Lien Release Bonds – Remove Liens, But Not All Liability
Among owners and contractors, payment and performance bonds are commonly used together in an effort to mitigate future risk against derivative subcontractor claims. But what happens when despite the effort to mitigate risk, a derivative claimant nevertheless files a mechanics’ lien on the owner’s real property? Not all hope is lost. There is another classification of bond, a “lien release bond”—also commonly referred to as an indemnity bond or a mechanics’ lien bond—which provides protections for real property after a mechanics’ lien has already been filed. The purpose of a lien release bond is to remove claims against the relevant real property. Notably, a lien release bond does not necessarily eliminate all liability of an owner or a general contractor. In number of states, an owner or a general contractor can be held personally liable for derivative claims despite a valid lien release bond.
What is a Lien Release Bond?
A lien release bond is a specific type of surety bond that removes an existing mechanics’ lien from an owner’s real property. In an effort to protect real property, an owner, or a general contractor, can obtain a lien release bond that will substitute or take the place of a mechanics’ lien. In the event a lien claimant files suit on the mechanics’ lien and seeks to collect on their claim, any proceeds recovered will come from the lien release bond rather than proceeds from the sale or foreclosure of the real property. The threat of mechanics’ liens is always present on a construction project— it is estimated that over 60,000 mechanics liens were filed in 2021 alone. Lien release bonds are an added layer of protection for an owner’s real property against a pending mechanics’ lien.
Process of Obtaining a Lien Release Bond
Lien release bonds are often obtained by general contractors rather than owners. Many contracts require that general contractors keep the owner’s property free from liens. Other contracts additionally require that general contractors indemnify or defend claims from scorned lower tier-subcontractors and suppliers. Lien release bonds are a useful mechanism for general contractors to protect the owner’s property and to potentially salvage a business relationship with the owner.
The process of obtaining a lien release bond can only occur after a lien claimant has filed a valid mechanics’ lien. Once a lien is filed, an owner or general contractor can contact a surety company to purchase a bond that will replace the value of the lien that was filed against the relevant property. However, obtaining a valid and enforceable bond requires more than merely paying the premium to a surety company.
An enforceable lien release bond requires strict adherence to your states respective lien and bond code. States generally require that the bond identify the mechanics’ lien claimant and the lien amount that the bond seeks to substitute. Additionally, most states specify that the bond amount must reflect more than the mechanics’ liens amount.i For example, in Arizona, a lien release bond shall be in an amount equal to 150% of the demand set forth and secured by a mechanics’ lien.ii Additionally, as common with other lien and bonds, a lien release bond is filed with the clerk of court where the mechanics’ lien was filed and the real property is located. Upon filing, generally either the clerk of court or the party filing the lien release bond will give notice of filing of the lien release bond to the lien claimants.iii
Owners and general contractors filing lien release bonds should be mindful that not every state’s procedure is the same. For example, contrasting to other states, in Virginia, the party filing the lien release bond is required to give five days’ notice to the lien claimant; after notice is given, the party must to request permission from the court to file a lien release bond.iv Once a Virginia court grants approval, then the requesting party is permitted to file the bond. Owners and general contractors obtaining lien release bonds should be cautious and meticulous, because as with most other statutory schemes, failure to strictly follow your state’s statutory code may render your lien release bond void.
Lien Release Bonds Do Not Limit a Lien Claimant’s Recovery
A lien release bond does not mean that a lien claimant’s right to recovery is erased. In the case of a valid lien release bond, a lien claimant will be permitted to collect directly from the respective surety company, who has guaranteed that funds will be available for lawful lien claims. In fact, a lien release bond provides a more favorable and streamlined process of recovery for valid lien claimants, compared to cases where a foreclosure sale would be necessary to collect on a lien claim.
If an owner or general contractor has obtained a valid lien release bond, a lien claimant will be given notice upon filing of the bond. After receiving notice, a lien claimant will be subject to a new deadline to file against the lien release bond. States generally require lien claimants to bring suit against the bond within one year.v Subcontractors, suppliers, and lower-tier lien claimants should familiarize themselves with their states bond claim deadlines to ensure that they do not miss the opportunity to collect on their claims.
Not All Liability is Eliminated
After lien release bond is properly filed, the owner and anyone seeking to acquire an interest in the real property will be protected from the mechanics’ lien filed on said property. However, a lien release bond does not completely eliminate all liability of an owner or a general contractor. A surety’s liability for the lien release bond is limited to the face value amount of the bond. In a number of states, the party who acquired the bond, or the principal, can be held liable for the judgment amounts that exceed the bond amounts. For example, in Florida, where a general contractor is the principal who posted the lien release bond, the general contractor can be found liable for the judgment amount exceeding the bond.vi Additionally, in Texas, an owner that obtains a lien release bond is still subject to personal liability, as the bond only removes the lien from the real property.vii States vary in their interpretation of owner and general contractor liability after a lien release bond has been filed. Owners and general contractors should be mindful that while a lien release bond protects real property, a lien release bond is not a complete shield from all liability.
Conclusion
Lien release bonds are an added layer of protection for owners’ real property. This specialized surety bond will act as a shield against valid mechanics’ liens claims, while simultaneously acting as a guarantee of payment for valid lien claimants. Owners, contractors, and subcontractors should all be aware of this tool and their own states respective statutory requirements for obtaining a valid and enforceable lien release bond.
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i See e.g., Tex. Prop. Code § 53.172(3) (requires lien release bond to be 1.5% more than the mechanics’ lien amount); La. Rev. Stat. Ann. § 9:4833 (requires that the lien release bond be no less than one and one quarter [1.25%] of the lien amount); Cal. Gen. Code § 8324 (requires that the lien release bond equal 125% of the amount of the claim); and N.Y. CLS Lien § 19(4) (allows a lien discharge bond if the bond secures up to 110% of the amount of the claimed lien).
ii AZ Rev. Stat. § 33-1004(B).
iii See e.g., Fla. Stat. § 713.24 (clerk provides a copy of bond to lien claimants); AZ Rev. Stat. § 33-1004 (principal is required to serve copy upon lien claimant); and Mich. Comp. Laws §570.1116(1) (clerk notifies lien claimants).
iv Va. Code Ann. § 43-71.
v See e.g., Tex. Prop. Code § 53.175 (one year to file suit on lien release); O.C.G.A. § 44-14-364 (one year to file suit on lien release).
vi Coppenbarger Homes, Inc. v. Williamson, 611 So. 2d 33 (Fla. 1st DCA 1992).