12.12.17 Mechanic's Liens

Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

Can the Construction Loan Mortgage have initial priority over mechanic's liens?

The general rule is that "liens attaching at different times have priority in the order of attachment." 52-138(2)

Consequently, a construction loan mortgage will generally have priority over the construction lien (i.e. mechanic's liens) if it is recorded prior to the construction lien. However, there are two general exceptions to this rule:

  • If visible commencement of the improvement has occurred before the recordation of the construction loan mortgage, and no notice of commencement has been filed, then under 52-137(3) the construction lien attaches as of the date of visible commencement.

  • If a construction lien is recorded which a notice of commencement is effective as to the improvement in connection with which the lien arises, the construction lien attaches as of the time the notice is recorded. Therefore, if a construction loan mortgage is recorded after the notice of commencement is recorded, then the construction loan mortgage can lose priority. 52-137(2).

  • Pursuant to 52-137(4) and (5), the term "visible commencement" occurs when:

    • Materials are delivered to the real estate to which the lien attaches preparatory to construction.

    • Excavation on the real estate to which the lien attaches is begun; or

    • Preparation of an existing structure to receive the new construction, or other preparation of the real estate to which the lien attaches, is begun.

    • In all cases not covered by subsection (4), the time visible commencement occurs is to be determined by the circumstances of the case.

Will initial priority as to future disbursements be retained only if certain procedures are followed?

Pursuant to 52-139 (3), notwithstanding knowledge that the construction lien has attached, or the advance exceeds the maximum amount stated in the recorded security agreement and whether or not the advance is made pursuant to a commitment, a subsequent advance made under a security agreement recorded before the construction lien attached has priority over the construction lien if:

  • The subsequent advance is made under a construction security agreement and is made in payment of the price of the agreed improvements;

  • The subsequent advance is made or incurred for the reasonable protection of the security interest in the real estate, such as payment for real property taxes, hazard insurance premiums, or maintenance charges imposed under a condominium declaration or other covenant; or

  • The subsequent advance was applied to the payment of any lien or encumbrance which was prior to the construction lien.

Also, 52-139(4) notes that "to the extent that a subsequent security interest is given to secure funds used to pay a debt secured by a security interest having priority over a construction lien under this section, the subsequent security interest is also prior to the construction lien.

If priority is lost, can it be regained?

There are four basic ways that a construction loan mortgage can regain priority:

  • The construction lienholder fails to record a notice of lien within one hundred twenty (120) days after furnishing of services or materials (152-137);

  • The construction lienholder fails to initiate a judicial proceeding to enforce the lien within the two (2) year period the construction lien remains enforceable (52-140(1) and (3));

  • If a person having an interest in the real estate gives the construction lienholder written demand to institute a judicial proceeding within thirty (30) days, the construction lien lapses unless within thirty (30) days after receipt of the written demand, the construction lienholder institutes judicial proceedings or records an affidavit that the total contract price is not yet due under the contract for which he or she recorded the lien (52-140(2));

  • A construction lienholder can execute a waiver of construction lien rights which waives all construction lien rights (52-144(1),(2),(3) and (4)).

Is there a difference between on-site and off-site work?

The basis for both the surveyor and/or architectural liens arises out of 52-130(1) concerning the definition of "real estate improvement contract," which means:

An agreement to perform services, including labor, or to furnish materials for the purpose of producing a change in the physical condition of land or of a structure including:

Preparation of plans, surveys, or architectural or engineering plans or drawings for any change in the physical condition of land or structures whether or not used incident to producing a change in physical condition of the real estate.

52-131(1) notes that "a person who furnishes services or materials pursuant to a real estate improvement contract has a construction lien ..........". Therefore, a surveyor's or architectural lien arises out of these general provisions similar to general contractors, subcontractors or materialmen.

Is priority the same for all contractors and subcontractors on the same project?

The statutes do not distinguish between contractors and subcontractors with respect to priorities. 52-138 sets forth the priority among construction lien claimants.

Under 52-138(1), all liens attaching at the same time have equal priority and share the amount received upon foreclosure of the liens and available for distribution to construction lien claimants in the same ratio as the ratio of the particular lien bears to the total of all liens attaching at the same time.

