Below is a great article on mechanic's liens and they interact with bonds in the state of Kentucky. Specifically, it deals with how a mechanic's lien that has been filed has the ability to be removed (which frees up the property for sale or financing) while any dispute of the lien is being held. This is a great solution given the ease of filing a lien. Any mechanic can file a lien, but that totally brings commerce to a halt for that property. Very few companies are willing to buy a piece of property, or refinance a piece of property, if liens exist. So, you can just get a bond, which then allows all the refinancings and sales to go through, but also allows the owner to dispute the lien. This even works for the lien holder because if they win their case, they get paid from the bond.
Bonding off a Private Mechanic’s Lien In Kentucky
In my previous post, I discussed the basics of filing a private mechanic’s lien in Kentucky. Today, the subject will turn to the release of a private mechanic’s lien by execution of a bond. Execution of a bond for release of lien (the “Bond”) provides the owner of property against which a mechanic’s lien has been asserted, or the contractor who contracted with the owner for the provision of labor and/or materials for improvement of the property, an avenue of relief whereby the owner or contractor can have a mechanic’s lien filed against the property released. Utilization of a Bond is particularly helpful when a dispute arises regarding the validity of an asserted mechanic’s lien.
Construction Lien. The assertion of a mechanic’s lien against a parcel of property has multiple negative consequences. For example, the lien creates an encumbrance against the property which must be removed or addressed before the property can be sold or refinanced. Furthermore, often times, the filing of a mechanic’s lien against the property constitutes a breach of the contractor’s contract with the property owner. An owner who discovers a lien against the property may, among other things, terminate the contractor’s contract and/or seek damages for the contractor’s breach. Moreover, due to the fact that a lien claimant has up to twelve (12) months from the date of filing of the mechanic’s lien to bring an action enforcing said mechanic’s lien, assertion of a mechanic’s lien can tie up the property for up to one (1) year without any action being taken to resolve the issues related to the subject lien.
Fortunately, KRS 376.100 provides the owner and/or contractor with the ability to have any mechanic’s lien “bonded off” and the encumbrance removed. Specifically, at any time before a judgment is rendered enforcing the subject mechanic’s lien, the owner or contract (or other person in privity with the contractor) may execute before the county clerk in the county where the mechanic’s lien was filed a Bond for double the amount of the mechanic’s lien claimed with good sureties to be approved by the clerk. The Bond shall require its obligors to satisfy any judgment that may be rendered in favor of the lien claimant. Upon execution of the Bond, the mechanic’s lien is released. Furthermore, in any action instituted by the lien claimant to enforce its mechanic’s lien, the lien claimant may make the obligors under the Bond parties to the action and, in so doing, any judgment recovered can be enforced against any or all of the Bond obligors.
It is also important to note that the Bond is merely a substitute for the liened property. The Bond transfers the mechanic’s lien from the property to the Bond. The obligation of the bond does not extend beyond the obligation of the lien for which it was substituted. In other words, the lien claimant has no greater rights under the Bond than it would have had against the property. Moreover, in order for a Bond to be effective and enforceable by the lien claimant against the Bond obligors, the subject mechanic’s lien must be valid (i.e. properly perfected). Otherwise, the lien claimant may not recover under the Bond.
Bonds can be an extraordinarily helpful tool. They provide the owner and/or contractor the ability to keep the property unencumbered and, in the case of the contractor, the ability to cure a potential breach of contract with the owner (as many contracts require a contractor to keep the property free and clear of any encumbrances related to labor and/or materials being provided). Bonds further allow for the owner and/or contractor to keep the subject property from being tied up in lengthy litigation where the owner and/or contractor dispute the amount and/or validity of the mechanic’s lien. Bonds are an important means by which owners and contractors can protect their respective rights and interests in the property being improved.