This blog has been taken from a webinar presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer who serves clients in the state of Florida. We will discuss a subcontractor’s step-by-step to getting paid. As a subcontractor these are steps that you need to know in order for you to increase the likelihood of getting paid on your projects.
Step 1: Your Contract
You should understand the limitations that exist in your contract. That may inhibit your ability to get paid on your construction project. And that usually comes down to one specific contract provision. That is the pay-when-paid clause or provision. It exists in almost every contract seen. Maybe only one in 1,000 contracts do not have a pay-when-paid provision.
Pay-when-paid clauses attempt to shift risk
A pay-when-paid provision is a valid and enforceable legal provision that exists in many general contractor contracts with subcontractors. It is a risk-shifting provision. In essence it says that if someone as the contractor has not been paid the owner, the contractor does not have to pay you as their subcontractor. These will be held against you if there is litigation. This means that it is a legal defense.
It is a legal defense to payment
So, if you sign a contract that has a pay-when-paid provision in it, you are not going to be able to sue the contractor that hired you if they were not paid by the owner. This creates a lot of risk for you as a subcontractor in a construction contract. So the question is, how do you deal with it?
a. Strike or modify the provision
You can try to strike or modify the provision. But this is highly unlikely. Most contractors understand the importance of the pay-when-paid provision and they do not intend to eliminate that provision or modify it at all. This does not mean that you cannot try, but very few people have success in doing that.
b. Add “stop work” provision
Adding a stop work provision is actually a good way to mitigate the risk of a pay-when-paid provision. It does not eliminate it, since you are not striking it. You are just saying that if you are not paid, that you get to stop work.
c. Bond claim
Another way to secure your right to be paid even if you have a pay-when-paid provision, is by timely securing any bond rights you have.
d. Lien rights
The other way is by asserting your lien rights.
1. Stop Work Provision
Most subcontracts include a provision like this and this one sentence that may be an entire paragraph:
Subcontractor shall not be entitled to stop the Work on account of a Contractor’s Default, including nonpayment, but shall proceed with the dispute resolution procedures in this Agreement.
This means that if you as a subcontractor are not getting paid on a construction project, you have to keep working. Which means that you have to keep paying your suppliers, labor, overhead, general conditions, and you get to proceed with the dispute resolution process that may exist in the contract.
You have to keep working and paying your bills, and you have to mediate the case, arbitrate the case, and file a lawsuit against the contractor for not paying you. But the bleeding has not stopped if you have to continue to work and pay your bills, but you are not getting paid.
So, what can you do?
Why is this so scary?
The single most important change you can make in your subcontract when you are negotiating a contract with a contractor is the following sentence:
Subcontractor may slow or suspend work if any payment requests have not been paid in full within thirty calendar days from submission.
Now the other side may not agree to 30 days. They may say 45, 60 or 90. You have some ability to not continue to work if you have not been paid, so adding a stop work provision in your contract is absolutely critical.
Again, you are not changing the pay-when-paid provision, what you are doing is saying that if you are not paid, that you do not need to keep working. So, it does not mean that you get paid, it just means that you get to stop the bleeding, which is important to combat an obligation to continue to work.
So, what else can you do to deal with the pay-when-paid provision?
a. Payment bond
Sureties are not entitled to pay-when-paid defense
If the job is bonded – that means if it is a public job or federal job where the contractor has a bond, including private jobs – the surety is not entitled to the pay-when-paid defense. The contractor may say that he has a pay-when-paid provision with you, so he does not have to pay you. The surety is not allowed to assert that defense. So that means that you can make a bond claim against the contractor’s bond. And that surety may still be obligated to pay you.
Now there is one exception to this rule in Florida. There is something called a “conditional payment bond,” and if you are working on a project where the contractor has issued a conditional payment bond then you need to pursue both your lien rights and bond rights.
The important thing to know is if you know that your job is bonded with a conditional payment bond, and you will know this if you get a copy of the bond and the title is “Conditional Payment Bond.” But barring that very limited exception, since it is seen in only two out of 100 projects, you will never see this on a public job. So, the only time you may find a conditional payment bond is when the job is bonded, and it is a private job.
b. Claim of Lien
Owners defending lien claim are not entitled to pay-when-paid defense
If you have lien rights, an owner cannot claim that you should not be paid based on your pay-when-paid-paid provision with the general contractor.
