Release of Mechanic’s Lien Bonds can be a way for property owners to use and deal with property that has a Mechanic’s Lien filed against it. Learn more about how these unique surety bonds are used, how to obtain them and what they cost.
A Mechanic’s Lien is a legal security filing against a piece of real property by a party who has performed work to the property or supplied material used in the property. Mechanic’s Liens protect contractors and material suppliers that do not get paid for workmanship and material supplied to the property. The Mechanic Lien in essence makes them a secured creditor. Before the property owner can sell the property, borrow against it, or use it as collateral, the owner must generally get the Mechanic’s Lien discharged.
Mechanic’s Lien laws vary by state but are generally enforced. Mechanic’s Lien laws go back hundreds of years. A notable exception to Mechanic’s Liens are public property as you cannot file liens against most Federal and Public properties. Instead, these property rights are protected by Performance Bonds and Payment Bonds under The Miller Act.
A Release of Mechanic’s Lien Bond is a type of surety bond that releases the Mechanic’s Lien from the property and gives the legal use of the property back to the owner. These bonds may also be referred to as Discharge of Mechanic’s Lien Bonds. The Release of Mechanic’s Lien Bond transfers the legal obligation to satisfy the lien over to the surety bonds and away from the real property. A Release of Mechanic’s Lien Bond gives the property owner the ability to sell the property, refinance debt against it, borrow against the property or use it for other purposes.
A Release of Mechanic’s Lien Bond is useful when the Mechanic’s Lien is in dispute. A property owner may feel that the Mechanic’s Lien is not warranted or there is a disagreement in the amount owed to the party who filed the Mechanic’s Lien. The Release of Mechanic’s Lien Bond allows the property owner to freely use the property while the parties work out the dispute. Often these disputes can take a lot of time and possibly even years while it is litigated.
The required amount of a Release of Mechanic’s Lien Bond varies by state. However, they are almost always required to be more than the amount of the Mechanic’s Lien. Usually Release of Mechanic’s Lien Bonds are required to be 110% to 200% of the Mechanic’s Lien amount. Not all states allow a party to bond around a Mechanic’s Lien. Husch Blackwell provides a great interactive resource to check each state’s requirements here.
A Release of Mechanic’s Lien Bond is a three party agreement between a Principal, Obligee and Surety Bond Company.
The Principal – The Principal on the bond is the party requesting the bond. This party is usually the Property Owner or General Contractor. This party guarantees to satisfy the Mechanic’s Lien by paying the party that is owed, once the amount is determined or no longer disputed.
The Obligee – This is the party that receives the benefit of the bond. In most jurisdictions, this is the court where the Mechanic’s Lien is filed. If the Principal does not pay the required amount and settle the Mechanic’s Lien, the obligee can file a claim with the surety bond company.
The Surety – This is the third party bond company that is guaranteeing that the Principal will satisfy the lien amount once it is settled. If the Principal does not, a claim can be made against the surety and the surety may have to pay the amount on behalf of the Principal. In return for this guarantee, the Surety receives payment from The Principal.
Release of Mechanic’s Lien Bonds are considered higher risk by most surety bond companies. They usually want to underwrite the party’s financial strength to make sure they have the ability to pay the Mechanic’s Lien. Most surety bond underwriters will ask for financial statements on the party requesting the release. Additionally, they will want to see the court paperwork showing the Mechanic’s Lien filing, including the amount. Contractors and Property Owners that are set up with other surety bonds usually find obtaining these bonds very easy.
Some surety bond companies write Release of Mechanic’s Lien Bonds with only a credit check on the Principal. These are usually for Bonds less than $1,000,000 and for financially sound Principals.
Most Principals can obtain Release of Mechanic’s Lien Bonds without collateral. However, some cases may require collateral. Those with credit challenges, or little financial strength may require collateral.
Release of Mechanic’s Lien Bonds for Homeowners are also considered higher risk. Often these surety bonds require collateral to write unless the homeowner can show significant financial strength.
Release of Mechanic’s Liens are higher risk surety bonds. These bonds usually cost between 1.5% and 3% of the bond amount, not the Mechanic’s Lien amount.
Release of Mechanic’s Liens require indemnity from the Principal. This means that if a Surety Bond Company pays a valid loss, they will seek reimbursement from the Principal and any other indemnitors. Principals can read more about indemnity here.
Mechanic’s Liens can be devastating to a property and should be avoided when possible. However, disputes are common in construction and a Release of Mechanic’s Lien Bond is a valuable tool to free up the property while the dispute is being settled. Axcess Surety has many bond companies that write Discharge of Mechanic’s Lien Bonds. Contact our surety bond experts anytime. Contractors and Property Owners may also visit our Surety Bond FAQ Page to learn more about bonding.
Other Frequently Asked Questions
It depends on the State in which the lien is filed but many states allow you to post a Release of Mechanic’s Lien Bond to remove the lien on a piece of property.
The Bond takes the place of the lien filing. Instead of having a claim against the property, the subcontractor or supplier has a claim against the surety bond.
Usually 1.5% – 3% of the required bond amount which is usually more than the lien. Cost depends on the lien and the financial strength of the party trying to release the lien.