In this blog we will look at what Bonding Off a lien means in the Construction industry, and the various situations when one does bond off a lien. Read on to know more about it.
What Does ‘Bonding Off a Lien’ Mean?
"Bonding off a lien" refers to a legal process where the owner, contractor, or subcontractor of a property provides a bond to secure payment for a lien that has been recorded against the property.
This bond is intended to guarantee that the lien claimant will receive payment for the debt they are owed without the need for the lien to remain on the property. The bond is usually valued at a percentage higher than the lien amount to cover legal fees, costs, and interests. Bonding off a lien is different from having a claim against a payment and performance bond that is typically posted at the beginning of a job.
In what situations might someone need to bond off a lien?
Situation 1 - Sometimes the owner, contractor, and subcontractor must keep property free of liens
- It is important to understand that in certain cases, the property owner, contractors, and even subcontractors may be obligated by law or contract to ensure that the property remains free of liens. It is important to note that this obligation to bond off a lien is different from the claim against a surety payment bond that is typically posted at the start of a project.
- For public projects, contractors usually have a bond, while on larger private projects, the property owner may require the contractor to obtain a payment bond. This surety bond secures the right to be paid in lieu of a lien in Florida. If a payment bond was not prepared and recorded at the start of the project, bonding off a lien means that the lien rights are still retained.
- However, if the lien on the property is causing problems, it is possible for someone to take the lien that is attached to the project and set it aside, and then put it against a security instrument. This bond acts like cash that is set aside to secure the lien, removing it from the property and placing it on that cash.
Situation 2 - Need for contractor or owner to keep property free and clear of liens
There are several situations in which a contractor or property owner may need to ensure that the property remains free of liens. These include:
If there is an existing loan on a property, recording a lien can be considered a technical default on that loan. In such cases, the property owner may be required to bond off the lien or instruct the contractor to do so.
In tenant buildout work, the lease between the landlord and tenant usually stipulates that the property must remain free and clear of liens. Therefore, if a lien is recorded, the tenant may have an obligation to post a lien transfer bond to bond off the lien and comply with the terms of the lease.
iii. Prime or subcontract terms:
In many cases, subcontractors may require the contracting party to keep the property free and clear of liens. Thus, if a subcontractor or supplier records a lien on the property, the primary contractor may be obligated to bond it off.
iv. Different from a Payment and Performance Bond:
Note that this transfer bond is distinct from a payment and performance bond typically prepared and recorded at the start of a project.
Situation 3 - Complex formula for lien transfer bond, but roughly 150% of the lien amount
To prepare a lien transfer bond, there is a formula provided in the lien statute which calculates the bond value. In general, this formula results in a bond value that is around 150% of the recorded lien amount. For example, if a lien is recorded for $100,000, the property owner or contractor would need to obtain a lien transfer bond of approximately $150,000 to bond off the lien.
Situation 4 - Extra to cover legal fees, costs, and interest
The additional 50% in the bond value is intended to cover legal fees, costs, and interests that may be incurred. This is why the bond value is not the exact amount of the lien or claim, but approximately $150,000 more. When bonding off a lien, there are generally two types of bonds that can be used.
Situation 5 - Can use cash or a transfer bond (surety)
There are two ways to obtain a transfer bond when bonding off a lien. One way is to deposit cash equal to the lien amount plus the additional 50% at the clerk's office, and a cash lien transfer bond will be issued. This is confirmed through a Certificate of Transfer which indicates the use of cash as security for the bond.
Alternatively, a transfer bond can be obtained from a surety company such as Traveler's, Liberty, CNA, or Hartford. In this case, the surety charges a premium and requires collateral from the person issuing the bond. The lienor must sign an indemnity agreement and pay the premium before the bond is issued.
The bond issued by the surety is a negotiable instrument that is taken to the clerk's office. The original bond is held by the clerk and a Certificate of Transfer is issued and sent to the lienor. The surety company's name is listed as the transfer bond surety on the certificate. This completes the process.
In conclusion, bonding off liens is an essential part of the construction industry that helps to resolve payment disputes and prevent legal and financial complications. By understanding the scenarios for bonding off a lien and the process involved, contractors, owners, and subcontractors can protect their interests and ensure timely payment to all parties involved. It is crucial to consult with legal professionals and surety companies to ensure compliance with lien statutes and regulations. Overall, bonding off liens is a valuable tool for maintaining successful and profitable construction projects.
Read more: My Lien was Bonded Off. Now What?