Learn about what a surety is how a construction payment bond can eliminate liens, why bond a lien, what the Tennessee lien statute says about lien enforcement for a contractors bond, bonding a lien, bonding a lien with a lien bond, bonding a lien using a payment bond, and perfecting the lien after a bond.
This blog is part five in a series on Tennessee lien laws where we will give the basics of what the lien law structure looks like in Tennessee, understand it a little bit, understand some of the pitfalls, and some of the things that you need to be aware of.
Part 3: Preserving a Remote Contractor’s Lien in TN – The Notice of Nonpayment Requirement
Part 5: Bonding a Lien in TN
Part 6: Overzealous and Improper Liens in TN
Part 7: Licensing Considerations – No License, No Lien in TN
Part 8: Can You Lien for Tenant Work in TN?
Part 9: What about Priority? - The Visible Commencement Standard in TN
Part 10: Other Rights – The TN Prompt Payment Act – Reasonable Assurances and Stopping Work
Part 11: Other Rights – The TN Prompt Payment Act – Notice and Remedies
Recap: TN Lien Law Basics
Now we will quickly do a recap on Tennessee lien laws.
a. Who has lien rights?
Remote contractors and prime contractors in Tennessee have lien rights.
b. For what work are lien rights valid?
For an improvement, you need a contract for lien in Tennessee.
c. For how much are lien rights valid?
There are some limitations on what the lien can secure, for instance, you cannot add attorney’s fees. Tennessee is pretty liberal on what can and cannot be liened.
d. Steps for prime contractor and remote contractor to follow
Remote contractors are a little different, they have the Notice of Nonpayment which is a rolling requirement. They have 90 days from the end of the month when the work or materials actually performed or delivered. Then there is the Notice of Lien which needs to be sent 90 days from completion and then the lawsuit and attachment 90 days thereafter.
Now that brings us to what happens if there is a lien filed. What about the bonding relationships? We will start off with what a bond is.
a. What is a bond?
Essentially, a bond is a three-party relationship where a party, the principal, tells an obligee that they are going to pay or they are going to have security to pay. The surety is the party that actually provides that security. The surety does so based on an indemnity agreement with the principal. So the surety has to pay and the surety has an avenue to come back and collect against the principal. That is what a bond is. It is a form of securing payment or securing an obligation to pay.
A Payment Bond Can Eliminate Liens
When we talk about liens and bonds, there is a unique feature compared to a lot of other states. It is one that actually makes a lot of sense.
What the statute above does is it essentially allows a private job to be treated like a public job where there are no lien rights if a payment bond is in place. As you can see, the issue is that the payment bond has to be procured, it has to be recorded. Prior to commencement it has to be for 100% of the prime contractor’s price. If those things happen there are no lien rights for remote contractors in Tennessee.
The rationale is the same as what you will see in the federal system or even the state systems on public projects under the Miller Act or Little Miller act, which require the general contractor to post a payment bond to secure payment for the remote contractors. Tennessee allows it but other states do not necessarily allow it.
It is a way in which you can avoid problems at the prime contractor level without the owner getting upset if there are issues downstream with remote contractors.
An AIA form of a payment bond is a common industry bond. There is nothing in Tennessee that requires any specific form. When a bond is placed and it is recorded pre-contract for 100 %, then there are no lien rights. Everything we have told you about timing deadlines in Tennessee goes out the window. And we say that from the perspective of what happens is that you are now controlled by the bond.
If for instance, we are looking at an AIA bond, the timings are sort of similar to what you see already in the Tennessee lien law act. That said, there is nothing requiring those time periods. So, there is something you need to be very aware of if you are a supplier on a project in Tennessee and a payment has been posted in lieu of lien rights. So, just be careful.
Why Bond a Lien
Now the other thing is, let us take this a little further down the road. Let us assume you do not have a payment bond for 100% of the contract price that was posted pre-construction. If that does not happen, then why are we even talking about bonds? Well, there are a couple of things that we have to talk about practically. What does a lien actually do?
