If A Construction Lien is Bonded…Does that Circumvent Payment to an Claimant?

Typically, a construction lien is filed to have a number of desired effects:  (1) To prevent the sale or transfer of the property; (2) To hold multiple parties without contractual privity liable for the debt; and (3) To provide contractors with a faster and more direct remedy against parties in litigation.

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.

Virginia – Strongest Liens of them All?

In the past, we’ve posted about the strength and effectiveness of construction liens.    Across the nation, construction or mechanics liens can be used as a powerful collections tool by contractors, suppliers and others working on construction projects.

The state of Virginia, however, has perhaps the most powerful mechanics liens in the nation.

In most circumstances, a mechanics lien will get resolved without the property being foreclosed or the property owner filing bankruptcy.   However, there are occasions (and in this economy, increasingly so) when a project falls apart, and those working on the jobsite find themselves waiting for proceeds to trickle down from foreclosure or bankruptcy proceedings.

In most states, a filed mechanics lien takes priority below the construction loan bank’s mortgage.   Further, the filing of bankruptcy usually defeats any lien rights.

In Virginia, however, the opposite is true.  A properly filed mechanics lien in Virginia will not get defeated in bankruptcy, and it will have priority over the construction loan bank.   Earlier filed mechanics liens have priority over later filed instruments.

We’ve posted in the past on why its important for contractors to lien unpaid construction projects.   This review of the powerful lien laws in Virginia stands as a reminder of how effective a mechanics lien can be, and why its important to make your claim timely & properly.

Can Unlicensed Contractors Lien in California?

In California, like in every state, those who perform labor or provide materials to a construction project obtain a right to lien the property.  In fact, this lien right is even built into the California constitution.

However, every state’s lien laws has complex requirements.   A question that is frequently asked is whether an unlicensed contractor has the right to file a construction or mechanics lien.

Of course, the answer to this question varies state-by-state.  Further, one must remember that in most states, the fact that a person is unlicensed is not necessarily controlling as licenses are not required in every situation.

As it regards the state of California, the question was discussed in a legal column of PressBanner.com.  Gary Redenbacher says:

But what about unlicensed contractors? By law, unlicensed contractors are not entitled to be paid — period — for anything. Even if they do a perfect job and put $300,000 of materials into your home, they will be thrown out of court if they sue to get paid. Since unlicensed contractors cannot turn to the law to be paid, any lien they record is a false lien.

Contracting without a license is a misdemeanor. Recording a false lien in an attempt to get paid might just jump an unlicensed contractor from the frying pan into the fire.

One of the most critical mistakes any contractor can make when filing a construction lien is not being qualified to file one at all.  In California, its pretty clear that unlicensed contractors are completely without lien rights.  Elsewhere, if you’re performing construction work without a license, you should be extra-cautious before filing a construction lien, as you may not be qualified.

Read What We Read

All day long, we scour the internet for information on construction liens, lien notices, lien laws and more.  While we post on this blog about certain construction lien news and legal updates, we can’t get around to posting about everything.

However, whenever we run across something great, we share it on Twitter or through Google Reader.  Interested in reading what we read, and learning more about construction liens and laws?   Subscribe to our Google Reader shared articles page (jen’s) (scott’s), or follow us on Twitter.

Know of a cool trade magazine, publication or other RSS Feed that we should be reading?   Let us know!

Be Careful When Using Free Legal Forms

Gerard Simington with “FindAnAttorneyForMe.com” published an informative article that warns businesses about using free legal forms found on the internet.

The Internet has placed legal information and legal forms at our fingertips – and its easy to forget sometimes that the law is a very complicated subject, and legal forms are no exception.  While a legal form may seem simple on its face, the blanks can carry significant legal consequences.

It’s always great to hire an attorney to draft legal documents from scratch, or to “tweak” legal forms to fit your particular need.   The costs associated with legal counsel, however, are simply sometimes out of your business’ reach.

Legal Document preparation services like Express Lien are perfect for these situations.  Our staffs of professionals are familiar with the forms that relate to your construction project, and we can help you draft & file your forms properly and avoid costly mistakes.

So What Is A Mechanic’s Lien?

The “construction lien” goes by many names in the United States: Claim of Lien, Statement of Claim or Privilege, Mechanics Lien, and more. And while the name and technicalities are different from state-to-state, construction liens generally operate similarly across the nation.

So what exactly is a mechanic’s lien?

When you run a Google search for “Mechanic’s Lien” an entry from Wikipedia is the first result. According to the collective Wikipedia editors, a mechanic’s lien is “a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property.” Read the full Wikipedia entry here.

The entry goes on to state that liens exist to “protect the contractors.”

Here are some general theories to keep in mind when trying to understand construction or mechanics liens:

• In general, those who perform labor or supply materials on a construction project will have the right to lien the project;
• The method of filing a construction lien varies state-by-state;
• Your lien must be filed within a defined timeframe;
• If your lien does not produce payment, you will need to “perfect” or “foreclose” on your lien within a defined time period.

To learn more about your state’s requirements, click on your state’s name in our blog’s navigation. Or check out your state’s requirements at the following charts:

Quick Guide to Lien Timelines - Chart of Lien Filing Deadlines
State-By-State Notice Requirements Chart

Q: How Does Express Lien Work?

ExpressLien is a legal document preparation service for the construction industry.

Contractors, Suppliers, and Construction Professionals can save time and money on common legal matters, such as construction liens, notices and cancellations.

ExpressLien helps your organization create reliable legal documents from the comfort of your home or office, and without spending thousands on attorneys fees. Simply answer a few questions online (or fax in an order-form) and your documents are prepared and sent for filing within 5 working days.

Based on the provided project data, you documents are:

• Professional drafted by our offices;
• Quickly filed with the appropriate authority;
• Served to all interested parties; and
• Safely stored on our servers.

We’ve created a demonstration video to help explain how a construction lien is handled by Express Lien, and you can view it here:

Feel confident with Express Lien, Inc. helping to prepare your legal documents, as we’re a bonded Legal Document Assistant in Los Angeles county and insured by an Errors & Omissions carrier. Even more, your complete satisfaction with our service is guaranteed.