Conditional Payment Bond
Should I Lien Or Should I Bond? Or Both?
When you enter into an agreement to furnish labor, materials, and construction services, but that agreement requires the other party to pay you only after you have started performing, you are extending credit. No surprise, but not all owners and general contractors are credit-worthy. “But,” you say, “Florida law provides me with lien rights.” If you are careful to comply with the many technical requirements, it is true that you may have lien rights. But, what if the construction lender’s mortgage that has priority over your lien exceeds the value of the property? Your lien may be value-less. Many subcontractors over the last few years have found themselves in just that situation. If you are fortunate enough to be able to say that you are protected by a payment bond, then you might be in good shape. However, even in the case of a bond, you must still be careful to ensure the greatest chance of getting paid.
Florida’s Construction Lien Law authorizes essentially two types of payment bonds, those that are unconditional and those that are conditional. Unconditional payment bonds essentially take the place of the property as security for subcontractors (as well as sub-subcontractors and material suppliers). They are unconditional in the sense that the surety’s liability does not depend upon whether the owner has ever paid the general contractor for your work. However, a person who would make a claim on an unconditional payment bond might have to comply with certain notice requirements if he or she does not have a contract with the general contractor. Additionally, suit on the unconditional statutory payment bond must be filed within one year of final furnishing of labor, materials, or services
Conditional payment bonds are conditional because the surety’s liability is conditioned upon the owner’s payment to the general contractor. That means, if the owner does not pay the general contractor for your work, the bond surety is not liable to you for that work. These bonds protect subcontractors (as well as sub-subcontractors and material suppliers) in the event that the owner pays the general contractor but that payment does not flow downstream. Although not commonly used, the careful subcontractor, sub-subcontractor, and material supplier reviewing the bond (doing “due diligence” to ensure success on his favorite part of a construction project) will quickly notice the conditional payment bond for what it is because it will have the following statutorily required “legend” on the first page:
THIS BOND ONLY COVERS CLAIMS OF SUBCONTRACTORS, SUB-SUBCONTRACTORS, SUPPLIERS, AND LABORERS TO THE EXTENT THE CONTRACTOR HAS BEEN PAID FOR THE LABOR, SERVICES, OR MATERIALS PROVIDED BY SUCH PERSONS. THIS BOND DOES NOT PRECLUDE YOU FROM SERVING A NOTICE TO OWNER OR FILING A CLAIM OF LIEN ON THIS PROJECT.
The effect of this bond, different from an unconditional payment bond, is that the bond does not take the place of the real property as collateral for monies owed to you. It is an alternative to payment instead. That means, that you can still record a claim of lien against the real property, as well as pursue a claim against the bond. You must however still comply with certain notice provisions to be able to do so. As that “legend” suggests, the careful subcontractor will still timely serve a notice to owner (within 45 days of your first work) and, if payments are not forthcoming, timely record a claim of lien (within 90 days of your last work). In fact, although the bond may not say it, the recorded claim of lien is necessary for the subcontractor to have rights under the conditional payment bond because it is the recording of the lien that triggers obligations of the owner. If the careful subcontractor has successfully navigated the requirements to this point but still has not received payment, it’s time to see your construction lawyer. Due to the many potential pitfalls that can occur along the way, consulting your construction lawyer along the way is probably prudent because, we are quite sure, you would not want to miss your favorite part of a construction project – getting paid.