This blog comes from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer who serves clients in the state of Florida. In this blog what bonding off your lien really means will be discussed, and why you should be happy when that happens.
What Is A Lien and How Does it Work?
Understanding what a lien is and how it works is critical to understand the significance of bonding off your lien.
As you may already know, a mechanic’s lien secures payment for materials furnished and services rendered to the project. Any improvement to the property that you render gives you a right to lien that property.
A lien encumbers real property
Whatever value you that you improve the property with, is the value of the lien that you are entitled to. That mechanics lien encumbers the real property or the lease. So, if you improve a property where you are working for the tenant, then more likely than not, your line is going to attach to the tenant’s interest in the lien. But in either event, the owner, landlord or tenant can bond off your lien.
Through foreclosure, the property can be sold
If you have a lien on a property or a lease, the legal process will allow you to foreclose that lien. This means that you get to file a legal action with the court and the court will then determine who is right. If you are right, then they will see how much your lien is worth and then your lien will result in the property or lease to be sold.
There will be then be a foreclosure sale in the property. In the foreclosure sale, if people show up to bid, they will bid up to your lien amount and you will get credit without having actual money.
Assume that you are foreclosing on a piece of property and your construction lien is worth $100,000. That is what the judge awards you, and you go to the sale. So you can go to the sale and bid up to $100,000 with your lien foreclosure credit. Now if someone pays more at the foreclosure sale than the amount you are owed, you can keep bidding if you want to, but most people stop.
Then new bidder will then deposit that money. Let us say that they buy it for $110,000. You will get the $100,000 and the $10,000 will go back to the original owner. But if no one bids more than your mechanics lien amount, then you take the property as the owner, subject to any prior encumbrances.
This means that if you are foreclosing on a piece of property, you are owed $100,000, but it has a million-dollar mortgage on it, then you will take the property subject to that million-dollar mortgage. That may not be what you want, because then the lender who has this mortgage is going to foreclose because no one is paying it off.
So, always take the property subject to any prior encumbrances like prior liens or mortgages. This is why bonding off your lien may be a really good thing for you.
When to File Your Lien
Now we will go through the process of recording your lien so that you understand the timeframes that all of this applies in.
As you may already know, those who are not in direct contract with the owner need to serve a Notice to Owner no later than 45 days from your first work or delivery of materials. The sooner the better. Ideally, you should do it well before 40 days. That is the first notice.
The second notice is the Claim of Lien which needs to be recorded no later than 90 days from your last work or last furnishing of materials on the job. You need to serve a copy of the Claim of Lien within 15 days of the recording date of the Claim of Lien.
But if you happen to have a direct contract with the owner, then you need to serve this additional document called the Contractor’s Final Affidavit. This needs to be served no later than 5 days before you file suit to foreclose on your lien. Typically, the best time to send the Contractor’s Final Affidavit is when you record your construction lien.
So, you prepare a lien, and you record it. If you are in direct contract with the owner, you will prepare the Contractor’s Final Affidavit, and when you send the construction lien to the owner, you are going to send them a copy as well.
The final deadline to file a lawsuit to foreclose on your lien, is no later than one year from the recording date of the Claim of Lien. So, these are the time frames that you need to be aware of.
What Does “Bonding Off My Lien” Mean?
Bonding off your lien means that sometimes the contractor, owner or even a subcontractor may have an obligation to keep the property free and clear from liens. In Florida, there is a process to take a lien that exists on a piece of property, remove it from the property, and place it on some other security. That is what bonding off your construction lien means.
Some examples of when someone would need to remove a lien from a piece of property include:
- Loan – The lender may say that you can keep this property free and clear of liens. So, if someone liens the job, the lender may tell you to now bond off that owner or contractor.
- Landlord – Most leases say that the property has to be kept free and clear of liens. So, if someone records a mechanics lien because work was done on the property, then the landlord may go to the tenant and say that you need to get the lien off the property or off your lease. The way you are going to do this is by bonding it off.
- Prime or subcontract terms – Sometimes prime contract and subcontract terms require these two parties to keep the property free and clear of liens. For example, let us say there is an owner who has a contract with a general contractor and that general contractor has a contract with a subcontractor.
The general contractor and the subcontractor are in a dispute, about maybe the scope of the work, or its value. So, the subcontractor puts a lien on the property, and there may be a provision in the contract between the owner and the contractor that says if a sub has a lien on a property, the construction lien has to be removed.
