Mastering Construction Liens: Pursuing Payment (Part 2)
Let’s assume you have successfully filed a construction lien. Let’s also assume your lien was timely recorded, notice was provided (if necessary), you have compiled all relevant documentation, and now you are ready to pursue payment for the amount secured by the lien. Unfortunately, recording a lien does not ensure that you will receive payment. While there are multiple factors to consider when deciding whether to take further action after recording a lien, the following three strategies often provide the best path to payment.
Enforceability Reminders
Before diving into payment strategies, it is necessary to remember the enforceability timeline for the lien. After a lien has been properly recorded, it is only enforceable in Nebraska for two years following its recording. If a lawsuit is not initiated to foreclose the lien within two years of the date it is recorded, the lien expires as a matter of law and becomes worthless. Therefore, if you intend to enforce your lien, you must file suit within two years.
1. Wait and See
The wait-and-see approach is exactly what it sounds like. When applying this approach, the lienholder will wait and see what the property owner’s plans are for the property that the lien is recorded against. This approach may be fruitful if the property owner has plans to sell the property, refinance, or convert from a construction loan to permanent financing within the lien’s two-year enforceability period. If any of these events occur during the lien’s enforceability, the lien will need to be paid at or before closing. No other actions or expenditures are required of the lienholder when using this approach, but the lienholder should be aware of the enforceability timeline, discussed above, to ensure they take further action prior to the expiration of the lien.
2. Demand Letter
By sending a demand letter, the lienholder is putting a small amount of direct pressure on the opposing party for a small cost. Even though demand letters are not costly to prepare, they can be effective. When multiple parties are involved in the real estate improvement contract, a demand letter sent to all parties may incentivize the non-compliant parties to pay the outstanding amount owed at the risk of facing a lien foreclosure lawsuit and additional pressure from the other parties involved. A demand letter is also often recognized as a starting point to forthcoming litigation.
3. Lawsuit
The third and final method to seek payment of the amounts secured by the lien is to file a lawsuit to foreclose on the lien. The foreclosure process ultimately seeks a judicial sale of the property subject to the lien. Once the property is sold, the proceeds of the sale will be used to satisfy the lien.
A judicial sale is the leverage that allows all three approaches discussed in this article to be effective, but a lawsuit is the only way to force the sale. Unfortunately, it is also the most expensive method because lawsuits do not always move through the court systems quickly and significant legal fees and costs are required to successfully navigate the process.
Lien Payment Concerns
While liens can be an effective tool to secure payment, the timeline for receiving payment on a lien can be far from ideal. As mentioned previously, lawsuits are often slow-moving and expensive. Even though a lien is enforceable for just two years, litigation related to such lien may last much longer.
Furthermore, even a successful foreclosure and judicial sale may not translate to obtaining payment for the entire amount of the lien. A lien is an encumbrance on the property, and encumbrances are generally paid out in order of when they were attached to the property. As a result, the first encumbrance recorded is the first encumbrance to be paid (often a mortgage). The proceeds that remain are then used to pay the remaining encumbrances in order of priority (i.e. first in time, first to get paid). Therefore, if your lien is one of the last encumbrances on the property, there may not be enough funds from the sale to satisfy the lien.
Because a lien is only enforceable within two years of being recorded, the property owner may also simply choose to wait until the lien is unenforceable before taking any action on the property. Consequently, a lien is not a guaranteed right to be paid but is better viewed as an insurance policy that provides a potential path to payment.
Liens can be beneficial, though, especially in new construction. If the lien is recorded before the owner has converted financing from construction to permanent, the lienholder puts himself in a favorable position to eventually be paid out on the lien.
Conclusion
In summary, after recording a lien there are multiple options for using the lien to obtain payment. To determine which method should be used, it is important to weigh the financial implications of each choice along with the property owner’s situation and the amount in controversy.
A wait-and-see approach requires no action or payment from the lienholder, but will only be useful if the property owner intends to sell the property, refinance, or convert financing during the lien’s two-year enforceability timeline. If the property owner has no such plans, applying a wait-and-see approach would essentially be doing nothing but letting the lien expire and forfeiting any potential payout rights.
A demand letter is a cost-effective way to show the owner that the lienholder has intentions of pursuing a judicial sale of the property. A demand letter can be a useful tool to open a dialogue with the property owner and explore an amicable resolution without incurring the expenses associated with commencing litigation.
A lawsuit is the most aggressive approach, but it is also the most expensive. Lawsuits typically move slowly through the court system and cost money at each step of the way. While a lawsuit to foreclose a properly recorded lien will likely lead to payment of the lienholder, it is important to consider whether the payout will be worth the costs it requires to get to that point. This is especially critical if the lien you hold is not the first in time or in right.
If you have any questions regarding lien payment strategies, please do not hesitate to contact a member of Koley Jessen’s Construction Industry Practice group. Additionally, if you haven't already, be sure to check out Part 1 of our series, 'Mastering Construction Liens: Strategies for Getting Paid,' where we discuss the initial steps of filing a construction lien and ensuring its enforceability. Click here to read Part 1.
This content is made available for educational purposes only and to give you general information and a general understanding of the law, not to provide specific legal advice. By using this content, you understand there is no attorney-client relationship between you and the publisher. The content should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.