This blog comes from a webinar that was presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer serving clients in Florida. The discussion will focus on three release tricks that you need to know about so that someone doesn’t pull the wool over your eyes as you are exchanging a release for a check.
We will go over the following:
- Trick #1: Using the wrong form of release,
- Trick #2: Not using a conditional release,
- Trick #3: Using the wrong through date on the release,
Trick #1: Using the Wrong Form of Release
We will go through a series of releases so that you can see what they look like and you aware of the issues that each one presents.
The first thing you have to be aware of is where you are in the pecking order of a construction project. If you are the general contractor, you will be looking for different things than if you are a subcontractor.
Decide whether to give a narrow or broad release
Generally speaking, you want to give a narrow release when you get a check. A narrow release means that you are giving up the fewest number of rights possible so that you preserve the greatest number of rights as possible. Now the converse is true if you are giving a check to somebody and you want them to release anything and everything under the sun.
A look at a basic statutory release
Now let us have a look at a basic form of release that is found in Florida statute Chapter 713. This basic form is a progress payment release. Below we will talk about some of the component parts:
There is a blank for the amount of money that you are getting. Next is the insert date blank where you will put in the release date that you are giving up your rights through. Those are the basic components of a progress payment statutory lien release. And all it releases are your lien rights.
Notice that the very last sentence says that this waiver and release does not cover any retention. So all the retention that you are holding over the course of the job or labor services or materials furnished are still reserved after the date specified. That is why the through date is so important.
What form of partial and final waiver should I use?
Now we will look at a statutory final release. It only has one real section which is the amount of money.
Notice that it does not have a through date and it also does not have that last sentence with the reservation for retainage and work or materials after the date. It has no through date because this release is good through the date you sign it. So, if you sign the release today, it is effective as of today.
So, all of your construction lien rights are extinguished from today back. If you show up on the job tomorrow, you will have new lien rights for tomorrow. But at least as far as today, you will have given them up. If it is dated as a week ago then that is when the release rights are extinguished through.
Now, this next release is different from the last one. It is not found in the statute. This is what would be considered a custom form of release and the first thing you will notice is that it has a lot more words.
If you are picking up a check, giving a release to get that check, and the release reads like this, you need to read it carefully because you are giving up a lot other things in addition to lien rights. Let us have a look at some of the component parts:
This notice is giving up things like any and all claims, change orders, works, materials, delays, fees, costs, losses, expenses, damages or sums for the labor. Notice that the statutory release form only releases your lien rights, but this form releases anything and everything that you may have as a possible claim, as in the list above. It is all effective prior to and including through date.
If you think that the job is running for a longer time and that you are going to make a claim at the end of the job for your extended general conditions and an overhead, but you are signing releases like this every month, just know that every month when you sign a release like this, you are giving up those rights. You will not be able to assert them later.
So, it is very important when you are signing a broad release like this, that you be very careful. If you are a general contractor, this is the form of release that you should be getting from your subcontractor. Because you want to know that every time you give them a check effective through the through date, all their rights go away.
If you are a subcontractor, you are getting a check and have to give a release like this which is not uncommon. You just need to understand what the rights are that you are giving away.
If you agree to a form of release in your contract, you are bound to it
If you agree to a form of release in your contract, then that is the form that you are bound to accept during the course of the project. So, if you are a sub contractor on a project and you sign a contract, that contract is going to say two things about the release:
- It will say that you agree to use the release form that is attached to Exhibit X on the contract. Because if you agree in your contract, that every month you are going to give a partial release on that form, that is the form you have to use.
- Words like “you agree to use the form of release that is deemed acceptable by the general contractor/owner” will be used in the contract. So, if it attaches a form of release, you need to review it.
If they make reference to the fact that you are going to agree to use whatever form they say you are going to use, then you need to identify that as you negotiate your contract and negotiate the form of release that will be part of your contract.
Just like you are negotiating other components of the contract, you want to make sure that you identify the releases in the contract and change them so that you are not bound to use them later.
Trick #2: Not Using a Conditional Release
This trick is what you should keep in mind when you are using a conditional release form when you are giving a release and you don’t have a check yet. A conditional release is a release on any form, but it has a condition. That express condition is that it is not effective until you receive the payment that is mentioned on the document.
The language you can use is:
Notwithstanding anything to the contract, this waiver and release is conditioned upon and not effective until the undersigned receives paid funds of $___.
It has a blank and you can put in $50,000 or $100,000. Whatever amount on the check or money that you are expecting to receive, you want to make this release expressly contingent on actually getting the money.
Let us say you are an electrical supply house, and you provided an unconditional release. You give it to an electrician who gives it to a contractor who gives it to the owner. But you never got the money, you just got an email copy, or a fax copy of a check that you thought was coming but never arrived.
That release is now effective at least to the parties up the chain because they have no reason to know that you did not get your money. So, it is very important that if you are giving a release without actually getting a check, that you make it conditional.
1. Watch out for releases titled “conditional” but are actually not
Watch out for releases that are titled “conditional” but are not. Sometimes there may be releases that say conditional partial release. But when you read the document, there are no conditions in it. So, it needs to specifically say what the condition is, which is you actually receiving the money.
2. Indicate the amount of money to satisfy the condition
You must indicate the amount of money that you are actually expecting to receive. Because if you put in $10 as the condition and then receive $10, then the condition is satisfied. So, you need to specify that you are expecting a $25,000 check, and the condition of this release is when you receive paid funds of $25,000.