The contractor can keep working on the job, not being default, and then bond off the lien.
So these are all examples of when a contractor or owner may decide to bond off your lien.
1. Bonding off a lien is different from payment and performance bond
Now, bonding off a mechanics lien is slightly different than when a contractor has a payment and performance bond. When the contractor has a payment bond and performance bond, you don’t make a claim against the property, you make a claim on the payment bond issued by the contractor.
So, this is a little different than in a situation where the job is bonded from the outset. Bonding off your lien means that you have lien rights and then subsequent to recording your lien, the lien is taken off the property, and they secure it with some type of security.
2. Collateral on the lien is also calculated
Your mechanics lien is taken and a collateral of roughly 150 percent of the lien amount is posted. The formula is not exactly 150 percent, but on average, it works out to be that. So, if the lien is $100,000, the other side is going to have to come up with collateral, either as a surety bond or cash to the clerk of about $150,000.
3. Any extra amount is part of this formula
The difference between the base lien amount and that extra amount is the mathematical formula in the statute that is intended to cover the anticipated legal fees, costs, and interest.
4. A lien can be bonded off in two ways
The two ways to bond off a lien are with cash or a transfer bond (surety). Cash literally means that you take a certified check to the clerk’s office. If the bond amount needs to be $150,000, whoever wants to bond it off has to take the necessary paperwork and a cashier’s check for $150,000 to the clerk’s office where the construction lien is recorded. It is handed to them and they will take care of the rest. They will effectively hold the money.
The other way is through what is called a transfer bond. The person wanting to bond it off, goes to a surety bond from a standard insurance surety company. They will typically need to sign an agreement of indemnity to indemnify the surety, pay a premium of roughly one to three percent of the bond amount, and in many instances many bonding companies will require a 100 percent cash collateral.
This means that if you go to the bonding company to post a bond for this amount, they are going to want you to give them the $150,000 that they are going to hold. Typically, this is in the form of an irrevocable letter of credit. This is in addition to signing the general agreement of indemnity, to indemnify the surety, and paying the premium.
Sometimes if you don't have an existing relationship with the surety, an owner or contract may decide to just take the money to the clerk's office.
My Lien Was Bonded Off, Now What?
If someone tells you or you learn that your mechanics lien has been bonded off, you should be happy. And the reason is because, as you read in the previous example, where your lien may be encumbering a piece of property that has no equity in it to pay you.
1. Your lien is now backed by cash instead of the property
You do not have to worry about that anymore once you get your lien bonded off. Once your lien is bonded off, you have cash sitting with the clerk that you can recover if you win your case. You do not have to worry about the fact that you have to take the property to a foreclosure sale. If at the sale there is not enough equity, you take the property, and now you will be foreclosed out by the mortgage lender. None of these things apply to a lien that is bonded off.
2. Get ready to fight
However, the downside of this is that you need to be prepared to fight. What I mean by this is, most people that are interested in resolving the situation will reach out to you to try and resolve it. The fact that someone has gone through the time, effort, and expense of bonding off your lien typically means that they do not want to pay you.
So, this means that you will probably have to litigate to get paid. It is very rare that someone bonds off a lien and the case is settled right away. Typically, it requires that you have to file a lawsuit, which follows the same process to foreclose the lien.
What you have to do if someone bonds off your lien is, file a lawsuit to foreclose on the lien that has been transferred to the bond. So everything is the same through the legal process, except instead of selling the property, the clerk now has the ability to give you the money that has been held.
3. Do not delay retaining legal counsel to start the foreclosure
The most important thing is that if you know your mechanic’s lien has been bonded off, do not delay in retaining competent legal counsel to start the foreclosure process. As mentioned earlier, someone that bonds off your lien usually does not want to pay you.
So, there is very little reason to keep waiting to get paid once your lien is bonded off. Our suggestion is that when that happens, you should initiate your legal action right away. Because it is highly unlikely that the situation is going to get better once someone bonds off your lien.
4. The deadline can be shortened
Keep in mind that the time period to file your lawsuit on your lien is one year from the recording date of the Claim of Lien. Those periods can be shortened; sometimes down to 60 or even 20 days. So be aware that there are legal manoeuvres that an owner or contractor can employ to shorten the time that you have to file suit.
This is another reason why you should not be waiting when it comes time to collect your accounts receivable.