Disputes can happen at every turn — especially during large construction projects. These disagreements often trigger mechanics liens, which stop the flow of money and labour, culminating in a long-winded, expensive legal process.

But it doesn’t have to be this way. Just let us help you by giving you everything you need to know about construction lien bonds. They help get the project rolling again while unburdening financial pressures.

By the end, you’ll have all the lien bond knowledge necessary to keep the project afloat and all parties happy.

 

What Is a Construction Lien Bond?

The success of a construction project is primarily dependent on two things:

• Schedule management by the project owner, general contractor, and other involved parties
• Timely payment by all parties

But unfortunately, that is a lot easier said than done sometimes. Thus, disputes arise between the parties involved in the project. If left unresolved, it can result in a mechanic’s lien against the property, which can trigger a bundle of problems since the owner can’t make any payments until somebody removes the mechanic’s lien.

Eradicating the lien can be exorbitantly expensive. Typically, it necessitates the main contractor to send cash with court equivalent to the figure of the mechanic’s lien plus 25% to cover the court costs.

However, that isn’t the only solution — a construction lien bond can replace the need for cash in court.

In this situation, the prime contractor files a lien bond with the court for the total of the mechanic’s lien plus 25% for court costs. This reduces the financial burden on the contractor and lets project funds flow while the disagreement between the parties is resolved.

Since construction lien bonds aren’t often issued, knowing a field specialist with an intimate understanding of the mechanic’s lien process is essential in ensuring you get the correct terms for your line bond.

 

Options to Remove a Construction Lien

Essentially, you have three options when trying to remove a construction lien:

• Cash — You must send money in a bank draft or certified cheque. You can post it to the court for the entire lien amount plus 25% to pay for court costs.
• Letter of Credit — This option involves posting a letter of credit to the court for the entire lien amount plus 25% for court service costs.
• Mechanic’s Lien Bond — As you know, you can file a surety bond with the court for the full lien price plus 25% for court costs.

 

How Do Liens and Bonds Work Together?

Before we go any further, it’s worth considering how liens and bonds work together to protect contractors. After all, 49% of contractors aren’t paid on time, according to a Levelset survey!

As you know, a mechanics lien protects contractors and suppliers from nonpayment on private projects. If a customer decides not to pay, you file a mechanics lien against the project, which appears whenever somebody performs a title search on the building.

In other words, a mechanics lien ensures payment by using the building itself as collateral. But your lien rights can be affected by various bonds, so take a moment to familiarize yourself with such cases:

 

Payment Bonds

You can’t file liens on publicly owned projects. Therefore, payment bonds are available to protect suppliers’ and contractors’ rights on government builds. The surety company provides you with payment protection with this type of bond, not the project owner.

However, payment bonds aren’t limited to public construction projects only. Sometimes, they’re used on private projects to protect subcontractors from nonpayment.

You (i.e., the contractor) can purchase a payment bond to ensure everybody involved in the chain (i.e., lower-tier subcontractors and suppliers) receive their money. If the subcontractors aren’t paid, they can claim with the surety company and get their payment from them. Although, be mindful that you’ll need to pay the surety company back for the debt it paid.

These bonds are held by the surety company. So, recording and filing a court case isn’t necessary for this scenario. Filing a bond claim with the surety company is relatively straightforward, and you can expect to be paid efficiently following a company-conducted investigation.

 

Performance Bonds

Some project owners request contractors obtain a performance bond for their build. It guarantees you (the contractor) will stick to your contractual obligations owed to the property owner.

If you default on your obligations, the surety company that issued the performance bond will investigate the situation. In the event they confirm the default, they seek to remedy the matter in one of the following ways:

• Issue tenders — The bonding company may decide to issue tenders for another contractor on the owner’s behalf. They also compensate the owner for additional costs arising from the new contract.
• Retain replacement —  The surety company can decide to obtain a replacement contractor itself to complete the build.
• Assist — The bonding company might choose to help you (the defaulting contractor) finish the project and remedy the default.
• Compensate — Finally, the surety company can choose to compensate the project owner for the damages they suffered due to your default.

 

Bid Bonds

Bid bonds come into play before the project begins. They are used in competitive bidding processes to protect the owner seeking that bid as part of your bid submission.

If you fail or refuse to enter into the contract at the quoted bid, the surety company compensates the project’s owner. The amount is calculated by finding the difference between your bid price (the defaulting contractor in this scenario) and their second choice’s price.

 

License Bonds

Certain license bonds are required by municipal, provincial, and federal governments in Canada. If your bond coverage ends during a project, you could lose your license along with your lien and payment rights.

Licensing protects private customers from contractors without the correct protections like bonding and insurance. If you’re unlicensed and your client refuses to pay, you’d be without a debt-collecting option.

