Construction Lien Waivers for Subcontractors
While the top of the contracting chain is concerned with obtaining waivers and limiting lien exposure, parties below are worried about losing more than they bargained for, and being leveraged into unfair situations because they need payment.
Since lien waivers are exchanged at a crucial time in the project – when a payment is to be received – this can result in an imbalance of power between the party with the money and the party that needs it.
That being said, there are many best practices to follow in order to both minimize risk and to promote faster payment. So what do we need to know and what should we look out for?
What to Watch Out For
Many times, owners or general contractors will attempt to include provisions in construction lien waivers that attempt to accomplish more than just waiving a lien right tied to a particular payment. These provisions may result in a loss of other claims or defenses to benefit the top tier party. Here are a few topics and key phrases you should watch out for when dealing with lien waivers:
- Waiver of all rights and claims of any kind and nature – not just of mechanics lien claims/lien rights
- Waiver (or no exceptions for) retainage, change orders, or extra work
- Promise to reimburse higher tier entities in the event of claims from lower tier subcontractors and suppliers
- Personal attestations
- Wrong waiver type for payment
Subcontractor lien waivers can be drafted to waive rights other than lien rights, not just what they seem to waive. This means that a party who does not review a construction lien waiver document can find itself having waived defenses and other claims, causing serious consequences. Be sure to thoroughly review all lien waivers for clauses such as those outlined above, that way you can avoid having claims thrown out and can receive your payment.
Construction Lien Waivers for subcontractors 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, pending change orders or other similar situations. This problem can be avoided by making sure that the waiver includes an exceptions section in which these items are listed. Keep in mind that what a waiver says happened may be more important that what actually happened, at least in terms of lien rights. If a waiver says you got paid $100,000 but you only received 1/2 of that, as far as your lien rights go you just got paid $100,000.
State legislatures and courts are forced to balance the rights of owners against the rights of potential lien claimants, since the whole point of a lien waiver is to protect against lien rights, the courts and statutes must protect them in the event the waivers are inaccurate through no fault of their own.
Proactive Steps to Use Waivers to Promote Fast Payment
Seems like there’s a lot of trouble when dealing with lien waivers, and makes you wonder if they’re even worth it, right? Lien waivers aren’t all bad news, though. In fact, they are a tool that can be used to promote relationships and prompt faster payment. Due to misunderstandings, complications, and poor construction lien waiver management practices, lien waivers are often a cause of slow payment, rather than the solution that they could and should be. Optimizing lien waiver processes could fundamentally change the speed of payments, while still providing protection to each side.
The needs of those who want to get paid quickly and those who keep the project free of lien claims intersect at the construction lien waiver document. If used to the proper advantage, lower-tiered parties can get their money faster while alleviating some of the cash flow problems that occur during construction projects for upper-tiered parties.
How can this be done? Conditional waivers should be sent by every party along with every pay-app or invoice. Since these waivers are conditional upon actual payment, they are not enforceable until such payment occurs, whereupon it immediately waives the right to lien for that amount. By proactively providing lien waivers, a lower tiered party shows that it is willing to waive lien rights when applicable, and removes a step or two from the payment process. This is a way to build relationships, get more business and get paid.
Best Practices for Lower Tiers
As a lower tier, you might feel like you’re at a disadvantage during the entire project, especially when it comes to your payment. We’ve listed out some best practices that we believe will help you mitigate financial risk from lien waivers and use lien waivers as a way to promote faster payment. Take a look:
- Have a set lien waiver policy
- Determine the waiver type: unconditional or conditional, final or progress
- Make sure the waiver type corresponds with the payment – have you been paid?
- Regulate the lien waiver forms acceptable for use
- Create processes for parties to review, approve and more.
- Determine whether the project (and associated lien waiver) is in a state with statutory waiver form requirements and if so, if the waiver matches
- Review the waiver to make sure that only lien rights are being waived
- Have a set policy to get assistance from counsel if the waiver is too confusing or complex
- Create a policy or culture to include conditional lien waivers with every invoice or pay-app
As you can see, construction lien waivers are sometimes treated as complicated documents, but in essence are really just simple to use when you know how to apply them. They have a significant impact on the involved parties rights and risks throughout the chain, making them a valuable asset to include.
Another way to look at it is that construction lien waivers act just like a receipt of payment. If a party gets paid, they won’t need to file a lien for the amount that amount. Following the best practices set forth above helps ensure that all parties gain the benefits from the proper use and management of lien waivers.