As of January 1, 2016, the state of Illinois will join the ranks of numerous states in the nation that permit the substitution of an eligible surety bond in place of real estate property as security for money owed to contractors who claim mechanics liens. On July 29, 2015, Illinois Governor Bruce Rauner signed House Bill 2635 to amend the Illinois Mechanics Lien Act. The new law states that a person with interest in the property can file a petition to substitute an eligible bond in lieu of property that is held as security for a mechanics lien, and may do so anytime prior to five months after a mechanics lien foreclosure action complaint or counterclaim is filed.
Section 38.1(a) outlines the broad universe of interested parties who may file a petition to replace a mechanics lien with an eligible bond. Interested parties include, but may not be limited to:
- The owner of record
- A secured lender
- A former owner with liability for payment of the claim
- A homeowners Association
- Another lien claimant
- A lessee
Eligibility of Surety Bonds to Replace Mechanics Liens
To complicate matters further, Section 38.1(a) also defines the criteria that a bond must meet in order to become eligible to replace a mechanics lien. In order to be eligible in the state of Illinois, a bond must:
- Be issued by an A-rated surety company and equal an amount of at least 175% of the lien claim
- Clearly state that any judgement based on the lien claim that is in favor of the lien claimant constitutes a judgement against the principal and surety of the bond for the amount due. This includes appropriate attorney’s fees and interest up to the amount of the bond.
- Be payable within 14 days after a final, non-appealable judgement is made.
Considerations Regarding Bonding Over
Although bonding over a mechanics lien can be advantageous for property owners and other interested parties to clear a title, the consequences of bonding over should be considered.
- The law imposes prevailing party attorney fees be paid by the non-prevailing party.
- The party invoking Section 38.1 could personally become liable for the amount due, even if no prior liability existed.
- The contractor risks becoming personally liable to lower-tier liens for the amount of the liens including attorney fees and interest.