3. As a general contractor, watch out for conditional releases
Finally, with respect to conditional releases, as a general contractor, you need to be careful about receiving and paying against conditional releases from sub-subcontractors or suppliers to your sub-contractors. So if you are a general contractor and you need to pay the electrician, if the electrician gives you a conditional release and you give the electrician the money, that release is now good because you have satisfied the condition on the face of the release.
If there was ever an issue, you would say that the release is conditioned on receiving $25,000, here is the cancelled check for that money, the condition is satisfied, and the release is good. But if the electrician has to give you a release from their supplier and that supplier’s release is a conditional release, you don’t have a direct ability to control that condition.
So, you write a check to the electrician, he gives you a conditional release from him and a conditional release from the supplier, but he never pays the supplier, now the supplier puts a construction lien on the job and makes a claim against your payment bond. If you say that you have the release and they say that it was conditional and they never got the money, you are stuck.
What do you as a general contractor when this happens? You have two options:
- The first option is to require that they fund the supplier or otherwise give you an unconditional release from the supplier.
- The second option is to issue a joint check. So, if you are presented with a conditional release from a supplier that is not in direct contract with you, then you can say to the electrician that he is owed $25,000 and that you are going to issue a joint check. You can give $20,000 to the electrician and $5,000 to the supplier, therefore you know that the condition on the supplier’s release is satisfied.
Step #3: Using the Wrong Through Date”
Using the wrong through date is a mistake that happens quite often. So then, what through date should you use and what if the through date and payment date don’t match?
The through date is the effective date of your release. So, it can be signed today but have a through date of two months ago. So I can sign the document today and say that the effective through date is whenever I want. Know that the through date is going to control over the payment amount. This is very important.
For example, if you submit a payout for $100,000, and you are given only $75,000, that you are entitled to the other $25,000. But if you have signed a release in exchange for that $75,000 and the through date is the end of the month, you just released $100,000 worth of your rights for $75,000.
What you need to know is that if the payment date and the through date don’t match, then you need to change one of them or both of them. But you should not accept it as is.
Another example is that of a plumber who did work for a general contractor. And it was a series of specific items over the course of several months. The general contractor wanted to make a partial payment against the total balance, which was $80,000. But he wanted the through date to be the last date that he did work on the job.
The plumber realizing the problem, said that he could not take partial payment and give a release through the end of the month. He said that instead he could give a release that matches the payment so if he could be paid only $50,000, he would need to change the through date to match the period of time that the $50,000 represents.
So, if $80,000 got him to the end of the month and $50,000 got him to the 22nd of the month based on how he did work and the billings on the job, then that is what the through date would have to be changed to. So, if the through date and the payment date don’t match, then a change needs to be made to one or both of them.
Bonus Tip: Why Does the Release Say $10?
This question is asked frequently by people: why does the release say $10? Since you are probably not getting $10 and you are not giving $10, you may be wondering why you need to have a release that says $10.
These $10 releases are valid for any type or amount of consideration
A $10 release is valid if you receive any type of consideration and sometimes even if you receive no money. Say you are a subcontractor on the job, and you have sent a Notice to Owner early because you signed the contract but are waiting to show up on the job and have not done any work. Now that the owner and contractor have your Notice to Owner, they need a release from you.
But you have not done any work and you haven’t submitted any bills. Issuing a $10 release at that point is perfectly fine as a sub-contractor. It is going to say that they are going to get a release from you because you issued a Notice to Owner, it will cover a month of time and it will say $10, because they are not actually giving you money but they still need the release from you.
So that is a situation in which a $10 release is perfectly fine.
2. If you get money, include the amount
Let us assume that you are a sub-contractor and that you are expecting a check from the contractor for $25,000. Ideally, your release should say $25,000, not $10. If you were a contractor and you are giving money and getting a release, you would always like it to say $10.
This is because you don’t want any argument later. When the sub-contractor comes to your office to pick the check or you mail to him/her and they say that you only sent them $20,000 instead of $25,000, if the release said $20,000 or $25,000, then that was the consideration that was given. If they are claiming more money, they may be able to use the argument that you shorted the payment.
However, if the release says $10, you gave them $20,000 and they wanted $25,000, you will say that it does not matter because you gave them consideration that you thought was adequate. So, if you are a general contractor, you would like to have all your releases and your sub-contractors and suppliers say $10. It avoids a possible argument in the future that you sorted any payment.
If you are a sub contractor, what you should try to do is scratch out $10 and put in the actual amount on the check that you are expecting to receive.
3. Do not make a conditional release $10
The only other time that a $10 release is acceptable, is when a contractor does not want the owner to know what they are paying the sub-contractors. Maybe a contractor has a lump-sum contract with an owner, and they do not want the owner to be able to run through all of the releases, add up all the numbers and realize that the contractor is charging them so much more than he is actually paying for the work.
So, they may want your release as a sub contractor to be $10, so that the owner cannot add up all of the amounts associated with the project. The way to deal with this is a sub-contractor is to issue two releases. You will give someone a release that has the amount on it, they will give you that money, and then once it clears, they will give you a subsequent release and it will say $10. For the same period of time you can hand that to the owner if you want.
You do not want to make any releases conditioned on $10 because if you only get $10, then the release is satisfied.