How to Exchange Lien Waivers A Guide for Everybody in Construction
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Lien Waivers: Introduction
• everybody in construction industry encounters lien waivers, but they are often overlooked or treated as an inconsequential part of doing business.
• company should have defined policy of how lien waivers are received/handled
• special attention and care should be given to which specific type of lien waiver is appropriate for the situation
• some states have specific statutory waiver forms that must be used - your company should know which states these are, and know the form required
Lien Waivers: What Are They?
• parties performing work or delivering materials to a construction project generally have the ability to file a mechanics lien (or bond claim) in the event that they are not paid for their work
• parties at the top of the payment chain (owners and GCs) have a big incentive to ensure that such claims are not filed.
• liens encumber the property and cause problems with financing and bonding, as well as the property’s title - a filed lien can make it so the project cannot be successfully completed
• in some circumstances, liens can require the top-of-chain parties to pay twice for the same work - nobody wants to do that.
Lien Waivers: What Are They?
• many construction projects involve a large number of parties, many of which may be unknown to the parties close to the top of the payment chain.
• this can make it difficult to keep a project clear of lien claims (and the associated difficulties) - the owner may not know whether some supplier to a subcontractor is getting paid or not.
• lien waivers exist, at least in part, for this reason.
Lien Waivers: What Are They?
• definition
• a lien waiver is a document from a contractor, subcontractor, materialman, equipment lessor or other party to the construction project (a potential lien claimant) stating they waive future lien rights against the property improved to the extent set forth in the waiver.
Lien Waivers: What Are They?
• definition, cont.
• generally, it may be easier to think of lien waivers as a type of receipt:
• if a party gets paid $100k, that party waives $100k in lien rights. It’s as simple as that. everybody is protected, and the payment process is fair.
Lien Waivers: What Are They?
• while the general definition, and function, of lien waivers really is that simple, there are some complexities that must be considered
Lien Waivers: Types
• 4 basic types of lien waivers
• minority of states actually make these distinctions by statute
• in states that do make the distinction, the specific waiver form will identify the waiver by type
• majority of states do not regulate lien waivers - or provide statutory formal guidance. this means that in many cases a lien waiver’s “category” can be unclear and must be determined by examination of the text of the document
Lien Waivers: Types
• whether or not the state in which your project is located regulates the form of lien waivers by type, it is important to understand the different categories, and more importantly, to which category a lien waiver you are providing / being asked to sign belongs
Lien Waivers: Types
• conditional waivers
• when it’s time to exchange payment in construction, there can be some tension b/c there are perceived liabilities on both sides
• the paying party wants a lien waiver before handing over the money, and the receiving party wants payment before giving a lien waiver
• conditional waivers can be used in this instance and should be satisfactory
Lien Waivers: Types
• conditional waivers, cont.
• these waivers work to waive the signor’s lien rights conditioned upon the occurrence of some other event (generally actual receipt of payment)
• the lien waiver therefore, can be given to the party that will pay prior to payment (which provides the benefit of protecting against double payment), but is ineffective until payment is received (which provides the benefit of not waiving lien rights prior to payment) - this type of waiver is immediately effective when the payment is made
Lien Waivers: Types
• conditional waivers, cont.
• two sub-types of conditional waivers
• conditional waiver for partial payment (progress payment)
• conditional waiver for final payment
Lien Waivers: Types
• conditional waivers, cont.
• conditional waiver for partial/progress payment
• used by parties making and receiving progress payments. future payments on the project may be expected, but the parties may still wish to exchange a waiver for a specific progress or partial payment received. in this case it is ok if the waiving party has not yet received the payment. since the waiver is “conditional” on receipt of the payment, it is not valid if payment is not ultimately received.
Lien Waivers: Types
• conditional waivers, cont.
• conditional waiver for final payment
• used by parties making and receiving final payment. after singing and exchanging this waiver, no future payments on the project are expected. it is ok if the waiving party has not yet received the final payment. since the waiver is “conditional” on receipt of the payment, it will be invalid if payment is not ultimately received.
Lien Waivers: Types
• unconditional waivers
• have the potential for significant and undesired consequences to lower-chain parties.
