A subcontractor’s weapon of choice is the mechanic’s lien. Once perfected, the mechanic’s lien is a great tool to leverage successful settlement negotiations. Additionally, filing a mechanic’s lien is a very affordable option to smaller subcontractors. However, if the general contractor disputes the lien claim or if the general contractor is required to do so by contract, the general contractor may file a bond to indemnify or bond around the subcontractor’s lien. This process relieves the property and the property owner of the lien claim while the dispute is litigated. Let’s talk about bonds to indemnify against liens.
What is a bond to indemnify against a lien?
For the bond to be effective against a subcontractor’s lien, the general contractor must file it among the real property records in the county in which the property is located. Additionally, the bond must be in an amount that is double the amount of the lien. However, if the total amount of the lien is greater than $40,000, the bond must be in an amount that is the greater of 1 ½ times the amount of the lien or $40,000 and the amount of the lien.
Once it is established that the general contractor perfected the bond, the owner of the property and the property itself is no longer encumbered and a sale can proceed. Of course, with the lien no longer a threat, the subcontractor is in a much weaker position since the owner is no longer under pressure to simply pay the claim and charge it back to the general contractor. However, the subcontractor still has an avenue to get paid by the surety.
The surety will be able to use all of the defenses available to the general contractor and will try to invalidate the lien if it can. However, if the subcontractor kept good records and properly perfected the lien claim—with the help of an experienced attorney—there is a good chance that the subcontractor can still obtain a favorable settlement on the merits at trial.
This blog is part of our 2020 Mastering the Subcontract series. Come back each week as we deep dive and pull apart everything you need to know about a subcontract.