Illinois is about to join the ranks of at least 35 other states and territories that permit substitution of a surety bond in lieu of real estate as security for payments due contractors who assert mechanics liens on private projects. Illinois House Bill 2635, adding new Section 38.1 to the Illinois Mechanics Lien Act1, has been passed by both houses of the legislature and currently awaits the governor’s signature for enactment into law.
Owners contracting for improvements to private property have always had the option to require performance and payment bonds as a condition of the contract, but a bonding requirement is often dispensed with except on large private projects because of the expense. Under the new amendment to the Act, a bond may be obtained if necessary after a lien claim is asserted and may be posted as security for payment. The owner of the subject property, or any other person having an interest in the property, will have the right to initiate or intervene in court proceedings and petition for leave to post the bond. Parties in interest can include, but are not limited to, the owner of record, a former owner having liability for payment of the claim, a secured lender, lessee, homeowners association or another lien claimant.
If the petition is properly noticed and the bond meets eligibility requirements, the court must enter an order substituting the bond for the property securing the lien claim and discharging the property, moneys and other consideration due or to become due from the owner to the contractor under the original contract. The lien claimant’s right to recover on the bond is substituted for other remedies available under the Act, namely recovery of money directly from the owner and foreclosure and sale of the property if necessary to satisfy the claim. Persons other than the claimant, principal and surety, who may otherwise be considered necessary parties to the proceedings under law, may be dismissed from the litigation.
To be eligible, a surety bond must be issued by an A-rated surety company in an amount equal to 175% of the claim. In addition, the bond must on its face submit the principal and surety to the jurisdiction of the court, provide that a final judgment or decree in favor of the lien claimant is a judgment against the principal and surety in the amount found to be due (including statutory interest and attorney fees, if awarded) to the full limit of the bond, and be payable within 14 days after entry of a final, non-appealable judgment.
Unlike bonding provisions in some jurisdictions, the posting of a surety bond under the new Illinois law will not operate as a release or discharge of the lien. The option to post a surety bond can nevertheless benefit parties to a lien dispute by providing the successful claimant a ready source of recovery in the form of cash proceeds, preserving the owner’s right to possess the property by removing the threat of foreclosure and sale, and allowing parties other than the claimant, principal and surety to avoid unnecessary legal expense by excusing their participation in litigation.