Bonding Off a Mechanic’s Lien: What Is It & What Does It Mean for You?
Once a mechanic’s lien is filed, there is an opportunity for the lien to be removed from the property with the filing of a discharge bond (also known as a transfer bond). Discharge bonds may be substituted for a mechanic’s lien. The process of replacing the lien with a bond is sometimes referred to as bonding around a lien, bonding off a lien, or bonding over a lien. Or, in some instances, a prevention bond may be provided at the start of the project, to ensure no liens attach to the property.
Bonding off a mechanic’s lien does not mean your mechanic’s lien rights are eliminated. Rather, your rights change; instead of pursuing a claim against the property, you pursue a claim against the bond.
Let’s imagine that one of those inflatable dancing tube people is the mechanic’s lien. The inflatable dancing tube guy must be attached to something, or he will blow away, in this case he is attached to the building and the only way to remove him from the building is to give him something else to attach to. So, the GC obtains a discharge bond and the dancing tube guy dances himself away from the building and attaches himself to the discharge bond, which is weighted down with the backing of a surety. The dancing tube guy is still secured, it’s just that now he is secured by the weight of a surety instead of the frame of the building.
You still have security. The security is different and the rules for maintaining that security may be different, but you typically have security to the same extent that you had security under the lien.
What about deadlines? Although it is state specific, you will likely follow the same deadlines as you would for the lien – to be safe, check statute or speak with an attorney.
3 Popular Reasons a Mechanic’s Lien is Bonded Off
1. No Lien Clause.
There may be a clause within the general contract requiring the General Contractor to ensure the owner’s property remains free and clear of any mechanic’s liens. This is sometimes referred to as a “no lien clause.” Although this clause is most frequently seen in general contracts, it is possible for this clause to appear within contracts throughout the ladder of supply.
There may be contractual disputes between parties within the ladder of supply, and although the disputes could be resolved, the parties will withhold payment. Disputes can take significant time to resolve and bonding off the lien provides parties with more time.
3. The Owner
If liens have been filed, the owner may withhold payment from the general contractor until the liens have been removed. The general contractor will then post a bond to remove the liens and the owner will remit payment. The owner may also bond off liens if they are trying to refinance loans on their property; banks aren’t fans of refinancing when the collateral (the property) is encumbered by other parties.
The Process for Bonding Off a Mechanic’s Lien
First, a lien must be filed against the property. Then, a bond (or a cash deposit) is filed with the register of deeds or court, as a substitute for the encumbered property. The amount of the bond may vary based on state statute, though frequently is 110% to165% of the amount of the lien. So, if the lien is for $100,000 and the state requires the bond to be 110% of the lien amount, the bond will be for $110,000. Often, the general contractor is the party bonding off the lien and is listed as the principal on the bond. However, anyone within the ladder of supply could bond off the lien.
Once the action moves to suit, the surety and principal of the bond (e.g., the general contractor) will be named in the suit action, instead of naming the owner. (Remember, once a bond is in play, the owner’s property is no longer part of the equation.)
Does the mechanic’s lien have to be released? This is a hotly contested question. Legal professionals fall on both sides: release the lien, don’t release the lien. Generally, we recommend not filing a release of lien, because the lien is attached the bond. However, it’s best to have an attorney carefully review your situation.
Having your lien bonded off can be a bit overwhelming because it’s a new process. But don’t worry, we’ve got you covered! Contact us today and let us help you navigate.