A mechanics lien definition should begin by identifying the parties involved in the lien bond: the contractor, a property owner and a surety company.
A contractor is the first party in this contractual agreement, and while they could purchase a lien bond, it is more likely that the property owner would purchase the bond, so it can be used to release the property from the contractor’s lien.
The surety company is generally an insurance company that sells the bond to the principal, which also incurs the responsibility for paying the amount of any claim made against the bond. The owner is an individual who is responsible for making payments to the contractor for all materials and labor used during the project, as specified in the mechanics lien bond.
If payments are not forthcoming for any reason, the contractor would have the right to place a lien against the property involved, and could at least theoretically sell that property to recover any lost revenues. When a mechanics lien is attached to a building or property, the owner has no recourse but to allow the legal process to go forward, while the property itself cannot be used.
How a mechanics lien bond actually works
When a property owner purchases a mechanics lien bond, it can free up the property from the lien so it can be used again commercially, or perhaps even sold. However, in purchasing the bond, the owner agrees that he/she will pay all costs associated with labor and materials if a judgment or court case finds in favor of the contractor. In an odd legal sense, the lien is nominally discharged by purchasing the bond but is transferred to the surety bond, which then acts as a guarantee of payment to the contractor.
If the property owner fails to live up to the terms of the mechanics’ lien release bond, the contractor can then claim the bond, in the amount that labor and material costs they incurred. The surety company, which sold the bond to the property owner, would then, in all likelihood, pay the amount of the validated claim and pursue the property owner to recover that same amount.
When a discharge of mechanics lien bond is purchased and filed, the lien transfers to the bond itself, and that means it would eventually have to be discharged from the bond before it is completely disposed of. There are several options available to the bond purchaser, when it comes to having the lien discharged, the first of which is to allow the lien to expire, which generally happens one year after filing the bond. This is essentially the same thing as allowing the lien to expire if it were still attached to the property. When the lien expires, the surety company involved will usually return any collateral used when purchasing the bond.
However, while you’re waiting for the lien to expire, a couple other things may occur. For instance, the contractor who had a lien put on your property may choose to foreclose on it, in which case you could lose the property entirely as the contractor sells the property to recover any losses. The second possibility is that you could try to legally prove that no payments are still owed to the contractor, in which case the lien would automatically be released. This is generally difficult to prove, given the fact that the contractor bond has already proven his case that a lien should be imposed.
What it costs to purchase a mechanics lien bond
The value of a discharge of a mechanics lien bond will always amount to 110% or more of the face value of the lien itself. That means that a lien of $100,000 will require a discharge lien bond of $110,000.
But this is not the amount that a purchaser would have to pay in order to obtain the discharge bond. The premium (or price) paid for the bond, will be some percentage between 1% and 5% of the discharge bond amount. The exact percentage will depend on several factors.
The most important of these factors is your personal and business credit scores. If these scores are relatively low, that would cause you to be placed in a higher risk pool than purchasers with excellent credit, because you are more likely to default on payments. In such cases, you can probably expect to pay somewhere in the upper range of the percentages referenced, perhaps 10% to 15%. Assuming a discharge bond with a value of $110,000, and a 10% premium assessed by the surety company, the cost to you of purchasing a mechanics’ lien bond would be approximately $1,100.
Obtaining your bond
Not all surety companies sell these kinds of bonds, in part because they are considered to be riskier than most other types of surety bonds. The company you choose must also be authorized to sell mechanics lien release bonds in your state. NFP is among the largest surety companies of its kind and is authorized to issue bonds in all 50 states.
After having chosen your surety company, you’ll have to fill out an application form and submit it, usually online. Once the surety company has had a chance to review your application, you will be notified of the premium required to purchase the bond, and if you agree to that, you would sign and return an indemnity agreement with payment. Once both are received by the surety company, your bond would be issued and coverage will begin.
Interested in learning more about what it means to be bonded, contact us today. We’ll answer any questions you may have regarding mechanics lien definition and show you how easy it is to get bonded with us.