Bonding off liens: Projects keep moving and claimants get paid
Tuesday, December 08, 2015
Mechanics liens are powerful tools. Through the consistent use of these security instruments, construction industry participants can nearly assure payment on every project. However, because liens are such powerful tools, they can have consequences that reach beyond getting the claimant paid.
While filing a lien is a good way to make sure a company gets paid, one of the ways it can accomplish that feat is by throwing a wrench into the works of the project itself. Grinding the project to a standstill is generally not desired, but the far-reaching effects of a mechanics lien can do just that.
In order to protect against these issues and avoid significant project delays, or to provide protection to the owner's interest in the property, a lien may generally be "bonded off." There is a fair bit of confusion surrounding both the process and effects of bonding off a lien, but it is actually a process that can benefit everybody on the project.
By substituting a bond for the property, the claimant retains security to get paid, the project can continue, and the property owner won't lose his or her property.
What is bonding off a lien?
It's relatively well known that a mechanics lien obligates the improved property as collateral to ensure the payment of claimants who have furnished labor or materials to improve the property. This means if a lien claimant is not paid for the work performed or materials furnished, he or she can force a sale of the property to satisfy the debt.
This encumbrance of the property makes it nearly impossible for the property to be sold. Perhaps more importantly, it can make it difficult for additional work to be financed, or for the disbursements to be made on the existing project, until the lien is satisfied. This provides a significant impetus to pay valid claimants quickly, or to take other action quickly, so that the lien doesn't make the project stagnate for too long.
One of these "other actions" that can be taken to free the property from the mechanics lien, is to "bond off" the lien. In this process, when allowed, a qualified bond (of an amount generally set by statute) may be substituted as security for the property, which is then unencumbered. This provides a balance between the need of the claimant to get paid, and the property owner and other project participants for the project to continue.
Instead of recovering against the property itself through a potentially long and convoluted foreclosure proceeding, the claimant can recover against the bond put up for that purpose. It helps to think of the bond as a pile of money from which a lien claimant may be paid, without necessitating any action against the underlying property.
How does it help?
For a lien claimant, the answer is simple: When a lien is bonded off, the surety company (or, in the case of a GC or property owner bonding off the lien itself, that party) is guarantying payment of the claim if you prevail in court enforcing the claim, without the need to foreclose on the underlying property. 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.
Foreclosing on a property to force a sale for payment of a claim is a messy, complex process, so if it can be avoided, that's a good thing. Getting paid from a pile of cash specifically obtained for that exact purpose is a much more streamlined way to go. Further, by bonding off the lien, the party that bonded it off is acknowledging a certain amount of pressure to have the lien removed and taken care of.
Bonding off a lien is not just good for the claimant, however. Until a mechanics lien claim is resolved, the property is tied up and in danger of a foreclosure lawsuit. Since these are not good things to the property owner, or to any party involved on the construction project, it makes sense for the interested parties to avoid the lien's encumbrance of the property.
Bonding off the lien can provide an immediate benefit to these parties, as well as the claimant. Removing the lien's encumbrance of the property enables the project to go forward, for everyone's benefit.
Bonding off liens is often misunderstood, but bonding off a mechanics lien can be the best of both worlds — protection is retained, and the project can move forward.
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