Bonding a Mechanic’s Lien: How Does it Work?

A mechanic’s lien is secured by real property. If a person/business fails or refuses to pay a contractor or supplier for the materials or labor provided by them to improve, maintain, or repair particular property, the aggrieved party can place a mechanic’s lien on the property.

Once a mechanic’s lien is recorded, it can affect the property owner’s ability to sell or refinance their property until the lien is paid or otherwise resolved. If the lien is not addressed, the party that placed the lien may have the right to initiate a foreclosure.

What is a Mechanic’s Lien Release Bond?

If a property owner wants to dispute a mechanic’s lien claim or wishes to clear the property’s title without immediately paying the amount owed, they can obtain and post a mechanic’s lien release bond.

A mechanic’s lien bond in California is a type of surety bond used to remove or “release” a mechanic’s lien from the property record. It guarantees the claimant that the amount owed will be paid and that the surety-the company issuing the bond will be responsible for making the payment should the principal fail to do so.

How Does it Work?

Once the bond is Recorded on title, the mechanic’s lien is transferred from the property to the lien release bond. In California, the bond amount is set at 125% of the Recorded lien amount.

To obtain a mechanic’s lien release bond, in most cases, the applicant must pledge collateral. Bond premiums can vary depending on the type of collateral used. If you are planning to pledge cash or an Irrevocable Letter of Credit, expect to pay 1 percent of the bond amount. Property owners who pledge publicly traded securities or real property usually pay anywhere between 3 and 4 percent of the bond amount as premium.

Once the bond is Recorded on title, the mechanic’s lien is released from the property’s title, and the property owner can be sold or refinanced.

Implications and Limitations

It is important to note that a mechanic’s lien release bond does not eliminate the claim, but essentially replaces the property as the security for the claim. By posting a bond, the principal cannot assume that the dispute no longer exists. The payment dispute still needs to be resolved through negotiation, arbitration, or litigation.

If it is later proven that the claimant’s lien was valid, the surety company must pay the claimant. The property owner is then obligated to reimburse the surety company for any payouts made to the claimant, plus interest and fees.

Reach out to H.M Vreeland

H.M. Vreeland is a reputable surety bond company in California. We are committed to making the process of obtaining a surety bond as simple as possible. To learn more, call 415-566-3401.