Under 52-138(2), liens attaching at different times have priority in the order of attachment. And under 52-138(3), a construction lien claimant who records a notice of commencement after he or she has recorded a lien has only equal priority with claimants who record a lien while notice of commencement is effective.

Time Limits

What are the time periods for recording lien claims by original contractors and subcontractors?

All construction lien claimants have one hundred twenty (120) days after his or her final furnishing of services or materials to record a lien (52-137(1)).

After what period of time can you waive a mechanic's liens if no suit is filed?

The general rule is that a recorded lien remains enforceable for a two (2) year period. Therefore, if the lien claimant has not brought a judicial proceeding to enforce their lien within the two (2) year period, then the lien will be deemed expired.

Removing or Waiving Liens

Is there a statutory procedure for affidavits if completion or notices of completion?

There is no statutory procedure for affidavit of completion or notices of completion.

Can a statutory bond terminate the mechanic's liens as an encumbrance on the title?

Under section 52-142, any person having an interest in real estate may release the real estate from liens which have attached to it by depositing in the office of the clerk of the district court of the county in which the lien is recorded, a sum of money in cash, a certified check, or other bank obligation, or a surety bond issued by a surety company authorized to do business in this (Nebraska) state, in an amount sufficient to pay the total of the amounts claimed in the liens being released plus fifteen percent of such total and recording, as provided in section 52-151, a certificate of the clerk of the district court showing that the deposit has been made.

The clerk of the district court has an obligation to accept the deposit and issue the certificate.

Upon release of the real estate from a lien, the claimant's rights are transferred from the real estate to the deposit or surety bond and the claimant may establish his or her claim under sections 52-125 to 52-159.

Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanic's liens by the general contractor and/or subcontractor?

There is no statutory authority for this.

Can a bona fide purchaser or bona fide lender take free of mechanic's liens later filed for earlier work?

Under section 52-146, a contracting owner may terminate a notice of commencement. The statute sets forth the procedure to terminate a notice of commencement.

Essentially, under the procedure, all claims for which a notice of lien is not recorded by the termination date, may e defeated by a transfer of the real estate.

Title Company Requirements

What are the customary requirements for issuing Loan Policies on Construction Loan Mortgages?

Inspection of property plus affidavit concerning no work done on property;

Recordation of Deed of Trust

Record Notice of Commencement

Indemnities from general contractor and owner

Possible review of financials

If giving mechanic's liens coverage:

Pending disbursement clause

Date down

Review of lien waivers

Note in owner's policy if insuring for amount of anticipated improvement.

Is it customary to add a "pending disbursement" clause or mechanic's liens exception in the Loan Policy insuring a construction loan mortgage?

Yes.

Pending disbursement of the full proceeds of the loan secured by the Mortgage or Deed of Trust described in Schedule "A" hereof, this policy insures only to the extent of the amount actually disbursed. This policy insures against any loss or damage which might result from claims of mechanic's liens arising from non-payment of bills for labor performed or material furnished prior to , except any such liens of notices thereof as may be recited under Schedule B hereof. At the time of each disbursement of proceeds of the loan, an endorsement of this policy must be secured increasing the amount insured hereunder up to the face amount of the policy, subject to the following requirements being met before issuance of such endorsement that: (a) the company is furnished evidence from the insured certifying that the disbursement has been made in good faith and without knowledge of any defect in, or objection to the title, (b) a title search by the Company reveals no liens, objections or any other adverse changes in the title, (c) the contractor and owner furnish this company satisfactory paid bills, lien waiver, or other evidence that all items from which a lien might arise, have been paid or otherwise satisfied, and (d) the Owner and Contractor furnish the Company satisfactory Affidavit and Indemnity Agreement(s) as to the matters referred to in (c) above.

This policy does not insure against mechanic's liens for labor performed and materials furnished subsequent to the last date to which mechanic's lien coverage has been extended, nor does this policy guarantee completion of the improvements in progress, or their compliance with plans and specifications. The Company in no way guarantees the sufficiency of the mortgage proceeds as adequate to complete said improvements.

Notwithstanding any other language contained in the insuring provisions of this policy, the above provisions are the sole provision applicable to the extension of coverage for loss or damage resulting from mechanic's liens or claims of such liens not of record.

Also subject to any bulletins relating to mechanic’s liens.