Bonding Off Liens: How Does it Work?

Bonding off, also known as "bonding around" liens, is a term used when a general contractor, owner or even in some cases, a subcontractor, are required to keep a property lien-free.

A lender could make the requirements of a loan that the property be lien free. If anyone decides to lien the job, the lender could suggest or demand to bond around the lien. A property loan may requirement that it be maintained lien free.

Another instance could be a dispute between the general contractor and subcontractor about the scope of work or the value it presents. If a subcontractor files a lien on the property, there could be a provision in the contract between the owner and contractor stating if a subcontractor has filed a lien on the property, the construction lien has to be removed. Ultimately, the contractor will be able to continue the project and then bond off the lien.

Mechanic's liens secure payment for materials and services needed for a privately owned piece of property. They are filed against legal pieces of property and can end with a lawsuit to force liquidation on the piece of property at a sheriff's sale, in order to pay off all parties who have liens on the property. However, bonds are instruments put in place to pay in the event of non-payment. "Payment bonds are reserved for public jobs because you can't file mechanic's liens on public pieces of property," said Chris Ring of NACM's Secured Transaction Services. "Occasionally, when a bond is put in place to bond around a lien, one of our member customers will mistakenly think that the same rules apply for claiming against a payment bond. Bonds put in place to bond around a lien must be reviewed to determine what has to be done to affect a claim. They are two distinct creatures."

There are slight differences between bonding off a mechanic's lien versus a contractor's payment and performance bond. When the contractor has a payment bond and performance bond, your claim is not against the property, but rather the claim on the payment bond itself is issued by the contractor. Bonding off your lien means you have lien rights—but after the lien is recorded, it is taken off the property, and secured with any type of security.

Bonding around liens is typically talked about in a positive light because of the granted opportunity to receive payment. The bond provides assurance that there are funds are available to pay any existing liens if necessary. Legal action to bring suit and foreclose on a mechanic's lien can be costly and in rare cases can take years. Claiming against a bond that has been put in place to "bond around" a lien is typically less costly and less time consuming.

Most state statutes legally allow owners or general contractors to bond around liens as well. All statutes require the amount of the bond to be 100% of the lien value. For example, if a lien is filed for $20,000 total, the bond around the lien needs to be put in place for at least the same amount. Most importantly, all states allow either the property owner or general contractor to bond around a lien once a lien is filed, said Ring. "I'll get a call or an email from a customer a couple of times a year when their lien has been 'bonded around.' After I consult with them about why this happened and their remedy to claim against the bond, their concern subsides."

-Kendall Payton, editorial associate

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Saturday, 13 April 2024

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