Mechanics Lien Release Bond – What Happens Now? What exactly is a Mechanics Lien and Why Might it Need to be Released?
California law entitles unpaid contractors, subcontractors, and material suppliers to record a mechanics lien on property where they performed work or supplied materials. The mechanics lien attaches to the real property as a legal interest and secures the right to payment for the work performed and materials supplied. If payment is not forthcoming the mechanics lien allows the property where the work was performed and materials supplied to be sold under court order to satisfy the debt. It is a powerful remedy against owners and their agents who do not pay for work performed and materials supplied to improve the owner’s property.
A Mechanics Lien Release Bond Frees Property from a Mechanics Lien
Owners typically do not wish to have their property sold out from under them. Fortunately for owners, there is a method by which a mechanics lien can be substituted for another interest and sale of the property thereby avoided. This method is through the use of a mechanics lien release bond. California Civil Code §8424 allows a property owner or contractor effected by a mechanics lien to record a mechanics lien release bond equal to 125 percent of the lien amount with the County Recorder where the mechanics lien has been recorded. The effect of this is to substitute the mechanics lien release bond for the mechanics lien itself, thereby relieving the property from the possibility of that property being sold to satisfy the debt. Instead, any payment made will come from the release bond.
Note: §8424(d) has specific requirements for the person who records the mechanics lien release bond to notify the lien holder that a release bond has been recorded. If these notice requirements are not met, the legal effect is as though the bond was never recorded.
Why Would a Lien Release Bond be Recorded?
There are a variety of reason why a mechanics lien release bond might be recorded. An owner might wish to sell the property soon and stop the mechanics lien from clouding title to the property and discouraging a potential sale. A contractor whose subcontractor or supplier recorded a mechanics lien might record a mechanics lien release bond because of a contractual obligation to the owner to keep title clear from mechanics liens.
What Does a Mechanics Lien Holder Do Next?
If you have been properly notified that a mechanics lien release bond has been recorded on the property on which you have recorded a mechanics lien, you generally have two options; First, if you haven’t filed a lawsuit, you have six months from when you received proper notice regarding the recording of a mechanics lien release bond to file a lawsuit on the bond, regardless of how much time was left to file a mechanics lien foreclosure action on the property.
Second, if you’ve already filed a lawsuit, the six-month deadline to file suit has already been satisfied by the foreclosure action against the property, but you will need to amend your complaint. The amendment is necessary to reflect that the subject of the lawsuit is now the mechanics lien release bond, and not the property itself. Hutnick v. United States Fidelity & Guaranty Co. (1988) 47 Cal. 3d 456. If an amended complaint is not filed, and you receive a judgement on the lien, a separate action would be needed to recover from the bond itself. Dennis Electric, Inc. v. United States Fidelity & Guaranty Co. (1990) 219 Cal. App. 3d 1228.
What Does the Bond Holder Do Next?
Once you record a mechanics lien release bond and properly notify the lien holder, you wait. If the lien holder hasn’t yet filed a lawsuit, the property is free of the mechanics lien and no additional procedural steps are necessary to protect the property. The mechanics lien has been lifted. The mechanics lien release bond serves in its place. Then, if six months from notice passes and a suit hasn’t been filed against the bond, in all likelihood, you’re free and clear of both the mechanics lien and a lawsuit on the release bond. Moreover, if the lien holder mistakenly files a lawsuit to foreclose on the property after this time has passed, it may be possible to strategically proceed slowly until the six-month timeframe has expired, at which time you can move to have the claim against the property on the mechanics lien dismissed. It would at that point be too late for an action on the mechanics lien release bond.
If a lawsuit has been filed against the property by the time you file a lien release bond, waiting won’t change anything, and it is up to the lien holder to appropriately pursue the bond, and not the mechanics lien on the property. However, depending on the circumstances, an owner might want to drag the bond company who provided the mechanics lien release bond recorded by the Owner’s direct contractor into the lawsuit. This would shift all burden on defending the action to the mechanics lien release bond company and the direct contractor, rather than the owner.
Conclusion: If you are unsure how a lien release bond can or will affect your property or lien, or need assistance in obtaining or addressing a new lien release bond, it is advisable to contact an attorney who is experienced with construction law.
Article by Eric Divine, Esq. in 2020. Mr. Divine is an Associate with Porter Law Group, Inc. in Sacramento, California, practicing construction law. He can be reached by phone at (916) 381-7868. Visit the firm’s website at www.porterlaw.com and www.AppliedLegal.com