 

Holdback Repayment Bonds

July 1, 2018, saw an amendment to section 22 of the Construction Act (Ontario) take effect. The alteration enables holdback funds to be retained as a demand-worded holdback repayment bond as described in the Construction Act.

It’s a relatively simple type of bond with the following characteristics:

• The owner can make a demand (or numerous demands) if a lien against the holdback hasn’t been discharged or expired.
• The surety company must pay the amount requested by the owner within 20 working days.
• Any demand made under the bond must be received by the surety company within 120 days from the final lien registration day.

 

Lien Bonds

Since liens drastically impact the property owner’s ability to sell the building, they typically wish to avoid mechanics liens.

However, in circumstances where a lien has already been filed, you can post a lien bond to replace it (otherwise known as bonding off a lien). As you know from the first section, this replaces the lien and lets unpaid contractors and suppliers file a bond claim. The debt is paid by the surety company, and the property owner repays the surety company.

 

The Pros and Cons of Bonding Off a Lien

No matter the role you play in a construction project, acquiring a construction lien bond comes with pros and cons.

 

The Pros for Owners and General Contractors

Bonding off a lien allows the construction to go ahead without interruption. Plus, project owners can rest easy under the knowledge that their building’s title is lien-free.

At the end of the day, a construction lien bond benefits both GCs and the owner. Mechanics liens are debilitating for both parties since it prevents the project from continuing and presents the risk of foreclosure.

Essentially, bonding off the lien is your ticket to smooth progress.

 

The Cons for Owners and General Contractors

Remember that despite the advantages, construction lien bonds can be expensive and hard to acquire. Either party may end up paying 1.5 times the claim amount to obtain the release bond.

Additionally, lien bonds are a temporary, not a permanent, relief. Once the relief is provided, parties must work to either:

• Resolve the dispute
• Pay the contractor the amount
• Appeal the lien in court

 

The Pros for Claimants

Bonding off a lien ensures the claimant doesn’t need to navigate the foreclosure process, which can be arduous, long-winded, and costly. Instead of a time-consuming enforcement action, the surety company provides the funds to pay the claim.

 

The Cons for Claimants

After a lien is bonded off, claimants often take additional steps to protect themselves. There’s typically more work for the claimant at this stage because they need to understand the necessary next steps, such as the updated deadlines for filing bond claims.

 

Who Requires a Construction Lien Bond?

If your contractual obligations require you to remove a mechanic’s lien from a building project, you need a lien bond.

Commonly, this construction bond type is utilized when a general contractor disagrees with a trade contractor. The latter then files a mechanic’s lien against the building to protect themselves against nonpayment. The lien bond simply replaces the need for the general contractor to post cash to the court while keeping the trade contractor covered if the disagreement goes unsettled.

With that said, lien bonds may also be issued on development projects should a dispute arise between the contractor and the developer. In this case, the contractor puts a lien on the developer’s property, so the lien bond must be issued for the developer.

 

How Much Does a Mechanic’s Lien Bond Cost?

Lien bonds are one of the riskiest types of bonds for surety companies. Why? Because they must position themselves into a situation where there is an active dispute. These companies aren’t law offices, and thus, might not have the ability to accurately decide which party is legally correct.

With that said, surety companies who have already issued a performance bond on a project are more interested in seeing the project to completion. Therefore, they are more likely to issue a lien bond.

Generally speaking, you should expect to pay from 2% to 3% of the mechanic’s lien value, plus 25% for court costs.

So, let’s say a mechanic’s lien is filed for $750,000. The court adds 25% to cover their services, increasing the total to $937,500. Therefore, the construction lien bond would cost anywhere from $18,750 to $28,125.

The surety company then continues to bill this premium every year until the dispute is settled and the lien bond is released from the court. Once the surety company receives the lien bond again, you stop paying the premium.

 

How Do You Secure a Lien Bond?

Securing a lien bond can be tricky without proper assistance. Bond companies analyze several factors when deciding whether they should issue a lien bond.

These factors include the following:

• The economic environment — The party requesting the lien bond must give the surety company an updated look at their financial background. To do this, you must provide them with aged listings of receivable accounts, financial statements, accounts payable, and a report. They’re interested in deciphering the financial strength of the party to work out whether it can support the size of the construction lien bond.
• The nature of the disagreement — Bonding companies want to understand the nature of the conflict, including each side’s argument, the parties involved, the resolution plan, and the values. Depending on your specific case, they could ask to acquire correspondence copies, contract documents, and a contract including the project and the parties.
• Any collateral requirements — Some surety companies may require extra collateral to support the bond issuance since lien bonds are pretty high risk in nature. In this case, collateral can be cash, a collateral mortgage, or a letter of credit. If you’re asked to put up collateral as part of your lien bond request, ensure you know the reasons and understand when they will release your collateral.

