2005 Legislation Provides Sureties
Some Relief on Nevada Bond Requirements

By Leon F. Mead II

This new legislation is intended to balance some of the inequities created by the previous statutes.

 

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In 2003, the Nevada Legislature nearly brought the issuance of construction surety bonds to a halt by enacting two particular changes to the state Mechanics Lien. The first change made a surety who issued a mechanics lien release bond under NRS 108.2413, et seq., liable on the bond regardless of whether the surety was paid the premium therefore, and also made the surety liable for any increase in the amount of the bond the court ordered. The prospect of having potentially unlimited liability without the ability to collect premiums for such service brought the mechanics lien release bond business to virtually a complete stop. The second change made it mandatory that a tenant obtain a payment and completion bond in one and a-half time the amount of his general contract before beginning any work on a tenant improvement contract.

Given underwriting realities, this obligation proved virtually impossible for most tenants. For some intended projects built on long term leased property, a bond simply could not be procured at any price. As a result, this mandatory requirement was totally disregarded by many tenants and their contractors.

To rectify these problems, the Associated General Contractors sponsored a bill, SB343, which among other things partially rectified these problems for the sureties and the construction industry as a whole. The new law, effective for all projects as of October 1, 2005, provides a cap on surety liability for mechanics lien release bonds, provides an alternative to the requirement of a payment and completion tenant improvement bond, and creates the ability to provide a private works payment bond to avoid mechanics lien claims altogether.

SB343 amended NRS 108.2421(6) and 108.2425 by limiting the recovery of a lien claimant against the release bond surety to "the penal sum of the surety bond". If the Court is faced with a surety bond that is insufficient to cover the mechanics lien claim, the Court may now order the principal on the bond to obtain additional security to cover the entirety of the mechanics lien claim that may be awarded to the lien claimant.

Despite this change, the surety who does issue the mechanics lien release bond will remain liable thereon up to the penal sum of the bond, regardless of the payment of the premium therefore.

The mandatory tenant improvement bond is now specifically optional between the tenant and the general contractor, and is specifically linked to the effectiveness of a notice of non-responsibility recorded by the landlord of the tenant making the improvements. If the landlord desires to have any notice of non-responsibility be effective, in addition to a number of new notice requirements, the tenant must post "security" for the improvements. This security can now take the form of either a recorded surety bond in the amount of 1.5 times the amount of the general contract, or the tenant may establish and fully fund a third-party maintained construction escrow account.

Finally, SB343 created the possibility of recording a payment bond for a private works contract. In this case, a principal would obtain a surety bond with a penal sum of 1.5 times the amount of the prime contract. The bond would then be recorded with the county recorders office, and a copy of the recorded bond is served upon the general contractor and any other potential lien claimant who has served the owner with a preliminary notice. Upon such recordation and service, the bond becomes a substitute for the property, securing any liens recorded against the project.

The intent of this legislation is to bring some alternatives for principals and sureties to protect their properties from mechanics lien claims, as well as balance some of the inequities created by the previous statutes. Hopefully, sureties will be able to respond favorably to these legislative changes.

Leon F. Mead II is the managing partner of Mead Pezzillo LLP in Las Vegas.
His practice focuses almost exclusively on construction law. He was named
to the Associated General Contractors, Las Vegas Chapter Board of Directors
for 2006.

 
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