It is a leverage tool for contractors, primes, and remote contractors to get paid. Where does that leverage come from?
i. A lien is likely a breach of the owner’s financing
Well typically, a lien is going to be a breach of the owner’s financing agreement, whatever that looks like
ii. Bonds release the property and eliminate the breach
It puts them in breach which will put a lot of pressure on the owner to clear the lien. This can be payment or demanding a bond. There are lots of options there.
iii. Bonds tie off the bonding capacity/capital
So you have to look at it from the perspective that there is some leverage that a lien claimant can get by placing their lien, but at the same time if that leverage goes into the owner or a prime contractor actually obtaining a bond, you have to remember that there is a cost to doing so which is only going to escalate the situation further. It will potentially somewhat flip the leverage.
Why get a bond?
i. Contractual requirement
You may have a contractual requirement if you are a prime contractor, and the lien is filed by a subcontractor.
ii. Business relationship
Secondly, sometimes it makes sense for one reason or another if you have a fight with a lower-tier supplier or maybe a supplier to a supplier who decides to lien. You do not want it to get messy because you want to keep it between you two. You may choose to bond off the lien to release anybody upstream whether that is an owner, a prime or another remote contractor that is above you in the chain.
iii. Statutorily required
The other reason is because it is statutorily required. Tennessee does have an interesting wrinkle. The statute is given below:
It allows an owner to force a prime contractor to bond a lien when the owner has already paid the prime for the portion of the work. There is a section that is very interesting in the sense that when an owner has paid a portion of a payment to a prime contractor that should have gone to the remote contractor who liened the property.
But there is a dispute, maybe for instance a remote that says there is a change that the prime is passed up to the owner as to whether the owner can then force the prime to bond off the subcontractor’s lien or the remote contractor’s lien. So, there is this wrinkle, and you need to be aware of it, particularly if you are a prime contractor and receive a demand from an owner.
That said, the breadth of it and the ability for the owner to really get a lot of leverage out of this really depends on what or what part of it is going to be interpreted to mean. That said, for the purposes of bonding a lien know that it is there, know that that is an option or a reason that a prime may have to bond a lien in Tennessee.
Bonding a Lien
If you have to bond a lien in Tennessee, how do you do that? There are two ways and the first thing you should know is that anyone can bond a lien. It is not limited to an owner, it is not limited to a remote contractor, or to a prime contractor.
Bonding a Lien with a Lien Bond
Now, what does that actually look like? We will start with Option 1.
Option 1 is an actual lien bond – a bond that is specifically procured just in relation to the lien that is being bonded. The idea is when you bond a lien the lien no longer attaches to the property. Instead, it attaches to the bond. So that frees up the owner from having to pay twice or makes the lenders happy in the sense that their security is the property, and their property is now free.
i. Licensed surety
There are a number of places that you can check about the licensed surety. Most of the time it is a pretty easy check. The surety can tell you and you can verify it pretty quickly from the Department of Insurance. So, assuming there is a licensed surety, what does it have to say in the bond? Well, there is not a ton out there. You have the statute in front of you and the statutory language that governs.
ii. The amount of the lien
The big thing we would point out is that the bond needs to satisfy any judgment. A lot of practitioners in Tennessee believe that to be any judgment on a lien claim, not any judgment, period. That said, that is an open issue. But the point is that you have to indemnify the party that liened if the party that liened establishes their claim.
iii. Record in public records referencing the lien
Once you do that you have to file it in the public records, same as you would have recorded the Notice of Lien. What does that look like in practicality? Because there are not a ton of guidelines, it really comes down to individual forms. Everyone's forms look a little different, there is not a one-size fits all here and there is usually very little back and forth on what the bond actually says so long as it is for 100% of the amount of the lien, it is securing the lien amount and as long as you have a good surety.
Those are the real hot button issues to get checked. There are some other things along the way that could be challenged but the definition of what has to be in that lien is pretty vague. Most counties have a stamp, not all counties in Tennessee do.
