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Mechanic’s Liens and the Bonding Off Process

Since the beginning of 2018, the HF Construction Industry Group has seen an uptick in mechanic’s lien filings and lawsuits to enforce those liens. One possible explanation for the increase is the boom in construction and real estate development in Central Virginia. Industry participants—from design professionals to material suppliers—are busy, and tight schedules and deadlines can lead to payment and financing hiccups. Two other factors that may be contributing to the increase: the volume of projects and the entrance of new, less familiar players in the market.

For subcontractors and suppliers —and general contractors concerned about the solvency of their owner/customers—mechanic's liens can serve as a security blanket against owner or GC non-payment by creating a lien, much like the lien of a mortgage or deed of trust, on the title to the real estate on which the project is situated. Mechanic’s liens can be a powerful tool in the effort to shake down lenders, owners, general contractors, and subcontractors who would  otherwise have less incentive to pay promptly.

A brief review of mechanic’s liens in Virginia:

Eligibility:  Virginia mechanic's liens are available to general contractors, subcontractors, and material suppliers (suppliers are known in mechanic's lien law as “sub-subcontractors”).  

Timing:  Timing is important. The “Memorandum of Lien” must be recorded within 90 days of the last day of the month on which the lien claimant worked, or within 90 days of project completion, whichever is earlier. The lien can claim amounts for labor and material provided only within the 150-day period (roughly five months) that precedes the last day on which the lien claimant worked or provided material to the project.  

Lawsuits:  A lawsuit to enforce the lien must be filed in the Virginia state circuit court for the locality in which the project is located within 6 months of the date of recordation of the Memorandum of Lien.  

For a more detailed discussion of these and other Virginia mechanic’s lien basics, take a look at our earlier blog post, here.

“Bonding Off” a Lien

What happens after a mechanic’s lien is recorded? General contractors often have a provision in their contracts with owners that requires the GC to remove any liens that are recorded against the project and the property. Virginia mechanic’s lien law provides a mechanism for owners or general contractors to remove liens from their projects through a process that is known as “bonding off” the lien. A mechanic’s lien can be bonded off either before, or after, a lawsuit is brought to enforce that lien.

When subcontractor or supplier lien claimants learn that someone (either the owner or more typically, the GC) wants to bond off their hard-earned mechanic’s liens, panic and outrage sometimes follow. But lien claimants should not wring their hands or become distraught over the bonding off process. In fact, when we represent lien claimants, we are encouraged to see a surety bond posted with the court in exchange for release of the corresponding mechanic’s lien in the circuit court land records. Assuming that responsible and fiscally sound surety has provided the bond, a surety bond will serve as equally adequate and more readily accessible funds for the satisfaction of a lien claimant’s claim for amounts past due. This is because, once a lien has been found valid, a bond claim against an already-posted bond is much easier and faster to satisfy than a lien claim against real estate, which can only be satisfied through a lengthier and more involved foreclosure process. Moreover, the bonding off process is relatively simple and, if the lien claimant and its legal counsel cooperate, the bonding off process moves relatively quickly.  

How the Bonding  Off Process Works

The person who wants to bond off the lien (owner, GC, or anyone with an ownership interest in the property) gives five days’ notice to the lien claimant of the intention to bond off the lien. The five-day notice period can be voluntarily waived by the lien claimant, and in our opinion the lien claimant should cooperate in the process and waive notice. Once proper notice has been given or waived, the person bonding off the lien makes a motion to the circuit court for the jurisdiction in which the project is located to post a bond, in double the amount of the lien claim (it’s important to get the amount of the bond right), plus the cost to the lien claimant of recording the Memorandum of Lien (normally $21 to $30). If the motion is unopposed by the lien claimant (and, again, we believe that it should be unopposed), circuit judges are normally willing to enter an order releasing the lien without the necessity of a formal legal hearing. Once that order is recorded in the land records, the real estate and the construction project are legally released from the mechanic’s lien. The lien release might just have the effect of opening up the free flow of money from a construction lender and getting folks downstream paid.  

Key Takeaway

From the lien claimant’s perspective, having someone who wants to bond off your mechanic’s lien can be a positive, not negative, development. Have thoughts or questions about mechanic’s liens or the bonding off process? Contact a member of the HF Construction Industry Group.

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