That may seem a bit confusing at the moment, but there’s no need to worry. Here at ConstructionBond, we put you in touch with licensed bond providers to make it as easy as possible for you to obtain the lien bond you need.

 

Follow the four simple steps below to let us help you get the perfect lien bond:

1. Complete our secure online inquiry form.
2. Our team takes a look at your bond requirements.
3. We connect you seamlessly with a licensed broker that specializes in providing construction lien bonds.
4. The broker contacts you to guide you through the lien bond acquisition process!

 

Construction Lien Bond Considerations

There are various factors to consider when bonding off a lien. But these factors change depending on your role in the project.

 

General Contractor Considerations

It’s a good idea to acquire a lien bond if you’re a general contractor on a project. Primarily because keeping the property lien-free is usually required by the contract between the property owner and yourself, the general contractor.

Even when bonding off a lien isn’t required in your contract, it still might be the best course of action. It will appease the owner, keep the construction moving, and give everybody time to resolve the disagreement.

 

Property Owner Considerations

As for property owners, acquiring a lien bond is a huge benefit. After all, it prevents foreclosure and stops your building from being a litigation subject — the surety bond is your property’s substitute!

Not to mention that you’re often not the one buying the bond. Typically, you can use your leverage against the general contractor to persuade them into bonding off the lien.

 

Why Should You Choose ConstructionBond?

We make finding surety bond providers across Canada a dream. Whether you’re a business owner, contractor, or construction company representative, we have a specialist broker ready and waiting to give you the lien bond you need.

Our experienced brokers have limits ranging from $25,000 to $50 million, ensuring no project is too big or small. But there’s no need to trawl through the brokers yourself — just let us do the hard work for you!

After filling in our quick and easy inquiry form, we work tirelessly to analyze your bond requirements and connect you with the perfect brokerage.

We’re trusted, transparent, and offer highly competitive rates. So, get the bonds you need today.

 

Frequently Asked Questions

 

How Can You Prevent Construction Liens As a Property Owner?

Property owners should take the necessary steps to manage their construction projects in a way that decreases the likelihood of construction liens.

To do this effectively, keep the advice below in mind:

• Perform background checks on the general contractor — Check your general contractor to make sure they are reputable and hold the correct licenses.
• Get a subcontractor list from the general contractor — Ask your general contractor for a list of all the material suppliers and subcontractors working on your project.
• Ensure conditional releases before paying — Don’t make any payments until your general contractor creates a conditional release for the work. Once the check is negotiated, the release triggers.
• Supply joint checks if necessary — If you’re made aware of a disagreement between the general contractor and the subcontractor, issue a joint check. That way, both parties must endorse it to receive their money. It can be a powerful tool to prevent further legal action.

 

Can You Get a Construction Lien Bond With Bad Credit?

Some surety companies allow you to take out a construction lien bond with bad credit. However, you will almost always be required to put up 100% collateral in this instance.

 

Can You Get a Construction Lien Bond If The Project Does Not Have a Performance Bond In Place?

Surety companies that have already issued a performance bond on the project are more likely to provide a lien bond as they have a vested interest in the completion of the project. The mechanics lien halts payments from the owner and increases the chance of a performance bond claim as work will usually cease.

However, obtaining a lien bond might be trickier if there isn’t a performance bond on the project. You should expect to pay closer to the 3% rate, and you might need to provide one of the following as collateral:

• Cash security with the bond company
• Letter of credit given to the bond company
• Collateral mortgage

 

What Questions Do You Need to Answer When Getting a Construction Lien Bond Quote?

When you use our surety bond quote form, we ask you the questions below:

• When do you need the bond by? You have the following options:
  • Within 24 hours
  • One to three days
  • Four to seven days
  • One week
• Amount of bond required? You can select any amount from $1,000 to over $100 million by using the drop-down menu.
• What type of surety bond do you need? If you’re unsure, select the final option, “Other Contact Me.”
• How would you like to be contacted? You can choose phone, email, or either.
• What is your name, phone number, and email address? Fill as required.

 

How Does a Construction Lien Impact the Contractor?

Suppose you, the contractor, have provided materials or labour to a project that helps improve the property. In that case, you hold the right to file a construction lien against the building if the owner or general contractor fails to pay.

The claim must be made for the price of the work and materials to the extent the value remains unpaid. Once filed, it stays in place until the disagreed payment is resolved (i.e., by a construction lien bond).

 

How Does a Construction Lien Impact the Project’s Owner?

As a project owner, the lien is registered against your property, which has the power to prevent the project from going ahead.

Often, mortgage lenders won’t advance any money until after registering the lien. In rare cases, you might be forced to sell the property to obtain the funds to pay the disputed amount.

 

How Long Does a Mechanics Lien Last?

Once somebody files a mechanics lien, it lasts for one year. But depending on the type of project, they can be extended for an extra year if required.