Lien Release Bond
The Mechanic’s and Materialmen’s Lien laws of Texas grant contractors and their subcontractors and suppliers certain rights against real property. Specifically, they are allowed to file an affidavit claiming an involuntary lien against an owner’s property to secure the amounts they claim to be owed.
The process is rather simple and does not involve the initial filing of a law suit, as laws in some other states require. As a result, it is not uncommon for a property owner or a contractor working for that owner, to be confronted with a lien claim they dispute, but which is holding up a closing, sale, or re-financing. Subchapter H of the Texas Property Code provides the owner or other person interested in removing the lien a vehicle to do so; A bond to indemnify against Lien," often referred to as a Lien Release Bond.
Lien Release Bonds can be tricky to use and almost always result in a law suit being filed against the bond applicant and the surety. Rarely will the surety issue such bonds without full collateral.
The Lien Release Bond must meet the requirements of Subchapter H to effect the removal of a lien affidavit. Standard “Bond to Indemnify Against Lien” bond forms meet those requirements, but we are occasionally asked to use bonds prepared by title companies and outside attorneys. The bond applicant should pay close attention to the forms they are requesting to be issued, as minor deviations from the statutory requirements may result in the bond not achieving the desired result.
The bond must be in an amount that is double the amount of the liens referred to in the bond unless the total amount claimed in the liens exceeds $40,000. If the lien exceeds $40,000, the bond must be in an amount that is the greater of 1-1/2 times the amount of the liens or the sum of $40,000 and the amount of the liens.
The bond, once properly prepared and signed, must be filed with the County Clerk of the County in which the lien is filed, not once, but twice! First, the bond is to be filed of record with the County Clerk. The County Clerk then issues a Notice of the Bond (which you or your attorney will often have to prepare for the County Clerk). That Notice must be served on the obligee of the bond (the lien claimant) by certified mail, return receipt requested. The Bond, a copy of the Notice, and a Certificate of Mailing (which you will also often have to prepare) must then be filed with the County Clerk.
If the bond is properly prepared, filed, served, and filed again, a purchaser, insurer of title, or lender may rely on and is absolutely protected by the record of the bond and the notice to the same extent as if the lien claimant had filed a release of lien in the real property records. The release of the lien does not, however, release the lien claimant’s contractual claims against parties with whom the client claimant had a direct contractual relationship.
The lien claimant must file suit on the bond within the earlier of one year after the date the bond was served or the date the underlying lien becomes unenforceable as a matter of law. If the Notice of the Bond filing is not properly served, that one year period does not begin to run. Accordingly, it is to the bond applicant’s advantage to serve the bond as soon as possible after it is executed and the Notice of Filing is prepared by the County Clerk.
When and if suit is filed against the bond, the bond applicant will have to retain its own counsel to defend the suit. The bond applicant is also obligated to indemnify and hold the surety harmless and reimburse the surety for all costs associated with the defense of the suit. In some cases, the surety will allow the bond applicant’s counsel to represent the surety as well, in order to save legal expenses. But, this is allowed only if counsel agrees to the sureties terms of engagement.
The bond premium is an annual premium and will continue to accrue until all liability under the bond has been released or has been extinguished as a matter of law. Collateral will also be held for at least the same period of time.
The complete text of Subchapter H of the Property Code is attached for your benefit
BOND TO INDEMNIFY AGAINST LIEN
SUBCHAPTER H. OF THE TEXAS PROPERTY CODE
§ 53.171. BOND. (a) If a lien, other than a lien granted by the owner in a written contract, is fixed or is attempted to be fixed by a recorded instrument under this chapter, any person may file a bond to indemnify against the lien.
(b) The bond shall be filed with the county clerk of the county in which the property subject to the lien is located.
(c) A mechanic's lien claim against an owner's property is discharged after:
(1) a bond that complies with Section 53.172 is filed;
(2) the notice of the bond is issued as provided by Section 53.173; and
(3) the bond and notice are recorded as provided by Section 53.174.
§ 53.172. BOND REQUIREMENTS.
The bond must:
(1) describe the property on which the liens are claimed;
(2) refer to each lien claimed in a manner sufficient to identify it;
(3) be in an amount that is double the amount of the liens referred to in the bond unless the total amount claimed in the lien exceeds $40,000, in which case the bond must be in an amount that is the greater of 1-1/2 times the amount of the liens o the sum of $40,000 and the amount of the liens;
(4) be payable to the parties claiming the liens;
(5) be executed by:
(A) the party filing the bond as principal;
(B) a corporate surety authorized and admitted to do business under the law in this state and licensed by this state to execute the bond as surety, subject to Section 1, Chapter 87, Acts of the 56th Legislature, Regular Session, 1959 (Article 7.19-1, Vernon's Texas Insurance Code); and
(6) be conditioned substantially that the principal and sureties will pay to the named obligees or to their assignees the amount that the named obligees would have been entitled to recover if their claims had been proved to be valid and enforceable liens on the property.
§ 53.173. NOTICE OF BOND.
(a) After the bond is filed, the county clerk shall issue notice of the bond to all named obligees.
(b) A copy of the bond must be attached to the notice.
(c) The notice must be served on each obligee by mailing a copy of the notice and the bond to the obligee by certified United States mail, return receipt requested, addressed to the claimant at the address stated in the lien affidavit for the obligee.
(d) If the claimant's lien affidavit does not state the claimant's address, the notice is not required to be mailed to the claimant.
§ 53.174. RECORDING OF BOND AND NOTICE.
(a) The county clerk shall record the bond, the notice, and a certificate of mailing in the real property records.
(b) In acquiring an interest in or insuring title to real property, a purchaser, insurer of title, or lender may rely on and is absolutely protected by the record of the bond and the notice to the same extent as if the lien claimant had filed a release of lien in the real property records.
§ 53.175. ACTION ON BOND.
(a) A party making or holding a lien claim may not sue on the bond later than one year after the date on which the notice is served or after the date on which the underlying lien claim becomes unenforceable under Section 53.158.
(b) The bond is not exhausted by one action against it. Each named obligee or assignee of an obligee may maintain a separate suit on the bond in any court of jurisdiction in the county in which the real property is located.