HOAs, mechanic's liens, subcontractors and bonds

When an HOA hires a contractor to do a job - install a pool or shingle a roof, for example - board members can maintain the quality of workmanship by withholding payment until the job is done right.

Contractors and subcontractors, however, have a method of getting payment from recalcitrant HOAs via filing a mechanic's lien against the HOA and the property. A mechanic's lien can have two chilling effects on HOAs:

  • Lenders often refuse to lend to properties with liens against them. If your HOA needs a loan to repair roofs while you're fighting a mechanic's lien for construction of a pool, you may not get that loan.
  • Prospective purchasers of units in the HOA's property may question why a mechanic's lien has been filed. Fearing financial trouble or a special assessment, a lien might affect property sales.

The problem with liens and subcontractors

A common problem is not when an HOA fails to pay a contractor, but when the contractor fails to pay a subcontractor and that subcontractor files a mechanic's lien against the HOA for payment.

An HOA can protect itself by vetting a contractor before the job to see if he pays his subcontractors. An HOA is also well-advised to enter into a proper contract with the contractor crafted by the HOA's lawyer and not the contractor. And HOAs can protect themselves by avoiding changes mid-project, complaining about faults in the work while the work is being done and not after the job has been completed, and paying in installments during construction and not in a lump sum after the job has concluded.

Perhaps the most effective way an HOA can protect itself is to insist on lien waivers. During the course of a project, an HOA can pay part of the total and insist on a waiver that all subcontractors have been paid to that point and the payment amount is not in dispute.

What to do when a mechanic's lien has been filed

If worse comes to worst and a mechanic's lien is affecting an HOA's ability to do business, an association can purchase a release of lien bond to cover the cost of the lien until the dispute is settled. With a bond, the lien doesn't affect the property, just the bond itself.

This can be an expensive fix, however. The bond amount is usually 110 percent of the bond and a lender will require collateral as well as payment of up to 15 percent.

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