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 mechanic’s lien bonds?

When construction professionals refer to mechanic’s 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 nonpayment. 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 mechanic’s lien bonds work?

Project owners and prime contractors should be fully aware that bonding around a mechanic’s lien (or the release of a mechanic’s 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.

1. Take the contractor to court and and prove he doesn’t have the right to lien because he’s not owed the money.
2. Pay the contractor whatever the disputed amount is.

Mechanic’s 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 mechanic’s lien bond?

Those looking to get a mechanic’s lien bond should contact a surety bond company that works with contractor bonding. It’s typically easier for construction professionals to get mechanic’s lien bond through an existing surety provider that has taken care of their previous contractor bonding needs.

How do contractors get mechanic’s lien bonds?

The mechanic’s lien bonding process is one of the most difficult for a surety provider to navigate. To get a mechanic’s 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.

Something else may happen after a lien is filed – it could be bonded.

A lot of property owners and prime contractors will bond off a construction lien as an intimidation factor.   As the claimant files the lien to make a statement that the debt isn’t going away, so too does the liened party file a bond to take the wind from the claimant’s sails.

But, what is the exact effect of the lien bond?   Does it destroy the claimant’s claim, or render the mechanic lien worthless?

The answer:  absolutely not.

This point was recently discussed by Vincent Pallaci on his New York Mechanics Lien blog, explaining as follows:

The bond does not discharge the mechanic’s lien in the sense of extinguishing it, it discharges the lien in the sense of removing it from the property. But the lien remains live an well. The mechanic’s lien, having been removed from the property, is now attached to the discharge bond.

To explain this in a different way, after your lien is bonded, you can no longer foreclose on the property.   However, the property has been replaced by the surety’s bond.   So, you are allowed to enforce your lien against that bond, and the surety’s funds.   You still have guaranteed money there – and in fact, the surety’s money may be better security than the equity in the property itself.

The lien is still there, and even if it’s bonded, it’s still important.   Without filing the lien, you’ll never get it bonded…which means, you’ll never have the surety’s funds available to enforce your claim.

Claims against sureties are beneficial because:  (1) It can reduce the prevalence of personality conflicts between the unpaid party and the general contractor; and (2) It is a guarantee that at the end of a proceeding, money will be there.

However, you can’t make a claim against a surety if you don’t know who the surety is.   And if you’re not on the best of a terms with a general contractor, you may fear that it won’t reveal the surety to you.

So, this begs the question:  how on earth do you discover the identity of a surety?

The answer is quite simple:  Just ask.  That’s right, just ask for it.

Who To Ask?

Under the Miller Act and most Little Miller Act statutes, the public agency in charge of the project is required to (and quite used to) disclose the identity of the surety to anyone who asks for it.

Using Google, you can generally always find the governing authority.   A governing authority will typically manage its contracts through:

(a) public works department;
(b) new construction department;
(c) purchasing department;
(d) capital projects department; or
(e) facilities department

Most of these governing authorities (almost all) will have a website that gives you some information about their public contracts.   Figuring out which department is in charge of the contract is generally a toss up, so you will likely need to navigate around government websites to find the best possible contact.

How to Ask

As I stated above, agencies are required to disclose the surety on the job….actually getting it, just depends on how difficult the agency will make it for you.

If a governing authority has a website, you will generally be able to find out at least a little bit of information about their projects. If the project is relatively new, they might still have bid postings, pictures, articles and reports posted.

Giving the agency a phone call will usually do the trick, but if you run into trouble, just send a certified letter making the request.  You can even have Zlien send this notice / request for you.   We’ll even figure out who to contact, saving your company valuable time and energy.

But if a homeowner (or other interested party) files a bond in response to the lien, does that defeat the purposes of the lien itself?

Quite simply, no.

What is a Lien Bond?

Most mechanic liens statutes give property owners and other interested parties in a construction project the ability to file a bond in response to a party’s filing of a mechanic’s lien.   Most states require the amount of the bond to equal more than 100% the lien claim.

In Louisiana, for example, a lien bond must be 125% the amount of a claim.   In Washington, the bond must be 150% the claim amount.

The bond itself is deposited with the recorder or clerk’s office and theoretically “takes the place” of the lien. A filed bond, therefore, usually has the effect of eliminating any barriers to the sale or transfer of property and nullifying any rights to sue parties without contractual privity.

So, if a lien can be bonded and all of the lien’s benefits nullified…what’s the point of the lien?

The Bond’s Benefits

While the lien bond acts to nullify some positive aspects of a party’s claim of lien, it does not defeat the purpose of the lien statutes.   The claimant loses some benefits of the lien itself, but it gains the benefits of the bond.

Here are some benefits of the bond:

• The entire amount in dispute (plus an additional amount – 25%, 50%, etc.) is filed with the court, and is securely awaiting determination of ownership.   This means that upon a court award, you won’t have to spend any money “collecting” the judgment.   The money is there.
• The lawsuit to foreclose or enforce your lien becomes a lot less complicated.   Sometimes, a subcontractor’s lien claim can include a handful of parties (owners, GCs, suppliers, etc.).   The more parties in litigation, the more expense and procedural hurdles.   When a lien is bonded, it reduces the litigation to a one-on-one dispute and narrows the scope (and expense) of the action.

In short, while a bonded lien does not prevent the sale or transfer of property and may reduce the number of parties a claimant can sue….the bond also eliminates the need for those remedies.  It places the entire amount in dispute (plus sum) into the reach of the claimant, and the claimant can move forward in a clean and uncomplicated procedural action to recover the funds.

If your lien is bonded, it has already succeeded to some degree (it has produced the cash).  Now, it’s only a matter of proving that the cash is yours.