In this blog, presented by SunRay Construction Solutions and Alex Barthet, Principal, The Barthet Firm, find out the answer to all above questions and educate yourself on how you can deal in situations where your lien gets bonded off.
What is a Lien, and How Does it Work?
In order to understand why bonding off lien exists, let us quickly take you through the basics of what is a lien and how does it work.
- So, what is a mechanics lien? It is a provision through which you can secure payment for the materials that you furnish and services that you rendered to the project.
- Once a lien is recorded, it encumbers the property, and the value of the lien is equal to the value of the materials and services that you provided to the project that constituted improvements.
- The lien is a publicly recorded document which means that once you have recorded your lien, you are letting everyone know that you are claiming an interest in the property.
- Through a legal process known as foreclosure, if you prevail, that property will be sold at auction to satisfy your lien and you are entitled to any equity that will be paid out of the sale. And this equity is the reason why you should be very happy when someone bonds off your lien.
Here are some of the key lien deadlines and steps that you need to adhere to:
- If you do not have a direct contract with the owner, then you need to serve a document called Notice to Owner and this document must be served no later than 45 days from your first work or delivery of materials.
- You can’t serve it before you have a contract, but once you have the contract, you can serve it as from the time you have the contract to no later than 45 days from your first work or delivery of materials.
- Next, you will need to record a Claim of Lien which must be recorded no later than 90 days from your last work or last furnishing of materials. You also need to serve this Claim of Lien to the owner within 15 days of recording it.
- In case you have a direct contract with the owner, then there is an additional document that you need to serve called Contractor’s Final Affidavit. This document should be served no later than 5 days before you file suit to foreclose.
- It is recommended that you serve it when you serve your Claim of Lien, to be on the safer side.
- Finally, you must file your lawsuit to foreclose that claim of lien within 1 year of the recording date of the Claim of Lien.
All the deadlines mentioned above are outside deadlines and the best way to ensure that you are adhering to these deadlines is to use our robust Deadline Calculator. This is a free tool that helps you to easily calculate your 45 days, 90 days, etc. While calculating these days, you have to keep in mind that some months have 30 days, and some have fewer or more than 30 days. By using this free tool, you can eliminate the risk of wrong calculation.
What Does “Bonding Off my Lien” Mean?
So, what does ‘bonding off my lien’ exactly mean? As you are aware, a lien is basically an encumbrance on the property which prevents the owners from selling it or refinancing the property. But sometimes, owners, contractors, and even subcontractors have a legal or contractual obligation to keep the property free of liens. In such cases, if you have recorded a lien, then they will bond it off.
Here are some examples where your lien may be bonded off:
- Loan – If the owner has a lender on the job and the loan document states that the owner can under no circumstances allow any liens to be recorded on the property. If the lender finds out, then the owner can be held in default. So, the workaround is that the owner will bond off your lien.
- Landlord – If you are tenant and you have hired a contractor to do some work. If they don’t get paid or the subcontractor doesn’t get paid, then may record a lien on the property; however, your landlord is not going to allow that. In this case, you will need to bond off the lien.
- Prime or Subcontract Terms – Sometimes, you will see that in prime contract, a subcontract or sub subcontract obligation placed on those parties that if any of their lower tier materials, suppliers or vendors or subcontractors, if they record a lien, that lien needs to be bonded off.
What bonding off lien means is that your lien which was secured by the property is now moved to be secured by a financial institution. A key point to remember is that bonding off lien is different from a payment and performance bond.
So, how is this bond amount calculated and how does the process of bonding off a lien work?
- There is a complex formula in the lien statute and according to this formula you need to calculate your lien amount plus 150% of the lien amount to determine the bond amount. Although it may not be exactly 150%, but it works around close to that.
- For example, if you have a lien for a $100,000 and the owner wants to bond off your lien, they need to get a bond amount equal to a $150,000.
- This extra 50% typically covers legal fees, court costs and interests, to the extent that you prevail on your lien.
There are two types of bonds to transfer the lien from the property to a bond:
- Cash Bond – A cash bond is where, for example, you need $150,000 to get the lien off the property. So, you take $150,000 cash to the Clerk of the Court and they will accept that cash, deposit it in a bank and issue a certificate of transfer. The certificate will say that the bond is cash.
- Surety Bond – The other type of bond is surety bond from an insurance company. In this case, you can go to a bonding agent, fill out the forms, and once it is approved, they will issue you a bond of $150,000. You will also need to pay an insurance premium (between 1-3%). This surety bond is then taken to the Clerk of the Court, and they will hold it for good until the matter is resolved. They will also issue a certificate of transfer and it will say that “your lien has been bonded off onto a bond issued by XXX in the amount of $150,000”.
This is why, if your lien gets bonded off, you should be happy about it because your lien is now backed by cash instead of the property which could have other claims on it. Here is an example to give you a detailed picture of why bonding off your lien is beneficial for you.
- For example, you are owed $100,000 and you record a lien on the property. Now this property is worth millions which is good news for you; however, there is a construction loan or a purchase loan for $950,000 before you in the priority list.
- Let’s assume that you foreclose on your lien, and you prevail. Earlier it used to be in-person at the courthouse, but now it is an online auction where people around the world can bid on the property.
- So, you are going to be the first bidder because you have a judgment from a lien. To keep it simple, let’s say that you have a lien for $100,000 and you put that amount as the first bid. Now, what you need is someone else to put in a bid for $101,000.
- Assuming that someone does bid, and they win, they will go to the clerk and pay that amount. The Clerk is going to take that money and you can cash out your $100,000.
- However, people who are bidding will know that they will be underwater if they bod on such a property (because of the loan on it).
- This means that technically no one else will bid on the property and just because you have the judgment, and you have put in the bid, you are now the owner of the property.
- This may sound like great news where you have become the owner of a property worth millions. But the previous owner who had a loan with the lender has stopped paying because they are no longer the owners.
- Now, the lender is going to file a foreclosure action against you because you are the current owner of the property, and it is now your responsibility to clear the debt.
- So, after all the hard work and efforts that you have put in, you are going to lose the property to the lender.
This is why you need to be happy when your lien gets bonded off because if you go through the foreclosure process (your lien has been bonded off) and you win, then you do not have to worry about any equity in the property.
All you need to do is just take your judgment to the Clerk and they will cut you a check for the amount of your judgment from the cash bond. If you have received the surety bond, then you can go to the insurance company, and they will write you a check. When you have your lien bonded off then you don’t have to worry about equity in the property and your ability to actually recover.
Here are a couple of things for you to keep in mind:
- You need to get ready for fight. This is because if someone is willing to go through the time, effort, and expenses of bonding off your lien means that they don’t want to pay you.
- So, it is typically recommended that if your lien gets bonded off then the best course of action is to file a lawsuit.
- Another key thing to remember is do not delay in retaining legal counsel to start the process. Don’t wait until the last few weeks or the last month to file the lawsuit. This is because the deadline to file your lawsuit can be shortened from 1 year to 60 days to even 20 days. So, you need to be aware that it is not always one year.
- Make sure that you follow all the lien deadlines so that your lien doesn’t get deemed invalid, and you can be in a good space even when your lien gets bonded off.