The other thing to note is that whenever you are recording anything with the recorder of these it has to have a bearer’s stamp. And actually, as of this year you also need to start including email addresses and the bearer stamp. So be aware of the new requirements for the email address in that block.
Bonding a Lien Using a Payment Bond
Now we come to Option 2. Option 1 was to get the bond specifically for the lien itself and it is a 100% of the lien amount that you record. Option 2 is whether there is a payment bond in existence. Usually, this comes into play where one or two things happen – there is a payment bond at the prime contractor level but someone forgot to record it, but more often than not, it comes into play where there is a remote contractor payment bond.
Typically, certain prime contractors require the subcontractor to post their own payment bond for anyone under them. You see this a lot; framing is one area that we see it pretty often with at least the requests being made. What Tennessee law allows is if there is a subcontractor lien bond and there is a lien placed by someone that would be covered by that bond. You can simply record that subcontractor lien bond and release the property, same as you would if you went out and got a specific bond.
But if that is already there, it can be recorded simply to release the lien. Same thing if there is a payment bond for the entire job and it just was not recorded at the beginning. It can be posted at this point.
Now this used to be a whole lot more complicated, but what we will tell you is that at this point, a lot of the complexities were removed – most of them in 2015, and there were a couple of additional rubs in 2020. The big difference is that if you were going to use a payment bond to release a lien in the past, you used to have to get 15% extras which was essentially more than you would have to get if you went and got just a lien bond to release the lien. It was limited to who could do it, and more importantly it had to be much broader.
It essentially had to be a bond and at the prime contractor level. These are all gone now.
In the statute now as you can see below, if you have a payment bond, whether it is at the subcontractor level or whether it’s at the prime contractor level. It can now be recorded to release a lien that is filed by someone who is covered by the bond. There are not a lot of additional loopholes or issues that you have to watch or check. It is pretty simple as far as getting it recorded so long as it is a good payment bond.
Perfecting the Lien after a Bond
Now, that leaves us with this – what happens when you bond the lien. This is one of the questions that both sides have often. What we would tell you is that we spoke about attachment in the lawsuit before. One of the things the statutes help clarify is whether there is a bond recorded to release the lien, whether that is a lien bond or a payment bond, there is no need to go through the attachment process.
That is helpful and the other part of this that is interesting is whether or not the owner of the property stays a party to litigation. That remains optional under the statute.
The second part of it is what you see in section (C) below. The question is always whoever provides a bond to release the lien, do all of the lien requirements need to be spoken about? Did I properly comply with the Notice of Nonpayment obligations as a remote contractor? Did I record on the 90th day or the 91st day from a priority standpoint if I was the prime contractor?
All these questions are still relevant. The reason they are still relevant is because statutorily, if someone bonds off a lien, the process of bonding off the lien does not waive any of their defenses. Instead, they statutorily retain all defenses to the underlying bond. So you are not going to get rid of that just because someone bonds a lien. The answer is that you are statutorily protected here.
The other thing we would tell you is that with the general contractor upstream, there is an additional wrinkle in (5)(B) that you can see above. It really forced a lien claimant’s hand in the sense that if an owner, prime contractor or even a remote contractor that is above the lien claimant is bonding off a lien and the lien claimant does not prosecute it after the lien is bonded, they can be liable for a lot of cost associated with the bond and the lien itself.
So it is just an additional wrinkle that adds pressure to a lien claimant to say that the money is here and here is the bond. Typically, you see these in situations where there is a real dispute on the lien. If you want to go forward you need to go forward, if not otherwise you need pay back all the cost for failing to actually prosecute the lien that you slapped on the property.
THE INFORMATION ON THIS WEBPAGE IS NOT THE SAME AS LEGAL ADVICE. SUNRAY CONSTRUCTION SOLUTIONS, LLC IS NOT AN ATTORNEY OR A LAW FIRM. WE RECOMMEND THAT YOU CONSULT WITH AN ATTORNEY.