Off a Lien Good for the Other Parties?
Some of the reasons bonding off a lien is good for the other parties on the project as well as for the general contractor, property owner and lien claimant are a mirror image of why mechanics liens are so effective in the first place. Mechanics liens encumber the property and make transfer, finance and project work difficult. Further, until the claim is resolved, or the mechanics lien dissolves as a matter of law, the property is in danger of a foreclosure lawsuit. Clearly, those possibilities are bad and having the ability to avoid them makes good sense.
The property owner who had contracted for an improvement to his or her property definitely doesn’t want to have that property foreclosed on and sold, and doesn’t want to be forced to pay twice for the same work. By putting pressure on the general contractor to bond off the lien, those situations can be avoided. And general contractors, while unenthused with the prospect of being pressured into posting a bond to get rid of the encumbrance on the property, will benefit from the project continuing with less interruption.
Bonding off liens is a misunderstood tool that can help everybody on a construction project. By unencumbering the improved property and still making sure that a claimant remains in a secured position, bonding off a mechanics lien can be the best of both worlds.