Illinois Now Allows Bonding Off of Mechanics Liens on Private Projects
By Jesse G. Shallcross, K&L Gates, Chicago
On July 29, 2015, Illinois Governor Bruce Rauner signed into law an amendment to the Illinois Mechanics Lien Act which allows a property owner, contractor or other party with an interest in real property which is subject to a mechanics lien claim filed against the property by an aggrieved contractor, subcontractor or material supplier on a private project to substitute a surety bond for such mechanics lien claim.[1] The new law is scheduled to take effect on January 1, 2016.
Illinois now joins the ranks of no less than 35 other states that provide for the right of an interested party to substitute a surety bond for real property against which a mechanics lien claim is filed, also known as “bonding off” a mechanics lien claim, on private projects.
Under the new law, (i) at any time, such interested party (referred to in the statute as an “applicant”) may file a petition with the county where the property is located to bond off a mechanics lien claim filed against the property, or (ii) if there is already a pending court action to enforce a lien claim, the applicant may, within five months after the filing of the complaint, apply to become a party thereto and file a petition to bond off the lien claim. The bond must be issued by an A-rated surety company in an amount equal to 175% of the claim.
Bonding off a mechanics lien claim allows the property owner or other party having an interest in the property to substitute the claimant’s lien on the property with a guaranty of a surety to provide a sum of money to the claimant if the claimant is successful in his claim. This is generally beneficial to owners, developers, general contractors and the like, as they are free to forge ahead on a construction project without being hamstrung by pesky subcontractor liens encumbering the property.
However, the new law also benefits aggrieved contractors, subcontractors and suppliers, particularly those who would prevail in court. The bond is required to be issued in the amount of 175% of the claim amount, and the law explicitly grants the prevailing party an award for attorney’s fees. Additionally, and perhaps most importantly, substituting a surety bond for a lien on real estate allows a successful claimant to collect on a judgment without potentially having to wait for a final disposition of the property, which may be subject to the security interests and liens of other creditors.
The new amendment to the Mechanics Lien Act does not apply to public projects, as Illinois does not allow mechanics liens to attach to real property owned by the state to begin with. With respect to private projects, however, there is no such prohibition against mechanics liens but rather a statutory right granted to aggrieved contractors, subcontractors and suppliers under the Act. Therefore, an amendment to the Act was required to allow a property owner, contractor or other interested party to override this statutory right and bond off a mechanic’s lien.
The law was the culmination of two-and-a-half years of efforts involving multiple parties, spearheaded by Paul Peterson of Chicago Title Insurance Company. The bill was drafted by the Chicago Bar Association and co-sponsored by the Illinois State Bar Association and Illinois Land Title Association.
[1] See Public Act 099-0178; 770 ILCS 60/38.1