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A construction lien bond is used by a property owner to remove a construction lien that was recorded against his property. This is often necessary when the owner needs to sell the property or refinance a loan secured by the property but cannot do so because the construction lien is clouding his title to the property. In most cases, the construction lien bond is provided by a licensed bonding company, but sometimes cash collateral can be used in lieu of a bond.
Construction Lien Rights
All states have enacted laws that give certain people who perform work to improve real property the right to record a lien against the property if they are not paid for their work. This lien right applies regardless of whether the property is residential or commercial. Although some states require a contract between the owner and the person claiming the lien, other states allow construction liens in situation where the owner may not know who is performing the work, such as a subcontractor hired by the owner’s general contractor. In many states, the construction lien is called a mechanic's lien, even though it does not involve the work of an auto mechanic.
Effect of a Construction Lien
A construction lien means there is problem with the project. In some situations, the owner refuses to pay the contractor because of a dispute regarding the quality of the work. Sometimes the owner pays the general contractor for work performed by a subcontractor, but the subcontractor does not receive the payment. Once the lien is recorded, the title to the owner's property is clouded, which effectively prevents the owner from selling or refinancing the property without paying the amount of the lien. Even if the owner is not under pressure to refinance or sell, the person owed money can file a lawsuit to foreclose the lien to enforce payment.
Construction Lien Bond
An owner who wants his property free of a construction lien but does not want to pay the lien claimant, can obtain a bond to take the place of the construction lien. Whatever lien rights the claimant had against the property are transferred to the bond and the owner can sell or refinance his property without concern for the lien. A bond is often obtained from a qualified surety company. If a lawsuit is pending to enforce the lien, some states allow the property owner to deposit the amount of the lien with the court to release the lien from the property.
Preventing Construction Liens
Any property owner undertaking a construction project should take steps to manage the project in such a way that prevents or limits the likelihood of a construction lien being recorded. The first step is to perform a background check on the general contractor to ensure he is properly licensed and reputable. Second, obtain from the general contractor a complete list of all subcontractors and material suppliers performing work on the project. Third, do not make any payments to the general contractor until he provides a conditional release for the work, both for his account and for any subcontractor. The release becomes effective once the check is negotiated. In the event the owner becomes aware of a dispute between the general contractor and a subcontractor, the owner should issue a joint check that requires both parties to endorse the check in order to get paid.