Most creditors think of the Payment Bond like a Mechanics Lien. This is a common misconception. The Mechanics Lien is an Instrument that is recorded against the title of Real Property and can serve as the catalyst to force the Real Property to be sold through foreclosure. Once the foreclosure sale is completed, the amount due to the lien holder is then paid and the collections process is satisfied.
This, however, cannot happen when the Property Owner is the City of Los Angeles or United States Postal Service. The law does not allow anyone to encumber a Public or Federally Owned Property.
So in order to protect the creditor on Public and Federal Projects,
the General Contractor is required to have a “Payment Bond” act as a substitute for the Real Property.
Here is an example:
If the Construction Project is for the renovation of 8 class rooms at Sierra Vista Middle School with a project value of $2,000,000.00, the General Contractor, as a condition to be awarded this project, will be required to secure a “Payment Bond” for approximately 125% of the project value. This Payment Bond is a “Guarantee” that anyone who is eligible to file a “Payment Bond Claim” for materials or services they provided to this project will be able to collect their open accounts receivable from those who have joined together to secure the Payment Bond. This is usually the Surety, the General Contractor, and the Property Owner.
So, unlike a mechanics lien where the lien is Recorded and Served then Perfected, the Payment Bond Claim is served (not recorded) then perfected. The perfection process usually involves a lawsuit against the Payment Bond. This is similar to a foreclosure suit, which results from a mechanics lien.
The fact is the Payment Bond is actually a more robust instrument because unlike Real Property, which can become over encumbered or have little to no value once foreclosed, the Payment Bond stands at its full value less any prior claims, which may have been previously made and awarded.
The easiest way to remember when to think Payment Bond Claim and when to think Mechanics Lien is for privately owned property select a Mechanics Lien and for a publicly owned property select a Bond Claim Notice. There are occasions when a private project may be bonded. In this case you can do both a lien and a bond claim. There are also occasions when a public project will allow you to place a lien against any unpaid funds which were allocated for the project.
The best decision is to file both a bond claim and a lien whenever these circumstances are available.
Public Projects also offer many more tools that may enter into the consideration:
- Stop Payment Notice
- Bonded Stop Payment Notice
- Public Lien (Where permitted by State Statute)
- Breach of Contract Suit
All these have their own process and are detailed on this website.
There is one more thing you should consider when working on Public Projects. You must first have the RIGHTS to submit a Payment Bond Claim. These RIGHTS are usually granted when a proper preliminary notice is served upon the Property Owner, General Contractor, and the Surety (the entity who has issued the Payment Bond) within the time allowed by the Statute. Should you fail to satisfy this requirement or should you serve an incomplete or inaccurate preliminary notice, your RIGHTS to file a Payment Bond Claim may be jeopardized and your collections may now be limited to a “Breach of Contract Suit”.
Most creditors who embrace the complete “Pre-Notice” process and tract their deadlines carefully are usually the creditors who get paid first and spend very little time trying to save a dying accounts receivable once a project has fallen apart.
CRM Lien Services offers 25+ years of experience preparing, serving and filing all the notices you may need to avoid a costly write off.
To have CRM prepare and serve your Payment Bond Claim, please click here and let the professionals prepare and serve your Bond Claim Notice.