Dealing with mechanic's liens can be a stressful experience for property owners and contractors alike. When disputes arise over payment for construction work, a lien can tie up a property, hindering its sale or further development. Thankfully, Illinois law provides a solution: the Release of Lien Bond. This article will guide you through the intricacies of this bond, explaining its purpose, requirements, and how to obtain one.
What is an Illinois Release of Lien Bond?
An Illinois Release of Lien Bond, also known as a mechanic's lien release bond, is a surety bond that substitutes for a mechanic's lien on a property. Essentially, it's a financial guarantee that ensures the lien claimant will receive payment if their claim is valid. Instead of the property itself serving as collateral, the bond acts as a substitute, freeing the property from the lien's encumbrance. This allows the property owner to proceed with transactions or development without the cloud of a pending lien.
Why is it Needed?
The need for a Release of Lien Bond stems directly from the Illinois Mechanics Lien Act. This act grants contractors, subcontractors, and suppliers the right to file a lien against a property if they haven't been paid for their services or materials. These liens create a significant obstacle for property owners, as they can prevent the sale or refinancing of the property. Amendments to the Illinois Mechanics Lien Act now provide a mechanism to "bond off" these liens.
The core purpose of the act is to protect those who contribute labor or materials to improve a property. When a payment dispute occurs, the lien provides a legal avenue for these parties to secure their right to compensation. However, this can inadvertently hinder the property owner's ability to utilize their property. The Release of Lien Bond provides a balanced solution, ensuring the lien claimant's rights are protected while allowing the property owner to regain control of their property. This process maintains the integrity of the Mechanics Lien Act while mitigating its potential negative impacts on property transactions. To better understand how these bonds work, consider reading about surety bonds vs. insurance: what's the difference.
How do I get an Illinois Release of Lien Bond?
Obtaining a Release of Lien Bond involves working with a surety company.9 The process typically includes the following steps:
- Application: You will need to complete an application with the surety company, providing detailed information about the lien and the property.
- Underwriting: The surety company will assess the risk involved, which includes evaluating the validity of the lien and your financial stability. This process is similar to general surety bond underwriting.
- Premium Payment: If approved, you will pay a premium to the surety company.11 This premium is a percentage of the bond amount.
- Bond Issuance: Once the premium is paid, the surety company will issue the Release of Lien Bond.
- Filing the Bond: You will then file the bond with the appropriate county recorder's office, officially releasing the lien from the property.
What Information Do I Need to Provide?
To facilitate the underwriting process, you will need to provide the following information to the surety company:
- Lien Details: A copy of the mechanic's lien, including the date of filing, the amount of the lien, and the name of the lien claimant.
- Property Information: The legal description of the property, including the address and parcel number.
- Contract Details: Copies of the construction contract, invoices, and any other relevant documentation related to the work performed.
- Financial Information: Financial statements or other evidence of your financial stability.
- Principal Information: Information about the principal who is obtaining the bond.
- Surety Information: The surety company's information.
Providing complete and accurate information is crucial for a smooth and efficient bond issuance process. Missing or incorrect information can delay the process or even lead to denial.
Example Scenario
Imagine a homeowner, Sarah, hired a contractor to renovate her kitchen. After the work was completed, a dispute arose over the final payment. The contractor filed a mechanic's lien against Sarah's property for $20,000. Sarah, who was in the process of selling her home, needed to remove the lien quickly. She obtained a Release of Lien Bond for $20,000, paid the premium, and filed the bond with the county recorder's office. This action released the lien, allowing her to proceed with the sale. The bond now stands as a guarantee that the contractor will be paid if their claim is valid.
How to Calculate for the Premium
The premium for a Release of Lien Bond is typically a percentage of the bond amount, which is usually equal to the lien amount. This percentage can vary depending on several factors, including:
- Creditworthiness: Your credit score and financial stability play a significant role.
- Lien Validity: The surety company will assess the validity of the lien. A stronger lien claim may result in a higher premium.
- Bond Amount: Higher bond amounts generally result in higher premiums.
Typically, the premium ranges from 1% to 5% of the bond amount. So, in Sarah's case, if the premium rate was 2%, she would pay $400 for the $20,000 bond. To learn more about factors that affect bond cost, review 10 things to know before buying a surety bond.
What are the Penalties for Operating Without this Bond?
Operating without a Release of Lien Bond when it is needed isn't penalized like operating without a license is, the issues arise from the existence of the lien itself. If a person does not "bond off" a properly filed mechanics lien, the following can result.
- Property Encumbrance: The lien remains on the property, hindering any sales, refinancing, or further development.
- Legal Action: The lien claimant can pursue legal action to foreclose on the lien, which could result in the sale of the property to satisfy the debt.
- Financial Loss: The property owner may incur additional costs, such as legal fees and interest, due to the unresolved lien.
- Delayed Transactions: Sales and refinancing of the property can be significantly delayed or even canceled.
- Damage to credit: When courts get involved, and especially in cases of foreclosure, the credit of the property owner can take a very serious hit.
- Loss of potential deals: When properties have liens on them, it makes them far less desirable to potential buyers.
It is important to remember that these potential issues stem from the mechanics lien itself, not a direct penalty for failing to purchase a surety bond. The bond is a tool to remove the legal and transactional roadblocks caused by a filed lien. If you are operating in Illinois, you may also want to review Illinois surety bonds.
Frequently Asked Questions
Q: How long does it take to obtain a Release of Lien Bond?
A: The time frame can vary depending on the complexity of the lien and the completeness of the information provided. Typically, it can take anywhere from a few days to a week.
Q: Can I obtain a Release of Lien Bond if I have bad credit?
A: Yes, it may still be possible, but you may be required to pay a higher premium.
Q: What happens if the lien claimant wins their case?
A: The surety company will pay the lien claimant the amount of the lien, up to the bond amount. The principal is then responsible for reimbursing the surety company.
Q: Is the amount of the bond always equal to the amount of the lien?
A: Yes, normally it is.