An amendment to the Illinois Mechanics Lien Act should decrease the real estate transaction problems caused by contractor’s liens. Public Act 99–0178 changes the Lien Act as of January 1, 2016. The new provision allows a property owner or “…other person having an interest…” to substitute a surety bond for lien rights. A bond can free the property from a contractor’s attachment while allowing him to retain his right to recover payment. The property can be sold while payment disputes are resolved separately.

A surety bond promises to pay

A surety bond sets up a formal promise to make good on another’s legal or contractual obligation. When substituted for a contractor’s lien, it involves three parties.

• Surety – bonding company that guarantees payment
• Principal – property owner who owes the contractor
• Obligee – contractor due a payment (bond penalty)

A contractor’s lien can obstruct a pending sale

When a contractor proves he is owed a payment, the County Recorder documents his lien in the property’s formal ownership record. The contractor then has a right to force a sale of the property to collect his payment, but that rarely occurs. Often, nothing happens until the owner tries to transfer title to the property. Then the lien becomes a roadblock that can force a buyer to back out of a pending sale.

Until a contractor’s lien is satisfied, he is essentially a part owner of the property. The purchaser can never fully own it until it’s resolved. Should the sale go through, liens and all, any appraisal of its real estate value will be diminished by the dollar amount of the lien and the fact that the lien exists.

Title searches discover lien problems

When a seller presents a title as proof of ownership, a potential buyer, his mortgage company and real estate attorney never accept it at face value. They authorize a title search to determine if the title is free and clear. If a search turns up a contractor’s lien, it might simply delay the sale, but it might also stop the transaction altogether. Surety bonds have the potential to change this.

It can get complicated

Surety bond substitution for contractor’s liens is a new idea in the Illinois real estate market. Recent Mechanic’s Lien amendments include notice and timeliness restrictions and a provision for “prevailing party” legal fees. To understand how these issues might affect future real estate transactions, property buyers and sellers should consult with a real estate attorney.