Nebraska Construction Lien Basics: Substitution of Collateral
A construction lien, sometimes referred to as a mechanic’s lien, is a security interest in real property that can be used to secure payment for unpaid services or materials that were used to improve the underlying property. The lien allows the individual or company who records the lien to have the right to seek any unpaid compensation arising from the project through the sale of the property. Specifically, if the person filing the lien is not paid, they are permitted to commence judicial foreclosure proceedings that, if successful, will enable them to force a sale of the underlying property to satisfy the debt.
Though this may seem like an easy way to collect money, construction liens do add complexity to any construction project. For example, the owner of the property will want the lien removed quickly because the mere recording of the lien may be a breach of their construction loan or could give their lender the right to accelerate the loan and immediately demand payment in full. Furthermore, the existence of the lien may hinder the owner’s ability to sell or refinance the property. Conversely, a subcontractor’s filing of a construction lien on a project will oftentimes interrupt a general contractor’s ability to make progress on a project as the owner may be reluctant to make additional payments while the lien is in place.
For these reasons, if a lien is recorded against a project, it can bring the project to a halt. Accordingly, the Nebraska Construction Lien Act provides a mechanism to remove some of the uncertainty and hardship that comes with a construction lien being recorded against the real property. To obtain this relief, any party having an interest in the real estate may release the real estate from the liens which have attached to it by substituting collateral for the real property that is securing the unpaid amounts claimed by the contractor or material supplier.
In order to secure the immediate release of the lien, an individual with an interest in the real estate must deposit a sum of money sufficient to pay the total of the amounts claimed in the lien(s) being released, plus fifteen percent of such total (effectively 115% of the amount being claimed in the lien). The deposit must be made in the office of the clerk of the district court for the county in which the lien is recorded. This deposit can be made in cash, certified check, other bank obligation, or a surety bond issued by a surety company authorized to do business in this state of Nebraska. After the deposit has been made, the person making the deposit must record a certificate from the clerk of the district court confirming the deposit.
Once the deposit is made and the certificate has been properly recorded, the property owner no longer has to worry about a judicial foreclosure and potential subsequent sale of the real property because the deposit with the clerk of the district court will be used to satisfy any successful lien foreclosure claim. Upon release of the real estate from lien obligations, the rights of the person claiming through the lien are transferred from the real estate to the deposit. If a release of the construction lien through the substitution of collateral is a financial possibility, it can actually be better for both parties overall because the owner can avoid property foreclosure and the contractor or material supplier can take solace in the fact that if they prevail through the judicial proceeding, their claim will be paid in full.
This article is meant to provide a general understanding of how to substitute a deposit with the clerk of the court as collateral for a construction lien in Nebraska. There are many nuances to filing liens or securing the release of the lien in Nebraska. For that reason, please do not hesitate to contact one of the members of Koley Jessen’s Construction Industry Practice if you have any questions.