Practical solutions to the problems resulting from the real life application of Florida's construction lien transfer bond statute.

• Author: Vega, Daniel R.

Florida's construction lien law has been defined by one appellate court as a complex set of rules and procedures that continues to confuse the bar and the judiciary just as much as it does the very folks it seeks to protect. (1) Generally, Florida's construction lien law provides that certain defined parties (lienors) who supply labor, work, or materials for the improvement of private real property located within Florida are entitled to lien the improved property for the value of the materials, labor, or work provided. (2) The purpose of the statute is "to protect those who have provided labor and materials for the improvement of real property" by providing an additional remedy, namely foreclosure of a lien, to the common law right to sue for breach of contract and related claims. (3)

Savvy owners wishing to avoid liens against their property are also afforded relief under the lien law. (4) First, owners (typically of large commercial or condominium projects) can generally exempt the property from all future liens at the outset of construction by requiring their general contractor to post a payment bond pursuant to F.S. [section]713.23 or [section]713.245 before construction begins. To do so, the owner is required to attach and record a copy of the bond with the notice of commencement prior to the beginning of construction. The owner must also identify the surety and the nature of the bond within the notice of commencement. As a result, unpaid lienors on a bonded construction project are generally protected by the surety bond instead of the real estate. (5) Second, owners are also provided the opportunity to transfer recorded liens to a cash or surety bond after a lien is recorded against the property. In the ever increasing world of construction litigation in Florida, the transfer of existing construction liens to such bonds has increased significantly during the past three years.

Florida's transfer bond statute, F.S. [section]713.24, permits an owner (or any other interested party to the lien) whose property is encumbered by a claim of lien to transfer that lien off the property to other security--namely a cash deposit or surety bond. Problems with Florida's transfer bond statute have surfaced, however, and "those who have provided labor and materials" are finding themselves unprotected and exposed to losses plainly not intended by the drafters. This article explains the purpose of the transfer bond statute, the advantages and disadvantages of the statute, the problems and complications that arise when the statute is applied to actual cases, and the various possible solutions/changes to the current statutory framework that should improve the statute and further its purpose of protecting the lienors, while still benefiting owners.

The Transfer Bond Statute--F.S. [section]713.24

The legislative intent of the transfer bond statute was simple: "to permit any owner, whether or not he is in privity with a lienor, to remove the cloud of a lien from his property against which the lien is impressed." (6) The practical result to the owner is that, since the cloud on title is no longer present, the owner may proceed to finance, refinance, or sell the property, or if a construction loan is in place, to release holds on draws by the bank on account of the lien.

An owner who elects to transfer a claim of lien from real property to security under F.S [section]713.24 can do so by either depositing cash or by posting a surety bond in a requisite amount with the clerk of court. Specifically, the owner is required to deposit:

an amount equal to the amount demanded in such claim of lien, plus interest thereon at the legal rate for three years, plus $1,000 or 25 percent of the amount demanded in the claim of lien, whichever is greater, to apply on any attorneys' fees and court costs that may be taxed in any proceeding to enforce said lien. (7)

Once the transfer has taken place, the clerk is required to record a certificate evidencing the transfer and mail a copy of it to the lienor whose lien was transferred. (8) The statute further provides that at any time, and without limit, "any party having an interest in such security or the property from which the lien was transferred," almost always the lienor, can request the court to require an increase in the amount of the cash deposit or lien transfer bond if the statutory required amount of the deposit or bond that is in excess of the amount claimed in the claim of lien is insufficient to pay the lienor's attorneys' fees and court costs incurred in the action to enforce the lien. (9) If the court finds the request for additional security to be warranted, the court is required to increase the amount of the lien transfer bond. (10) The purpose of the bond increase provision is to preserve the lienor's right to adequate security for the attorneys' fees, costs, and interest that are properly awardable to a lienor who prevails on a construction lien foreclosure and which would otherwise be paid from the proceeds of the ensuing sale. (11)

Practical Reality: The Transfer Bond Statute Fails as Written

There are several significant problems with the real life application of the transfer bond statute. The first problem involves F.S. [section]713.24(1)(b) and pertains to the amount of the cash deposit or surety bond required to transfer a lien. This provision is intended to ensure that small subcontractors and material suppliers remain adequately protected for the attorneys' fees and court costs to be incurred enforcing the claim of lien and interest. The statute fails because, more times than not, the amount deposited for attorneys' fees is quickly surpassed in the underlying litigation. The statute's strict 25 percent of the lien amount allocation for attorneys' fees and court costs is almost always insufficient for small liens (i.e., liens under $50,000), whereas it is likely to be at least adequate for large liens (i.e., liens greater than $50,000), despite the fact that both liens invariably cost the same to litigate. In other words, the statute's failure to delineate greater percentage allocations for attorneys' fees and costs based on the amount of the lien penalizes the party the statute seeks to protect most (i.e., small subcontractors and material suppliers who have improved real property and who generally record liens of less than $50,000).

To protect against this problem, the drafters included language in F.S. [section]713.24(3) that permits lienors to seek an increase in the amount of the security initially posted to transfer the lien. The actual application of this provision, however, leads to a second problem with the transfer bond statute in that it fails to enumerate any consequence(s) for noncompliance with an order requiring an increase in the security. At the same time, the statute fails to provide courts with any specific authority (above and beyond the court's inherent authority)...