Should You Sign That Lien Waiver?

Reviewing my Google Reader feed over the weekend, I was directed to a Daily Journal of Commerce article in Oregon of interest written by the folks who publish the Ahead of Schedule blog.  The article doesn’t address mechanics lien or lien waiver issues head-on, but incorporates a discussion of lien waivers into its bigger picture take on the “Evolving Concept of ‘Fairness’ in a Construction Contract.”

I love the title of this article because it subtly hints at how “fairness” is an evolving concept, and this is just one of the reasons the practice of law is so tough. What is and is not fair can be an evasive question.

For the purposes of this blog post, however, let’s review how this all relates to lien waivers.  Lien Waivers are a very popular topic for those in the construction industry, because this particular legal document is encountered thousands of times throughout someone’s construction career.

A general definition is always nice, and who else to turn to than Wikipedia:

In the mechanics lien process, 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 the DJC article inspiring this post, the author asks whether contractors or subcontractors should sign a lien waiver. While the article does a good job by bringing up the topic, it does little to answer the question, instead providing this unhelpful analysis:

The aforementioned risk-shifting clauses must be assessed on a project-by-project basis. Rigid company policies are rarely the correct path. If only one contractor in town can perform the specialized work at issue and it demands a waiver of consequential damages, the owner may be forced to accept it.

So, should a contractor, subcontractor or supplier sign a lien waiver?  The answer is YES, but only when they are supposed to sign the document, and only when it accurately reflects the situation. These two details, of course, is what makes the concept difficult.

When You Are Supposed to Sign A Lien Wiaver

DO NOT sign a lien waiver at the start of a construction contract. Sometimes, general contractors, property owners and other parties will try to bury a “waiver of all lien rights” clause within the construction contract, or ask you to sign a separate lien waiver document right at the start of construction, before you have done any work. As we’ve addressed in the past on this blog, this is sometimes against a state’s public policy and therefore invalid. However, the act is valid and enforceable in other states (so be careful).

[pullquote style="right" quote="dark"]A lien waiver is like a receipt for payment you are recieving.  A contractor pays you $100k, and you waive $100k of lien rights. It’s as simple as that.[/pullquote] I found the best explanation of a lien waiver on the Georgia construction law blog published by Cobb Law Group, where they state that a lien waiver is “like a reciept.”  This is exactly right.  A lien waiver is like a receipt for payment you are recieving.  A contractor pays you $100k, and you waive $100k of lien rights. It’s as simple as that.

Remember, however, the form you sign must be an accurate receipt, and that brings me to the next point.

Lien Waiver Must Accurately Reflect Payments Received

[pullquote style="left" quote="dark"] Lien waivers are more wordy than a receipt, and therefore, requires you to spend some time reading it and comprehending it.[/pullquote] You wouldn’t pay $2,500 for car repairs that only cost $1,500. If the dealership gave you a receipt to this effect, you’d notice the problem, point it out and fix it.  The only difference between this and the situation with lien waivers is that lien waivers are typically more wordy than a receipt, and therefore, requires you to spend some time reading it and comprehending it.

Some states make understanding lien waivers easier by prescribing certain forms within their statute. The state of California, for example, does this.  There are 4 forms built right into the lien law statutes, and these 4 forms must be used or the lien waiver is not valid.  The California Board of Contractors even posts the forms on their website for download, and provides detailed explanation to consumers and contractors.

In states like these, your job of reviewing the form is a bit easier. Rather than having to understand the details of each form, you need only identify which form is being used.

Generally speaking, there are 4 different types of lien waiver forms to be looking for.  Again, I turn to Wikipedia to identify:

1. Conditional waiver on progress payment – The safest waiver for claimants, this waiver generally specifies that if they have indeed been paid to date (and that includes no return or stopped payment checks) the waiver is an effective proof against any lien claim on the property.
2. Unconditional waiver on progress payment – This waiver releases all claimant rights through a specific date unconditionally (and that includes no return or stopped payment checks).
3. Conditional waiver on final payment – This waiver releases all claimant rights to file a mechanics lien if they have indeed been paid to date (and that includes no return or stopped payment checks).
4. Unconditional final waiver final payment – The safest waiver for owners, this waiver generally releases all rights of the claimant to place a mechanics lien on the owners property unconditionally. It is immaterial if the payment check has been returned or stopped payment. Claimants should issue this type of release only when they are positive their work is done and the payment has cleared their bank. Owners should demand this release when they are paid in full. Some states allow an Unconditional Release upon final payment that is used to induce the final payment. It is an inherent vagary in the lien release law.

When you’re reviewing a lien waiver, keep these different types in mind, and figure out which one you’re working with. Then, compare it to the facts of your situation.

Is the dollar amount identified right?  Is the date of services correct?  Is the scope of work correct?  Are you waiving rights on any amounts not yet paid?

Most of the time, doing the right thing with lien waivers isn’t rocket science — it just requires paying attention. Spend a few moments with your lien waiver, and you’ll be fine.