Everyone in the construction industry encounters lien waiver documents, but too often, these complex and consequential forms are overlooked. Whether you’re a sole proprietor or a large corporation, understanding and managing lien waiver requests is important.
Ask yourself: Does your company have a defined policy for how lien waiver requests are received and handled? Is your staff prepared to analyze the hundreds of thousands of lien waiver form variations in the marketplace? This extensive guide will explain everything you need to know about lien waivers, and walk you through best practices that could save your organization from a very expensive mistake.
What Is A Lien Waiver?
Anyone furnishing materials, labor, or services to a construction project may be entitled to file a mechanics lien or bond claim in the event that they are not paid. Those in charge or at “the top” of a project — such as the property owner, lender, construction manager, or general contractor — are highly motivated to finish the project successfully without any liens or bond claims being filed. In fact, since these claims affect the property title or bonding capacity, they may actually prohibit the job from getting completed successfully.
Keeping a project free and clear of lien and bond claims is actually quite challenging since many construction projects involve a high volume of parties. It’s nearly impossible for those at the top of the contracting chain to know for certain that everyone down the chain is getting paid.
This is why the lien waiver document exists, and is employed thousands of times every day on construction projects across the United States.
To help formally define the term “Lien Waiver,” I’ll turn to Wikipedia, whose entry provides that “a lien waiver is a document from a contractor, subcontractor, materials man, equipment lessor or other party to the construction project (the claimant) stating they have received payment and waive any future lien rights to the property (of the owner).”
In “Should You Sign That Lien Waiver?,” I made reference to Cobb Law Group’s great construction law blog, and specifically an analogy they drew between the lien waiver and a “receipt.” This is perhaps one of the best ways to think high level about lien waiver documents:
A lien waiver is like a receipt for payment you are receiving. A contractor pays you $100k, and you waive $100k in lien rights. It’s as simple as that.
The lien waiver document does present some complexities (as we’ll explore below), but it’s general definition is quite simple. Every time a payment is made on a construction project there, is a payor (the paying party) and a payee (the party receiving payment). The payee will execute a lien waiver acknowledging receipt of the payment, and promising to not file a lien with respect to the same.
The Four Basic Types Of Lien Waivers
This section breaks down lien waivers into four basic categories. While a minority of states will actually distinguish between these four lien waiver types, and the forms in these states will even label each waiver by its type, the majority of states do not regulate lien waivers at all. Accordingly, a lien waiver’s “category” may be unclear, requiring a close review of the waiver text itself.
Nevertheless, regardless of how a lien waiver is labeled, it’s important to understand these categories, and more importantly, which category applies to the lien waiver you’re being asked to sign.
When its time to exchange payment in the construction industry, the paying party wants a lien waiver before handing out money, and the receiving party wants payment before handing out a lien waiver. This standoff sometimes creates more friction than necessary. Conditional lien waivers are commonly used and should satisfy most parties.
The Conditional Waivers
The first two lien waiver types we’ll discuss are the “Conditional Waivers.” These waivers perform exactly as the title suggests: they waive the signor’s lien rights, but the waiver is conditioned upon the occurrence of something else. The something else is almost always receipt of actual payment.
Getting paid on a construction project creates a frustrating catch-22 scenario. The paying party wants a lien waiver before handing over payment, and the receiving party wants payment before handing over the lien waiver. The solution to this stand off is the “conditional” set of waivers.
There are two types of conditional lien waivers:
1. Conditional Waiver for Partial Payment: A partial conditional waiver should be used when you are expecting to receive a progress payment on the project. You may be expecting future payments on the project, but are looking to sign a waiver for a specific progress or partial payment that you are receiving. Because this is a “conditional” waiver, you may not have received the payment. That is okay. A conditional lien waiver is “conditional” on your receipt of the payment and will be invalid if payment is not ultimately received. If you have already received this payment in full, then you will likely want to consider signing an “unconditional” waiver.
2. Conditional Waiver for Final Payment: A final conditional waiver should be used when you are expecting to receive a final payment on the project. After signing this waiver, in other words, you will not be expecting any future payments. Because this is a “conditional” waiver, you may not have received the payment. That is okay. A Conditional lien waiver is “conditional” on your receipt of the payment and will be invalid if payment is not ultimately received. If you have already received payment in full, then you will likely want to consider signing an “unconditional” waiver.
The Unconditional Waivers
These next two categories of lien waivers are referred to as “Unconditional Waivers,” and they are much more dangerous to subcontractors and suppliers than their conditional cousins. Unlike conditional waivers, these unconditional lien waivers are completely effective and enforceable upon execution. There is no waiting for payment.
