The following post will briefly explain lien waivers, their common problems, and how technology can solve those issues. For additional information, please see a guest post discussing lien waivers by Scott Wolfe on Christopher Hill’s Construction Law Musings blog.
Lien waivers are essential to construction payment, and proper lien waiver management is crucial to good credit management. Since an encumbrance to the property such as a mechanics lien is something that top of chain parties want to avoid, these parties are generally eager to obtain lien waivers to minimize this exposure. Further, lower-tiered parties want to get paid faster, and see signing lien the lien waivers requested by the top of chain parties as a means to accomplish this end.
Since construction projects routinely involve a large number of parties, many of which may be unknown to the parties ultimately in charge of payment, keeping a project free of lien claims can be quite challenging. In fact, poor visibility on construction projects can make it nearly impossible for those at the top of the contracting chain to appropriately control payment. This, then, prompts the paying parties to require lien waivers all the way down the chain.
What Is a Lien Waiver?
A lien waiver is a document that states that he or she has received (or is expecting) payment and waives any future lien rights to the property (to the extent that he or she has been paid). When this system works as planned, lien waivers function as receipts – a party is paid a certain amount and waives the right to later claim a lien for that particular amount. It is unfortunate, but this is not always how it works, however, and the lien waiver process can be complicated and full of risk for each party.
Simple Guide to Lien Waiver Types
Lien waivers can be broken down into two separate classifications, each of which has two specific sub-types.
Conditional waivers are just that: a waiver of rights conditioned upon the occurrence of something else (generally the actual receipt of payment). This type of waiver is underutilized in the industry, and can be used to solve the frustrating standoff in which the paying party wants a lien waiver before handing over payment, and the receiving party wants payment before handing over the lien waiver. The condition waiver can be signed and given to the paying party, and it becomes effective only when the payment is received.
On the other side of the waiver coin are unconditional waivers. This type of waiver is much more dangerous to subcontractors and suppliers than the conditional type. Unlike a conditional waiver, these unconditional lien waivers are completely effective and enforceable upon execution – whether or not payment has actually occurred. In the realm of unconditional waivers, what matters is what a party “says” they have been paid, not what they have actually been paid.
Given the stakes, and the wild wild west of the lien waiver landscape, it’s no surprise that problems and mismanagement are prevalent in the exchange of lien waivers. What’s more, these troubles can be large, with significant consequences for all of the parties involved.
One often encountered problem is that parties are using lien waiver documents that are either poorly drafted, or just flat-out incorrect. While only 12 states have statutorily mandated forms, in these states the failure to use the proper form can result in the entire lien waiver being invalid. Despite this, many companies are blind to this possibility, and use the same generic waiver form from state-to-state and project-to-project.
Waiving Additional Rights
Construction payment is a process in which leverage or pressure is often exerted depending on a participant’s proximity to the money. Because of this pressure, the need for lower-tiered companies to get paid, and pervasive view that lien waivers are “routine” documents that should be disposed of quickly, companies often sign waivers without a thorough examination of the document itself. This can lead to companies signing away more than they bargained for. The excess waiver can be for additional lien rights, but this can also extend to waiving other potential remedies or rights.
Pressure to Sign “Early”
Related to the above problems, sometimes companies may incur pressure to sign a waiver on the “promise” of payment, rather than related to actual payment. This exchange of a waiver prior to actual payment is what likely should happen – BUT ONLY with conditional waivers. If the waiver is unconditional, the pressure to sign may result in a loss of all rights.
Technology Can Solve These Problems
The exchange of lien waivers is complicated, and choosing the appropriate lien waiver documents themselves can be difficult, too. Luckily, it just so happens that these problems are problems that computers excel at solving. New technology platforms can streamline and optimize lien waiver management. There are many reasons that technology is perfectly positioned to help with the lien waiver exchange process. Technology platforms can determine accurately each instance in which a specific lien waiver form is required by law, and make that form available, which means no more worry whether a lien waiver form will be determined invalid in any proceeding. Further, using a disinterested third-party technology platform for waiver generation means that all interested parties can rest assured knowing that there is no “funny-business”, like additional waiver language, or some other non-required clause muddying-up the waiver. New technological abilities allow the waiver process to be optimized for the benefit of every party to the transaction. This means that lower-tiered parties can get paid faster, and top-of-chain parties can still be protected from the risk of liens on work for which they’ve already paid. Everybody wins, and everybody builds better relationships.
Learn How To Use Technology To Improve Your Lien Waiver Process Through The Link Below: