This post is part of zlien’s Best Practices series, which provides tips for handling documents that are important to collecting and giving payment in the construction industry. These tips and best practices will help companies position themselves for financial protection and fair payment exchanges.
Lien waivers may be some of the most misunderstood documents in the construction industry.
Despite, or perhaps because of, their ubiquitous nature, lien waivers are seldom examined as much as they need to be. But the fact that waivers are exchanged on nearly every project doesn’t mean that they can be overlooked. Lien waivers significantly impact lien rights, and unless you work in one of the 12 states that statutorily regulate lien waivers, the content and structure of a waiver is almost limitless.
It’s common to find terms and provisions that seem confusing (or unfair). The freedom of contract allowed in non-regulated states provides ample opportunity for the parties requesting the waiver (i.e the parties that give payment) to insert terms that will protect themselves at the expense of the parties receiving payment.
That is not to say that the top-of-chain parties are immune from lien waiver risk. Lack of project visibility can lead to not obtaining lien waivers from all the necessary parties, which may result in double payment. Misplaced faith in waivers that do not comply with applicable laws exposes parties to similar risks. For documents that are exchanged multiple times on nearly every project, lien waivers are tricky, and proper management of lien waivers is a crucial part of managing or mitigating financial risk – both for parties at the top and bottom of the contracting chain. This article presents best practices to follow in order to properly use lien waivers, minimize financial risk, and engage in fair payment practices.
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Lien Waivers: The Owner’s and GC’s View
Lien waivers present interesting problems for parties at the top of the contracting chain.
A top tier party’s primary lien waiver objective is usually to obtain waivers from the parties below (subcontractors and suppliers), and to make sure those lien waivers are valid and correspond correctly with the payments that were given. In order to accomplish this, and remain protected to the maximum possible extent, GCs and owners should follow several best practices.
Lien Notices Are Your Friend – Use Them
While it may seem odd to begin a lien waiver best practices post by talking about notices, the fact of the matter is that they are related, and the proper use of notices can provide an enormous benefit to top tier parties.
One of the most pressing issues for parties at the top of the contracting chain, with respect to lien waivers, is not knowing every party on the project form which lien waivers should be obtained to fully protect against lien-based financial risk. Construction projects can be large, complex, convoluted endeavors, and some participants on the project can be unknown or “hidden” from the parties at the top of the contracting chain. Preliminary notices were designed to correct this deficiency. A smart GC (or other top tier party) actually uses the preliminary notices for this purpose – and doesn’t just file the received notices away without real review.
Preliminary notices provide a perfect template for creating a birds eye view of the project, and completing the knowledge gaps regarding the parties on the job at a far remove from the GC. By using received notices to create a project-tree of all project participants, that project-tree can be used as a custom-made checklist of parties from whom lien waivers should be obtained.
Further, some states provide for specific information request notices to be sent by top tier parties to their subs in order to be provided with the identity of other project participants. If the project is located in a state in which these notices can be used, its a best practice to make use of this ability to gain information about the parties on the project. The more parties a GC knows are on the project, the more comprehensive the chart of parties from whom to obtain lien waivers will be.
Use Sufficient Waiver Forms (and Be Fair)
While many states exists in a “wild wild west” of waiver regulation, in that basically no regulation or oversight exists at all, there are 12 states in which a statutorily mandated form must be used. In those 12 states, failure to use the form required by law can result in the invalidity of the lien waiver. This can put top tier parties in significant jeopardy of double payment, if payment disputes arise. Since the specific point of a lien waiver is to protect against the potential of valid liens being filed on the project for work that was already paid for, it’s extremely important to make sure that the forms being used actually accomplish that task. So, if the project is in California, Nevada, Utah, Arizona, Texas, Massachusetts, Mississippi, Georgia, Florida, Missouri, Wyoming, or Michigan – it is a best practice to make sure the proper statutory form is used.
Further, in the rest of the states, just because the content of lien waiver forms is not regulated by statute, it is generally a best practice to be fair in the content and requesting of lien waivers. Just because a lien waiver can be used as a vehicle for exerting leverage over the parties below, that doesn’t mean it should, or should be used in any manner other than what it was intended for – a waiver of specific lien rights tied to a particular payment amount. Along these same lines, it a best practice to request appropriate waivers. Are you making a payment? Request a waiver. But, only request unconditional waivers when payment has been made, if payment is going to be made, request a conditional waiver. This bit of thoughtfulness will go a long way to building trust and a respectful relationship with your subs, which can result in smoother projects, and more business down the road.
Tie Waivers to Particular Payments
Lien waivers shouldn’t be treated as a grab bag, or something to use without a set schedule or plan, and only associated will-nilly with payments made down the chain. A successfully orchestrated lien waiver policy, and now that results in the maximum amount of protection from potential financial risk, is a structured and ordered policy. Each payment made should be associated with a lien waiver all the way down the chain. This is one area in which a well-formed project-tree and good visibility of project participants is beneficial. If all project participants are known, each particular payment made can be associated with lien waivers for all parties to be paid from that disbursement. If waivers are specifically tied to the proper payments, are fair waivers specifically formulated to waive only the amounts actually associated with the payment to which they are attached, and are distributed and obtained from all the parties down the chain associated with the payment, a top tier party can basically eliminate the risk of valid liens being filed against the project. And that is something to strive for.
Lien Waivers: The View From Below
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 – the exchange 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. First, however, what do lower tiered parties need to look out for?
What to Watch Out For
Many times, owners or general contractors will (or will attempt to) include provisions in lien waivers that attempt to accomplish more than just waiving a lien right tied to a particular payment. This type of provision may also result in a loss of other claims or defenses, to the benefit of the top tier party. Here’s a few topics and language you should watch out for of 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, Extra Work
- Promise to indemnify higher tier entities in the event of claims from lower tier subcontractors and suppliers
- Personal Attestations
- Wrong waiver type for payment
Lien waivers, especially in any of the 38 states that don’t specifically set forth their form by statute, can be drafted to waive rights other than lien rights – not just the lien rights they purport to waive. This means that a party who does not critically review a lien waiver document can find itself having waived defenses and other claims. This can have serious consequences. A best practice, then, is to review all lien waivers thoroughly, and examine them for clauses such as those outlined above.
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. 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
The above section dealt with potential problems with lien waivers, and extended language attached to them. Lien waivers aren’t all bad news for lower tiered parties, however. In fact, they are a tool that can be used to promote relationships, and prompt faster payment.
Due to misunderstandings, complications, and poor 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 the lower tiered parties (getting paid quickly), and the needs of the upper-tiered parties (keeping the project free of lien claims and avoiding double payment) intersect at the lien waiver document. By realizing this, and using to their advantage, intelligent lower tiered parties can get themselves paid more quickly, and alleviate some of the cash flow problems that seem universal in construction.
How can this be done? Conditional waivers (conditioned upon the actual payment) should be sent by every party along with every pay-app or invoice. Since the waiver is conditioned upon actual payment it is 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 faster.
Best Practices for Lower Tiers
While the above was, at least hopefully, interesting this article promised best practices. The following is a list of best practices, and steps to take, for lower tiered parties to both mitigate financial risk from lien waivers, and use lien waivers to the advantage of both sides of the equation and promote faster payment.
- 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 re: review, approval, etc. and which parties have this ability
- 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 needed, or the waiver is confusing or complex
- Create a policy or culture to include conditional lien waivers with every invoice or pay-app
Lien waivers are sometimes treated as complicated documents, but while they do have significant impact on parties rights and risks, throughout the contracting chain, they should be, and are in essence, simple documents. If parties are fair, lien waivers act just like a receipt of payment – I got paid, so I won’t file a lien for the amount I got paid. Simple and fair. Following the best practices set forth above helps ensure that all parties gain the benefits that can be derived from the proper use and management of lien waivers.