Unlike conditional waivers, these unconditional waivers are completely effective and enforceable upon execution. There is no waiting for payment.
1. Unconditional Waiver for Partial Payment: This waiver should be used when you have received a progress payment on the project. You may be expecting future payments on the project, but are looking to sign a waiver for a specific progress or partial payment that you are receiving. Because this is a “unconditional” waiver, you must have actually received the payment. If you have not received the payment, if the check hasn’t yet cleared the bank, or if there is some other reason why payment might ultimately fail, this waiver should not be furnished. If this is the case, you will likely want to consider signing a “conditional” waiver.
2. Unconditional Waiver for Final Payment: This waiver should be used when you have received a final payment on the project. After signing this unconditional lien waiver, you will not be expecting any further payments in the future, and are confirming that you have received — in hand — all payments owed to you on the project. Because this is a “unconditional” waiver, you must have actually received the payment. If you have not received the payment, if the check hasn’t yet cleared the bank, or if there is some other reason why payment might ultimately fail, this waiver should not be furnished. If this is the case, you will likely want to consider signing a “conditional” waiver.
See all of zlien‘s Lien Waiver resources on our website.
Want to take all of the hassle out of exchanging waivers on all of your projects? Check out zlien‘s latest product:
The Difference Between Lien Waivers and Lien Cancellations
Most people use “lien waivers” to refer to these waiver instruments. It is not uncommon to encounter other terminology, including lien release, claim waiver, and claim release. This can get confusing when trying to distinguish the waiver from another “waiving” instrument: the lien cancellation.
Lien waivers are sometimes referred to as releases. Lien cancellations are sometimes referred to as releases. Thus, a problem is borne!
A “lien cancellation” is the cancellation of a formally filed lien or bond claim. To qualify for a lien cancellation, a party must be unpaid, must then file a lien, and must then be paid or otherwise convinced to cancel that lien claim.
This is easily distinguished from a lien waiver, which is simply a waiver of rights to file a lien in the event of nonpayment. Companies oftentimes get confused between these instruments.
The Difference Between Lien Waivers and “No Lien Clauses”
Another confusing concept in the mechanics lien and bond claim world are “no lien clauses,” which are contractual agreements before any payment is due and/or before any furnishing , whereby a party agrees to waive any future lien claims. This is distinguished from a lien waiver, which is executed by parties after a payment is due, wherein the party waives the right to file a lien for the work that is being paid for.
Companies oftentimes get confused about “waiver” clauses within their contracts and more formal “lien waivers,” thinking that they are the same or are regulated in a similar way.
No Lien Clauses, unlike lien waivers, are very controversial. In fact, they are only formally allowed in three states, and are expressly outlawed by the legislatures in over 20 states. View this national map of which states do and do not allow no lien clauses to invalidate mechanics lien or bond claim rights.
Some States Have Regulated Lien Waiver Forms, But Most Don’t
Now that you know some lien waiver background information, it’s time to turn to the instrument itself…and this where lien waiver management gets enormously confusing. While a few states create mandatory lien waiver forms, the majority of states do not, which leaves the parties to grapple about what these documents should and should not say.
Only 12 states have statutory requirements for lien waiver forms, which are highlighted on this color-coded map, below:
*Florida does not require that parties use the statutory lien waiver, but it offers the waiver as a safe option, and seems to prohibit parties from requiring a non-statutory form.
If you are furnishing materials, labor or services to one of the 12 “regulated” states, dealing with lien waivers is a little easier. If the time is right to sign a lien waiver, you simply serve up the statutory form and submit it. There is no room for debate about the contents of the lien waiver document because the state legislatures typically render any non-statutory lien waiver forms as completely null and void.
In the 38 other “unregulated” states, however, lien waiver forms are like a legal wild-wild-west.
Those at the top of the contracting chain see these documents — which are exchanged for money, a strong motivator — as a golden opportunity to craft a perfect legal position. Further, since every company has their own priorities and temperaments, the length, complexity, and contents of lien waivers forms run the gamut.
Legal Provisions In Unregulated Forms You Need To Understand, Or Avoid
The trouble with contractual language (such as language within a lien waiver) is that it lacks any guide as to what that language will ultimately mean. The language ultimately used within a contract or lien waiver is bound only by human creativity, and the result is that even the most common “clauses” contain pretty unique wording as you move from form-to-form. When courts are called upon to review a particular contract, therefore, the court can look back to old case law and decisions, but will likely only be persuaded (and not bound) by those decisions because of ambiguous wording.
