One of the impediments to private construction projects are liens against real property. They cause hassles for the general contractor, the owner, the lender, and the surety. What if there was a way to provide unpaid subcontractors with a payment remedy that would foreclose the need for the filing of liens in the first place?
Well, it turns out, there is a way on private work—it is called a payment bond—and some states have codified this powerful payment alternative in their statutes. “The secret to reducing frustrations and headaches is bonding the contractor on private work,” asserts Mike Specht, Owner of NASBP Member Minard-Ames Insurance Services, LLC in Phoenix. “More private owners and financing lenders need to be aware of the value of bonds on private work and their statutory benefits in certain states.”
When it comes to private construction projects in Arizona, sureties can supply general contractor clients with a statutory payment bond form in lieu of lien rights while incurring no extra premium. A sample of an Arizona statutory payment bond is located
here. The general contractor can record the signed bond and a copy of the contract with the county recorder. With those steps accomplished, unpaid subcontractors can look to the filed payment bond, rather, than go through the technical and legal process of perfecting mechanics liens, to ensure payment of valid claims, and the general contractor can remain in good stead with the project owner.
“When you’re properly withholding money from a subcontractor, but that sub liens your job, that could cause problems between you and the owner that you’re doing work for,” Specht observes. “The owner might ask to ‘bond around that lien’—ask them to get a release of lien bond. This creates an extra cost for the bond premiums so that’s another negative from the general contractor’s point of view,” Specht continues.
Specht also notes that subcontractors “still have an option of filing a claim on the payment bond that has been recorded and/or filing a lawsuit against the general contractor.”
In addition to protecting the project owner, the lender can also enjoy the benefits. “Lenders will know that the project on which they are providing financing will have clear title and remain lien free.” “Savvy lenders may wish to tell the project owner that construction risks can be further mitigated by requiring a performance bond of the general contractor, and the lender can be added as an additional obligee under the performance bond via a dual obligee rider,” Specht relates. “In addition to the project owner being protected by the performance bond, so will the bank as long as the contractor is receiving progress payments as outlined in the contract.”
In addition to Arizona’s statute, similar private work payment bond statutes exist in Florida, Kansas, and Texas, among other states. NASBP hopes to raise awareness of the advantages that these statutes can provide on private construction projects.
To that end, NASBP has conducted a preliminary survey of the various states to determine which states have similar statutes in place. In the future, NASBP may seek legislative opportunities in select states to introduce such legislation, benefiting private construction project participants in those states.
Specht further notes relational benefits from the existing Arizona law: Those bonds can help build relationships between sureties and their general contractor clients. Not only can they substantively benefit the contractor by keeping the owner’s property free of liens, but also the surety bond producer is seen to be looking out for the general contractor’s interests even if the bonds are never used to block a lien,” adds Specht.
Like most things, careful consideration must be given to decide whether this avenue fits a particular project. “Specht is a strong proponent of bonding contractors, but he also recognizes that liens have their place in disciplining unreliable project owners. Specht recommends that contractors hold off on filing the bond with the county if there are questions about the reliability of the project owner to pay contracted funds.
“If you’re going with someone you don’t know, maybe it makes sense not to record it so the whole construction team can lien the job,” Specht said. “And, even with these statutory bonds in place, they do not preclude the general contractor from filing its own lien on the property should that be necessary.”