• these waivers are completely and entirely effective and enforceable upon signing - it doesn’t matter if the payment has been received, or is ever received
Lien Waivers: Types
• unconditional waivers, cont.
• two sub-types of unconditional waiver (mirrors conditional)
• conditional waiver for partial payment (progress payment)
• conditional waiver for final payment
Lien Waivers: Types
• unconditional waivers, cont.
• unconditional waiver for partial/progress payment
• this waiver should only be used when a progress payment has been actually made & received. future payments may be expected on the project, but a specific progress or partial payment has been made & received and the rights to file a lien for that payment may be waived.
Lien Waivers: Types
• unconditional waivers, cont.
• unconditional waiver for final payment
• this waiver should only be used when final payment for the project has been made & received. after exchange of this waiver, no further payments in the future are expected to be made & received; actual receipt of all payments should have occurred, if there is any reason the payment might fail (i.e. check hasn’t cleared, etc. this waiver shouldn’t be used).
Lien Waivers: Differences Between Waivers and Cancellations
• there can be some confusion regarding terminology surrounding these documents, especially since waivers are unregulated in many states.
• lien waiver: waives the right to file a lien
• lien release/cancellation: releases or cancels a lien that has already been filed
Lien Waivers: Differences Between Waivers and “No Lien Clause”
• there can be some confusion regarding terminology surrounding these documents, especially since waivers are unregulated in many states.
• lien waiver: waives the right to file a lien (after payment is due for work already done)
• “no lien clause”: contractual agreement before any payment is due and/or before any furnishing, through which a party agrees to waive any future lien claims
“No Lien Clause” aside
• “no lien” clauses are looked upon with disfavor, are specifically not allowed in many states, and only specifically allowed in 2.
Lien Waivers: Regulated forms
• 12 states have statutory requirements for lien waiver forms - in these states, if a lien waiver does not follow the appropriate statutory form, it can be rendered null and void - this means that top-tier parties using the wrong forms in these states may be required to pay double (even when they thought a waiver was obtained)
• no room for debate about content of forms
• california, nevada, utah, arizona, wyoming, texas, missouri, mississippi, florida, georgia, michigan, and massachusetts
Lien Waivers: Un-regulated forms
• the other 38 states do not have statutory requirements for lien waiver forms - and allow the forms to appear in basically whatever form the parties want.
• this creates confusion
• forms may look similar but there is no standard, they may actually be drastically different
• lien waivers can be used as a document to craft a legal position
Lien Waivers: Un-regulated forms
• legal provisions to consider, understand, and avoid
• lien waivers are not the place to supplement the contract or jockey for legal position - they should work as created to be like a receipt and further a fair payment process
• retainage, change orders, other work
• waive contractual rights
• personal attestation
Lien Waivers: Un-regulated forms
• retainage, change orders, other work
• waivers generally waive the ability to lien for work performed through a certain date, but this can be a problem if there are retainage amounts outstanding, or pending change orders, etc.
• can be avoided by including an exceptions section in which these are listed
Lien Waivers: Un-regulated forms
• waive contractual rights
• waivers can be used to waive other rights - not just the lien they purport to waive, i.e. defenses and other claims
• in one TX case, a party was held to have waived rights to defenses against liquidated damages, in a lien waiver and it ended up costing them millions.
• parties should look for any language that moves the waiver beyond the mechanics lien arena
Lien Waivers: Un-regulated forms
• personal attestations
• seems like no big deal to require the signor of the lien waiver to personally attest to the contents of the document he/she is signing. however, this can potentially create personal liability where there once was none.
Lien Waivers: Important Company Policies
• it is important to be careful regarding the contents of the lien waiver form
• because policy requires that parties must be able to rely on lien waivers, the amounts stated on the face of the documents are more important that the amounts actually received
Lien Waivers: Important Company Policies
• create a thorough lien waiver policy
• regulate the forms you use
• create processes re: disbursement, review, approval, etc. - which parties have this ability
• have a tool to manage waivers / waiver forms
• insist on fair waiver forms - they are to be receipt, not a leveraging tool
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