It is with this cautioning that I now enumerate some legal provisions or issues commonly found within unregulated lien waiver forms, and discuss how they may impact you.
1) Retainage, Change Orders, Extra Work
“Retainage creates a tricky issue” in lien waivers, explains David Eisenberg in his great article on this topic: The Dangers Posed by Lien Waivers. He continues, “Because the lien waiver is supposed to waive lien rights to all work performed up to the effective date…[i]f an owner is withholding retainage, contractors risk waiving their lien rights if they submit unconditional lien waivers.”
The same “tricky issue” is present with a few other token construction contract issues like unapproved or pending change orders and change directives, or extra work.
Subcontractors are typically required to submit their pay requests through a pay application, and that pay application includes certain work items and excludes certain work items. The trouble with many lien waivers is the language frequently waives “everything” up to a certain date, irrespective of what may be excluded by the pay application (i.e. retainage, pending change orders, etc.).
Subcontractors must be very, very careful with this.
California’s statutory lien waiver forms handle this issue fairly well. Each of its waivers contain a section labeled “Exceptions,” where the subcontractor can stash any number of excepted items, and the progress waivers include statutory exception text excluding retainage and unpaid “extra” work. It’s still important that subcontractors keep their head up, notice this exceptions section, and accurately complete it.
2) Waiving Contractual Rights
The lien waiver document was created to assist property developers in managing the risk of potential lien claims. Developers could trade money for waivers, and theoretically, since the developer now held a receipt for payment, he would never be called upon to pay for work twice. The lien waiver document simply waived lien rights.
Over time, however, these forms have gotten very sophisticated, and contractors utilize this to make subcontractors waive a few other things…like contractual rights.
An example of how this could impact a company is found in a recent Texas case involving Zachry Construction. We summarized the problem Zachry encountered in Lien Waivers Cost Zachry Construction Millions:
In Zachry, the contractor wasn’t demanding payment for sums it had mistakenly acknowledged receipt of within a lien waiver. Instead, Zachry was simply defending itself against the liquidated damages claims the Port of Houston asserted. The Port of Houston withheld over $2 million in liquidated damages for contract delays, and Zachry alleged it had defenses to those liquidated damages. But, the court of appeals agreed with the Port of Houston that Zachry had waived all those defenses and claims when it signed those pesky lien waivers.
Think about the seemingly severe injustice here.
Zachry Construction did work and was owed money for it. To receive a payment, they were required to sign lien waivers. The exchange of lien waiver for payment is completely fair, and a sensible and traditional thing for both parties to do. However, the parties also had some things they disputed aside from the exchanged payment (i.e. liquidated damages). The lien waiver document, which really has nothing to do with the dispute, disarmed Zachry completely because it had provisions within it waiving the rights to assert any defenses.
A great discussion about this issue (and example language) can be found in David Fine’s article published at the “On Solid Ground” blog, Should You Sign That Lien Waiver. Just as we do here, Fine warns “[i]n the body of the form, look for language that moves the release beyond the mechanic’s lien realm.”
3) Personal Attestations Creating Personal Liability
Another thing we’ve seen in lien waivers is a requirement that the person signing the waiver “personally attest” to the contents of the waiver. This personal attestation requirement may seem benign at first glance, but in reality, it creates potential personal liability on a construction contract that likely does not have any personal liability otherwise.
Obviously, a subcontractor or an employee at the subcontractor’s office, will want to avoid this risk.
How To Review A Lien Waiver Document
Lien waivers are typically exchanged between parties multiple times on each construction project. Multiply that times the number of construction projects your firm deals with each year, and you could be looking a pretty substantial number of interactions with lien waiver forms.
In a perfect world, perhaps you could pass along every waiver request to an attorney for review. This delay and direct expense, however, is clearly unbearable. So, what do to?
First, you’ll want to keep and stick to an approved set of forms. In “regulated” states, educate your staff in what the waiver document should look like, and empower them to approve conforming documents. In “unregulated” states, work with your attorney to create a default lien waiver form. Whenever your company is asked to sign a lien waiver in an unregulated state, default to your approved form.
Second, you’ll want a specialist at your company to deal with contractor or owner provided forms. Sometimes, a stubborn contractor or owner will refuse acceptance of your waiver form and require you to sign their form (BEWARE!! Their form is likely a legal minefield). If this happens, you’ll want to escalate that request to someone designated to read the waiver form and make a decision about it. This way, your company can rely on one or a few different people with this special lien waiver knowledge to help decide whether to accept or reject such forms.
Third, go to counsel if needed. You can’t go to counsel to review every single lien waiver form, but you can go to counsel to help you in special circumstances. The way your policy deals with lien waivers may be suitable for 99% of circumstances, but when the 1% comes along, escalate it to an attorney to enlist legal help.
Remember, Review of Lien Waivers May Happen at the time of Your Contract. That’s right, many construction contracts actually include the lien waiver form within it as an Exhibit or Appendix. Accordingly, you may need to approve or disapprove the lien wavier language at the time of signing your contract. Keep an eye out for this, as it could be a real downer to discover later that the only way to adequately protect your legal rights is to refuse a lien waiver…and its accompanying payment.
What You Say You Received In A Lien Waiver Matters More Than What You Actually Received
Let’s say you were paid $50,000, but your lien waiver says you were paid $100,000.
There are two possible explanations for this. Perhaps, first, you made a mistake and the waiver amount is simply an accident. Or perhaps, second, the lien waiver amount was requested by the owner and general with the promise to pay you the full amount later.
The trouble with lien waivers is that the law probably doesn’t care about these explanations at all. In most states, the courts will look to the waiver itself, and if it says $100,000, that’s the final authority on the matter. You were legally just paid the $100,000.
Why is this?
In Trust vs. Best Practices: The Dangers Posed by Lien Waivers, attorney David Eisenberg explains this necessary evil nicely:
In order for a lien waiver to be a valid waiver of a contractor’s lien rights, the owner must be able to justifiably rely on the statement. And an owner has every right to rely on the veracity of verified lien waivers. It is only when that reliance is not justifiable that they become unenforceable. For example, if an owner were to require a lien waiver from a prime contractor, receive the lien waiver, and then withhold payment, could it rely on that waiver? Of course not – the owner knows the prime contractor was not paid. However, when a lower-tier subcontractor verifies that it has been paid, an owner may be entitled to rely on that statement, whether payment has been received or not.
State legislatures and courts are constantly balancing the rights of owners against the rights of potential lien claimants, and the whole point of the lien waiver is to protect third parties against unknown liens. If the third party does their job of collecting the lien waivers, then the courts and statutes must protect them in the event the waivers are inaccurate through no fault of their own. In large part, that is exactly what happens.
When you sign a lien wavier, therefore, what the waiver says you received is always more important than what you actually received.
Policing Your Staff’s Lien Waiver Control With Policies and Procedures
It should now be clear that lien waiver documents are complicated and largely unregulated, and that their consequences could be severe. It’s surprising, therefore, how infrequently companies employ formal policies controlling how lien waivers are processed and managed. Too often, companies simply enable their staff to exchange lien waivers for payments willy-nilly, blind to the hidden dangers that may be lurking in the details of a lien waiver form.
Too often, companies simply enable their staff to exchange lien waivers for payments willy-nilly, blind to the hidden dangers that may be lurking in the details of a lien waiver form.
Here are the four things that you must achieve with your lien waiver policy:
- Regulate the Form: Identify the states where statutory forms are used, and provide a place for those forms to be referenced. For all other states, establish an accepted corporate form for your company that can be used when a lien waiver is requested. This enables your company to predict, as a default, what exact lien waiver forms will be used on all projects.
- Create Handling Process: When lien waivers are requested, who is authorized to review them, and who is authorized to approve them? What is the approval process? A road map is required to give every lien waiver request consistent treatment.
- Enable Lien Waiver Form Ejections: Sometimes, your hope of sticking with one form is not going to pan out. Through your policy, enable a way to eject out of using the company approved forms.
- Have a Place To Go For Help: You are likely able to handle this process in house…for the most part. There will be unique situations that require individual legal analysis. Provide the procedure for qualifying and seeking said advice.
Tools To Help You Manage Lien Waivers
In 2009, Stinson, Morrison & Hecker, LLP published a great article for the American Bar Association’s Probate & Property publication about lien waivers titled: What Have We Done To The Lien Waiver? Way Too Much.
What I love about this article is that it conducts a pretty sophisticated survey of the legal treatment afforded to mechanics lien and bond claim waivers across the country. However, it is not a very good reference item for contractors or construction law attorneys if they want to make a practical decision about any particular waiver document. In fact, one of the reasons why I like the article is because it underscores the problem with lien waivers, something intended by the authors: There’s way too much going on!
The lien waiver document was supposed to be simple. It was supposed to be a receipt. A waiver of lien rights exchanged for a payment. Now, however, it’s a hot mess of legal traps and nuances. Some states regulate it and some states don’t, and because the regulations are complicated in themselves, it’s tough to decide which is a worse fate.
If you learn anything from ” The Ultimate Guide to the Lien Waivers,” you must learn this: It is impossible to manage lien waivers without some tool.
Just like you need a tool to manage mechanics liens, preliminary notices, and bond claim compliance, so too do you need a tool to manage the process of exchanging lien waivers. Don’t underestimate this need.
Where To Get Great Forms
I don’t want to brag, but at zlien, we pride ourselves on being the undisputed champion of providing top notch mechanics lien and bond claim resources.
This includes providing free downloadable lien waiver pdf forms for every state.
zlien’s lien waiver forms are all prepared by practicing experienced law attorneys (just like all of its mechanics lien and bond claim resources). The forms are conveniently organized by state, and they include those 12 states with statutory forms, and the 38 unregulated states as well.
State Resources Providing Guidance
Bless their hearts, state legislatures and agencies do try to help contractors and suppliers with this lien waiver problem. To do so, they publish resources on their agency website with some background as to how these lien waivers work, and oftentimes even provide downloadable forms.
There are a few issues you must keep in mind.
First, you can only use these resources and forms for that one state. If there is ever a resource that is jurisdictionally restricted, it is these state resources.
Second, sometimes these resources are oriented to the consumer property owner. For whatever reason, these state agencies are usually building out websites and resources as a consumer protection device, and therefore, the information published on lien waivers is designed to educate the consumer property owner (i.e. residential owner-occupied property owner) about how lien waivers work. The states are presuming that businesses already know.
Here are some state resources:
- California (from Contractors State Licensing Board)
- Georgia (Governor’s Office of Consumer Protection)
- Michigan (Department of Licensing and Regulatory Affairs)
- Nevada (from Contractors State Licensing Board)
- Oregon (from Construction Contractors Board)
- Texas (from Department of Housing and Community Affairs)
- Washington (from Department of Labor and Industries)
Tool To Generate and Manage Your Lien Waivers
Downloading a lien waiver form is a good quick fix, but it is not a solution to organizing and managing all your waivers. zlien‘s Waiver Inbox makes it easy for companies that exchange lien waivers regularly to manage all their lien waivers in one place. This feature of the zlien platform makes lien waivers easy, fast and collaborative for everyone ranging from suppliers and contractors to lenders and property owners. Click here to speak to a zlien expert about how you can integrate Waiver Inbox with your current waiver process.
Everything in One Place
Forward all your waivers – in any format – to zlien and we will convert them to an electronically readable version. Our software reads the waiver and associates the information with projects in your zlien account. You can then sign and return the waiver with a few clicks
No Manual Work
Do you spend too much time printing, filling out, mailing, and archiving waivers? Stop chasing your tail (and your paper trail). Complete your entire waiver process in one online location. No more searching through emails or file cabinets, all your waivers are collected together in an actionable inbox.
Tie Waivers to Projects
Associate waivers with projects in zlien platform to keep all your waivers linked with project, invoice, and contact data from your zlien account. You can see all your documents associated with a project in one place.
Faster Waiver Exchanges
Wish you could get paid or accept a waiver more quickly? Electronically sign, send, and receive waivers for faster transactions in our secure online platform. Electronic exchanges saves time by eliminating the necessity of dealing with attachments, printing and scanning waivers, or waiting for snail mail.
Create custom waiver templates or use zlien‘s standard templates. Waiver Inbox supports notarization and offline signature in addition to online signatures.
Are you nervous when you sign or accept a waiver? Do you worry that the fine print will make you financially liable? zlien‘s waivers protect both parties for a fair transaction.
Conclusion: What Now?
At the start of this guide we asked you to ask yourself these two questions:
- Does your company have a defined policy for how lien waiver requests are received and handled?
- Is your staff prepared to analyze the hundreds of thousands of lien waiver form variations in the marketplace?
The lien waiver document is too often overlooked and mistaken for a light “form.” In fact, however, the document carries significant legal consequence, and the unsophisticated approach taken to the document by many subcontractors makes it a perfect opportunity for owners and general contractors to take advantage.
Companies must understand the lien waiver’s legal significance and utilize tools to manage these documents. zlien, the leading mechanics lien and bond claim compliance platform in the nation, offers a comprehensive lien waiver management solution.
Talk to Us
Managing the exchange of lien waivers can be a headache for just about everyone on a construction project. However, there are thousands of folks in the construction business that use zlien to help with their waivers.
Get in touch with us the next time you have some free time. We might be able to help you, too.