Helping Contractors Through Tough Times
What is a Lien Bond?
Part of any business is dealing with resolving disputes. As many contractors know, the successful completion of any project is dependent on timely payment and schedule management. However, sometimes it just isn’t that easy and for whatever reason a dispute arises between parties on a construction project. If this isn’t resolved it can lead to the placing of a mechanics lien against the property where the building is occurring. This can result in a cascade of issues as the project owner is unable to make payments until the mechanics lien is removed.
Removing a lien can be a costly process and requires the prime contractor to post cash with court equivalent to the value of the mechanics lien plus an additional 25% for court costs. A lien bond is an alternative solution that replaces the requirement for cash in court. Rather than placing cash into court, a contractor would file a lien bond with the court for the value of the mechanics lien plus 25%. This eases the cash burden on the prime contractor and allows project funds to continue to flow while the dispute between the two parties is resolved.
Lien bonds are not frequently issued in the marketplace so having a construction and surety specialist broker that understands the mechanics lien process and how construction disputes work is critical in ensuring that you receive the right terms for issue of your lien bond.
Security Options to
Remove a Lien
Mechanic’s Lien Bond
A surety bond can be posted into court for the full amount of the lien plus 25% for costs.
Letter of Credit
A letter of credit can be posted into court for the full amount of the lien plus 25% for costs.
Cash, in the form of a certified cheque or bank draft, can be posted into court for the full amount of the lien plus 25% for costs.
Who Needs Lien Bond?
Lien bonds are required by anyone that has a contractual obligation to remove a mechanics lien from a project. Most often this bond is used when a general contractor is having a dispute with a trade contractor and the trade contractor files a mechanics lien against the property to protect them against non-payment. The lien bond replaces the requirement for the general contractor to post cash into court and still provides protection to the trade contractor if the dispute is not settled. Lien bonds are also commonly issued on development projects when a dispute arises between the developer and a contractor. In this scenario, the contractor would be placing the lien against the developer’s project property and so the lien bond would be issued on behalf of the developer.
FCA is Canada’s Lien Bond Expert Since 1919
FCA has been providing Canadian companies with surety bonds since 1919. We have set the industry standard for turnaround time for both new and existing clients. We pride ourselves in ensuring our clients never miss out on an opportunity.
Lien bonds are considered a higher risk form of bond for surety companies. The main reason is that they are inserting themselves into a situation where there is an ongoing dispute. Surety companies are not law firms and so may lack the ability to determine who is legally in the right. However, if a surety has issued a performance bond on a project they have a vested interest in seeing the project completed. If there is a dispute they may have a larger onus to issue a lien bond if they have already issued a performance bond on that project.
The cost for these bonds is between 2-3% of the value of the lien inclusive of court costs. So if a mechanics lien is filed for $500,000. The court would add 25% for court costs bringing the total value to $625,000. The premium would then range between $12,500 and $18,750. It should be noted that this premium is billed annually until the dispute is resolved and the lien bond is released from court and returned to the surety company.
A bond company will look at a variety of items when considering whether or not to issue a lien bond.
Those include the following:
- Nature of the Dispute – a bonding company will want to understand the nature of the dispute, including the parties involved, arguments of each side, values involved and the plan to resolve the dispute. They may want copies of correspondence, contract documents and a contract accounting for both the overall project and the contract between the parties in dispute.
- Financials – the surety company will want a full financial update for the party applying for the lien bond. This would include financial statements, aged listings of accounts receivable and accounts payable and a work on hand report. The surety will be focused on whether the financial strength of the corporate entity supports the size of lien bond required.
- Collateral – in some cases, due to the higher risk nature of these bonds, the surety company may require additional collateral to support issuance of the bond. This could be cash, a letter of credit or a collateral mortgage. If you have been asked for one of these as part of a lien bond request then you should have a clear understanding of the reasons for the request and the timeline for release of that collateral.
Surety companies have a greater interest to issue lien bonds when they have already provided a performance bond on that project. The reason being, is that the placing of a mechanics lien stops the flow of payments from a project owner and increases the likelihood of a performance bond claim because without any payments flowing, work will likely cease on the project.
However, if there is no performance bond in place it can make securing a lien bond more difficult. As such, the requirement for one of the following pieces of collateral is more likely:
- Collateral Mortgage
- Cash Security with the Surety Company
- Letter of Credit provided to the Surety Company
Lastly – if the lien bond is required on a project where a performance bond has not been issued the likelihood of a rate closer to 3% would also increase.
Why Choose FCA Surety?
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We set the industry standard for turnaround time for both new and existing construction bond clients, you can expect excellence.
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Outstanding relationships with all of the most reputable construction surety bond markets in the industry, giving you the power of choice.
Surety is What We Do
Our industry-leading team boasts seven full time dedicated surety professionals with a combined 80+ years of construction surety bond experience.
Our organization has been working with FCA Surety Bonds and Insurance for over 2 years. The team, led by Jamie Collum and Warren Griffiths, exceeds expectation in service, responsiveness and construction knowledge. Our business needs often demand last minute bonding, and we have never been disappointed by FCA. Always going above and beyond to deliver the right solution in a seamless and effortless manner. We highly recommend FCA for all construction insurance needs.
After 6 years in business, our construction company was asked to provide bonding for 3 very important projects that were awarded to us. We had no idea where to start as bonding was something totally unknow to our organization. A quick search online, and let me say, we couldn’t have found a better company to assist us…. FCA! Andrew and his team were quick to explain the intricacies of bonding, all the requirements including processes. They took their time to clearly explain and educate us on all that is bonding. They were patient and they took the time to walk us through the necessary steps to get us started and set up. These days, it is rare to receive this level of support. I highly recommend FCA!
FCA is one of the best companies we have had the pleasure of working with so far. Very professional, fast and always on time. Looking forward to continue working with them.
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