NASCLA Lien Laws and Payment Procedures 2 — Questions and Answers
Question 1: A 'lien release bond' (also called a 'lien discharge bond') allows a property owner to:
- Permanently avoid paying a lien claimant
- Remove a mechanic's lien from the property by substituting a surety bond in its place (Correct answer)
- Extend the deadline for filing a lien
- Transfer a lien to another property
Correct answer: Remove a mechanic's lien from the property by substituting a surety bond in its place
A lien release bond substitutes a surety bond for the property as the lien security, allowing the owner to sell or refinance the property while the lien dispute is resolved.
Question 2: Under the Prompt Payment Act applicable to federal construction projects, owners must pay contractors within how many days of receiving a proper invoice?
- 7 days
- 14 days
- 30 days (Correct answer)
- 60 days
Correct answer: 30 days
The federal Prompt Payment Act requires federal agencies to pay contractors within 30 days of receiving a proper invoice, with interest penalties for late payments.
Question 3: Which of the following is required for a mechanic's lien to be valid in most states?
- The lien must be filed before any work begins
- The lien must be recorded within a statutory timeframe and served on the property owner (Correct answer)
- The lien must be approved by the local building department
- The lien must name all other subcontractors on the project
Correct answer: The lien must be recorded within a statutory timeframe and served on the property owner
A valid mechanic's lien typically requires timely recording in the county records within the statutory deadline and serving notice on the property owner within a specified period.
Question 4: What is 'joint check agreement' in construction payment practices?
- A check signed by two owners of a business
- An agreement where checks are made payable to both the general contractor and subcontractor jointly, ensuring the subcontractor receives payment (Correct answer)
- A federal requirement for checks on public projects
- An agreement to split costs between the owner and contractor
Correct answer: An agreement where checks are made payable to both the general contractor and subcontractor jointly, ensuring the subcontractor receives payment
A joint check agreement requires the owner or general contractor to issue checks payable to both the GC and the subcontractor (or sub and supplier) jointly, ensuring funds reach the intended party.
Question 5: In a 'pay-when-paid' clause, what condition must be met before a general contractor must pay its subcontractors?
- The subcontractor must pass a performance review
- The general contractor must first receive payment from the owner for the corresponding work (Correct answer)
- The subcontractor must submit three invoices
- The general contractor must complete all punch list items first
Correct answer: The general contractor must first receive payment from the owner for the corresponding work
A pay-when-paid clause conditions the general contractor's obligation to pay subcontractors on first receiving corresponding payment from the owner, shifting owner payment risk to subcontractors.
Question 6: What is the primary difference between a 'pay-when-paid' and a 'pay-if-paid' clause?
- They are legally identical in all states
- Pay-when-paid sets a timing condition; pay-if-paid (if enforceable) eliminates the obligation to pay if the owner never pays (Correct answer)
- Pay-if-paid requires faster payment than pay-when-paid
- Pay-when-paid applies only to subcontractors; pay-if-paid applies only to suppliers
Correct answer: Pay-when-paid sets a timing condition; pay-if-paid (if enforceable) eliminates the obligation to pay if the owner never pays
Pay-when-paid creates a timing condition (pay after receiving payment); pay-if-paid, if enforceable, extinguishes the GC's payment obligation entirely if the owner never pays — many states ban pay-if-paid clauses.
NASCLA Lien Laws and Payment Procedures 2
A 'lien release bond' (also called a 'lien discharge bond') allows a property owner to: