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Bonding Off a Mechanic’s Lien Can Be a Good Thing for All Parties

A mechanic’s lien is the primary tool available to subcontractors, construction suppliers, and workers dealing with payment disputes. A lien can halt construction, put an encumbrance on the property, and cause many other legal problems for general contractors, lenders, and property owners. For this reason, some owners or contractors will threaten to “bond off” the lien to discourage claimants from filing. But “bonding off” isn’t necessarily a bad thing. Here’s what you need to know.

What does bonding off a mechanic’s lien mean?

A mechanic’s lien can delay construction or force the sale/foreclosure of a property until everyone involved in the project is paid. A typical response to a mechanic’s lien is purchase of a surety bond. The bond becomes the subject of the non-payment claim, which avoids the risk of foreclosure. Any legal action made by the claimant is then made against the bond rather than the property. This is what is meant by “bonding” or “bonding off” a lien.

What does it mean for contractors, property owners, and construction project participants?

General contractors are almost always required by contract to keep a property free of liens. Bonding ensures they fulfill this obligation, allows construction to progress, and allows more time to resolve any disputes. For property owners, bonding allows continued construction, prevents liens that could interfere with sale, and avoids the lengthy process of disputing claims in court.

But where does that leave the claimant? Despite the misunderstanding, bonding off a lien does not invalidate the initial claim, nor does it prevent the claimant from being paid. In fact, bonding can make sure the claimant is paid and lenders avoid the need for foreclosure and the risk of losing money to priority rules. Claimants must keep track of deadlines and state laws, but a surety bond can streamline the payment process.

What happens during the resolution?

The ideal outcome is mutually beneficial: The claimant is fully paid, lenders and property owners avoid foreclosure, and the general contractor avoids defaulting on the contract. In practice, this is not always the case. Not all states require claimants to be informed when their lien is bonded off, which causes deadlines to be unknowingly missed and further complicates the payment process.

Despite the potential consequences, bonding off is not the pitfall it is often made out to be. In some ways, it is preferrable to the alternative. Surety bonds are designed to curtail financial mismanagement and protect lenders, property owners, and general contractors from its consequences without leaving subcontractors, suppliers, and workers to bear the burden. Understanding surety bonds — and what it means to bond off a mechanic’s lien — allows for responsible, informed financial decisions.

Need help managing your commercial credit risk? MSCCM financial experts can assist you. Contact us today.