If you work in construction, or invest in construction projects, it’s critical to understand the unique financial issues which may arise. Mechanic’s liens are a frequent source of frustration and misunderstanding for construction workers, suppliers, contractors, property owners, and investors.
So, what is a mechanic’s lien, and why does it matter?
What are mechanic’s liens?
Construction companies expect to be paid when they complete a job for a contractor or property owner. When contractors and/or property owners cannot, or will not, pay the bill, subcontractors, suppliers, and others involved in construction can file for a lien, essentially claiming a partial share of the property because they were not paid. This is a mechanic’s lien.
For contractors and owners, mechanic’s liens are bad news. Contractors most likely have a clause in their contract to guarantee no liens on the property, so the filing of a mechanic’s lien puts them in default. Liens on a property make it almost impossible to either continue with construction or sell, and if the owner can’t find a way to pay the debt, foreclosure might be their only solution. But for suppliers, a mechanic’s lien is a vital tool for ensuring that, eventually, they will be paid for the work they’ve done.
Bonding off a mechanic’s lien
One of the biggest misconceptions about mechanic’s liens surrounds the process of “bonding off” the lien. Bonding off a mechanic’s lien is often deliberately misrepresented to construction workers as something of a “Get Out of Jail Free” card for owners and contractors. The idea is to dissuade them from filing a lien, but bonding off a mechanic’s lien doesn’t prevent workers from collecting what they’re owed.
Bonding off a mechanic’s lien involves purchasing a surety bond, which then becomes the subject of the claim in place of the property. All legal action taken is filed against the bond instead of the property, but if suppliers keep track of new deadlines and other legally binding date changes — which present the biggest risk to a result in their favor — bonding off liens typically makes it more likely for construction suppliers to collect payment in a timely manner without the risk of losing to priority rules. For contractors, bonding off allows them to avoid the legal and financial complications of defaulting on contracts, and property owners can dodge foreclosure, continue construction, and sell the property without restrictions.
Bonding off a mechanic’s lien can be a viable solution for all involved, but using it as a threat, or failing to inform workers of the intention to bond off — regardless of whether notification is required by state law — is taking unethical advantage of misinformation and confusion. Mechanic’s liens are a tool for helping workers get paid for completed work, just as bonding off is a tool for avoiding contract disputes and foreclosures.
Financial setbacks are all too common in construction. Understanding mechanic’s liens — and bonding off — is vital to ensuring the financial side of a project goes smoothly.
Announcing the 2022 Virtual Seminar: May 18 and May 25
Mark your calendars for two days of educational content presented via Zoom by our returning guest speaker, Jean Arnold, Esq., who will cover a broad range of information on Colorado and Wyoming Lien laws, including public project claims, filing mechanic’s liens, and an online Q&A following each session. Space is limited to the first 100 registrants.