By Hugh J. Gorman, III
Whether you are representing an Owner, a Contractor, or a Subcontractor on private building projects in Massachusetts, a situation could arise that requires a mechanic’s lien to be dissolved through the use of a “target” lien bond.
This article describes the steps to be followed to apply for and obtain a “target” lien bond and the impact its recordation has on the underlying mechanic’s lien claim.
THE TARGET LIEN BOND
The Massachusetts Mechanic’s Lien Statute is codified at M.G.L. c.254 et seq. Section 14 of the statute provides that any person in interest may dissolve a mechanic’s lien filed under the chapter by recording, in the registry of deeds in the county or district where the project is located, a bond equal to the penal sum of the lien to be dissolved, which must be issued by a surety authorized to do business in Massachusetts. The form of the bond is specified by statute. The bond must be conditioned on payment of the amount which the lien claimant proves that it is entitled to recover for the labor and materials that it contributed to the real property. Because this type of bond is posted for the purpose of dissolving a specified lien, it is known as a “target” lien bond. Once recorded, the lien is dissolved and the bond thereafter stands in place of the real property. Upon service of the bond on the lien claimant, the claimant may assert its claim against the bond by commencing a lawsuit within 90 days after the later of the filing of its Sworn Statement of Account or its receipt of notice of the recording of the bond.
HOW TO OBTAIN A BOND
As contemplated by the statute, the target lien bond must be obtained by a surety authorized to do business in the Commonwealth. Through your insurance agent, you will be required to submit a “Release of Lien Bond” Application as well as a series of documents based on which the lien bond surety will assess, consider, and determine whether or not they will issue the bond. They include:
- Copies of all lien documents as recorded;
- A description of the dispute leading to the lien;
- A completed financial statement demonstrating the principal’s financial condition and ability to pay;
- Personal Financial Statements for the owners of the business or LLC;
- A letter of recommendation from your insurance agent.
In addition to the above information, the surety will require you to post a letter of credit or other collateral equal to at least the amount of the lien or more.
Bruce Thorne, principal of Thorne Insurance, Bridgewater, MA, frequently obtains lien bonds for his clients and relates that sureties often require collateral worth 125% of the lien amount or more. Moreover, according to Thorne, the premiums for lien bonds are expensive and can be as much as two percent (2%) of the penal sum annually. In short, the process which you must go through to get a lien bond is comprehensive and arduous. This notwithstanding, it is often a contractual requirement and/or a business necessity to procure such an instrument.
AFTER THE LIEN BOND IS RECORDED
Once the target lien bond is recorded at the appropriate Registry of Deeds and served on the lien claimant, it takes the place of the real property and the mechanic’s lien is dissolved. The recording of the bond does not mean that the underlying lien is deemed valid or enforceable. The interested party posting the lien bond still retains all of its defenses (both legal and equitable) to contest the claim and the lien. Moreover, the lien claimant must continue to follow the necessary procedural steps to perfect its lien rights as required by statute. The advantage of posting a bond is that it clears the way for further funding to be advanced to permit the completion of an on-going construction project irrespective of the lien. On a completed project, posting a bond permits the sale of the real property.
(Hugh Gorman is head of Prince Lobel’s Construction Law Group.)