The purpose of a mechanic’s lien is to provide collateral for a contract debt. If you perform work on a project and are not paid, then the mechanic’s lien laws allow you to attach the property where the work was performed. In other words, a mechanic’s lien provides you with a property right you can foreclose in the same manner a bank can foreclose a mortgage. However, before you can force a sale of the property to collect your money, you have to prove you are entitled to the payment you claim. Therefore, a mechanic’s lien could be in place a long time.
Because the lien laws are intended to provide security for a debt, but are not intended to prevent the property from being transacted, most states, including Connecticut, have a procedure by which a surety bond can be substituted for a mechanic’s lien. The problem with Connecticut’s procedure is that it is too long and cumbersome.
While a mechanic’s lien is in place, a property cannot be refinanced, or sold – at least not without addressing the mechanic’s lien to a lender’s and/or buyer’s satisfaction. It is possible that the property might be refinanced or sold if the owner places the lien amount in escrow, but that still leaves the property encumbered. Thus, most lenders and most buyers – not to mention most title insurance companies – require a property to have clear title at the time of a transaction. As a result, mechanic’s lien claims that cannot be resolved in time for the property to be transacted are often released upon the substitution of a surety bond.
A surety bond substituted for a mechanic’s lien gives the contractor or supplier that filed the lien the same, exact rights as it had against the lien. And I do mean the exact same rights. If there was any defect in the mechanic’s lien, the surety who posted the substitution bond can use that defect as a defense. Thus, a mechanic’s lien claimant does not improve its position when a bond is substituted, but it does have the benefit of an easier litigation process. (Instead of having to go through a foreclosure process, the lien claimant simply brings a lawsuit against the surety.) For that reason, a lien claimant may agree to the substitution of a bond for its lien, which also allows the lien claimant to negotiate the amount of the bond. (The substitution of a bond for a mechanic’s lien by agreement will be addressed in a future post).
A bond that is substituted for a mechanic’s lien has to be more than the face amount of the lien, because a lien claimant is potentially entitled to the lien amount, plus interest, attorneys’ fees, and costs. The problem arises when the parties cannot agree on the amount of the bond that should be substituted for a mechanic’s lien.
When the parties cannot agree upon the amount of the bond to be substituted for a mechanic’s lien, the property owner and/or the property owner’s general contractor have to make an application to the Superior Court (the “Court”). The Court then orders the application to be served along with an Order for Hearing and Notice upon the company or individual that filed the mechanic’s lien. The Order for Hearing typically includes a hearing date that is about a month after the application was filed. During the first “hearing,” the Court typically holds a status conference to see if an agreement can be reached. If an agreement is not reached, the Court schedules the actual hearing to take place a few weeks or a month later. After the hearing, the Court has up to 120 days to rule, and that decision can be appealed. (The same procedure applies to an application requesting that the lien be discharged.)
In light of the foregoing, mechanic’s lien can end up clouding title for a long time. An owner whose lender is demanding the immediate release of the lien in accordance with the subject mortgage may find itself forced to make a payment and/or agree to a lien amount with which it strongly disagrees to avoid defaulting on its mortgage. Similarly, a general contractor whose contract requires it to keep the property clear of all liens from its subcontractors and/or vendors may have to make similar concessions in order to avoid breaching its contract.
This situation does not occur in other states. Some states have procedures that allow a bond to be substituted for a mechanic’s lien without any input from the person or company that filed the lien. That may take things too far in the other direction, because the lien claimant should have some say in the amount and type of security being offered. However, having a procedure that is supposed to allow an owner to clear title that can take 6-8 months makes no sense.
Until the process is changed, if you have any questions about substituting a bond for a mechanic’s lien, please give me a call at 203-640-8825.