So, you need to secure your lien or bond rights, whichever one you have. The payment bond and Claim of Lien are two great ways to attempt to overcome a pay-when-paid provision. That in conjunction with the ability to stop work are very important things that you need to do.
Step 2: Securing Your Lien Rights
Now, step 2 is how to secure your lien rights. A lien is a right that you have in many states including Florida. When you improve real property in Florida, under some type of agreement (it does not even have to be in writing, it can be an oral agreement or based on invoices), that right means that if you are not paid, you can put a lien on the property. That lien allows you to foreclose or sell the property to get paid.
There are of course some exceptions to these rules, and we are going to go through some of them. Also know that the right to lien does not guarantee that you are going to get paid. It just means that if there is any equity in the property, that you will be entitled to sell the property and get some of that equity.
If you lien a piece of property for $100,000, it is worth $1 million, and there is a $1 million mortgage on it, you may not get anything. So, recognize that there are some limitations to what you can get from the lien that you put on a piece of property.
So, how do you have lien rights?
1. How to claim a lien
a. The contract price between owner and contractor must exceed $2,500
The first thing you need to know is that the contract price between the owner and the contractor has to be more than $2,500. It almost always is. But if for example, you are a plumber and you change a toilet under a contract with a contractor, the contract between the contractor and the owner may be less than $2,500, so you may not have lien rights.
b. Notice to Owner must be served
But barring that, you need to send a Notice to Owner on all interest parties no later than 45 days from your first work or delivery of materials to the project.
c. Record Claim of Lien
You need to record the Claim of Lien no later than 90 days from your last work or delivery of materials to the project.
d. Serve a copy of the Claim of Lien on all interested parties
You need to serve a copy, meaning that you need to mail a copy of the lien on all interested parties within 15 days of recording that lien.
e. File lawsuit to foreclose on lien
You have to file a lawsuit to foreclose on the lien. That foreclosure process is an actual lawsuit where you hire a lawyer, and the lawyer files a case in court. That has to be done no later than one year from the date of recording of the Claim of Lien.
2. Common Traps to Avoid
a. All days are calendar days
Keep in mind that all the days mentioned above (the 45 days and the 90 days) are calendar days. You start counting the date after you deliver the materials. So, if you deliver today, Day 1 is tomorrow. You count 45 days including every weekend and legal holiday, except when the last day falls on a weekend or legal holiday.
You may get a few extra days there. For example, if the 45th day is a Sunday, technically, your Notice to Owner would be due to be received by the owner on the 46th day which is a Monday.
The same counting process applies for the Claim of Lien. The 90 days are counted from the last day of delivery. You start with the next day and you count every day, weekend, and legal holiday. If the 90th day falls on a Saturday, you role it to Sunday, and then to the Monday. If Monday happens to be a legal holiday, when all the courts are closed, you can roll it to Tuesday.
So, you can get a few extra days on the tail end.
b. Be careful with your date of last work
Another thing to keep in mind is that 90 days is not 3 months. So, if you are counting lien rights by thinking June 7, July 7, August 7, and so on, that is not going to work because some months have more than 30 days and one has fewer than 30 days. Remember to count by days and not months.
Warranty work and punch list work is not last work. You have to do actual work that would entitle you to get paid. Change order work does count as long as it is an approved change order.
3. Amending a Claim of Lien
You can amend your Claim of Lien at any point in time that you otherwise have to record the Claim of Lien. So, if you record your claim on Day 72, and you realize that there is a mistake in it, you can amend it on Day 84, 89 or 90. But you cannot amend your claim after the 90th day from the time that you provided your last materials to the job site.
Step 3: Securing Your Bond Rights
You are going to see a lot of these rules are going to seem very similar to the rules that we talked about for lien rights. Many of the dates are very similar.
1. Payment bond claim
a. A payment bond secures a lienor’s right to payment
A payment bond is a security instrument that exempts a property from a lien, and you as a claimant have a right against this security instrument called a payment bond. So, your rights to be paid are secured by the payment bond instead of the property.
b. A lienor has a claim against the surety bond
You cannot lien public property, so almost every public job is bonded by the contractor. That is where you will make your claim, and some private jobs have bonds. So instead of recording a lien on the private project, you would make a claim on that bond.
c. The payment bond should be referenced in the Notice of Commencement
How do you know if a job is bonded? Well, you can look at the Notice of Commencement which is recorded in the public record where the property is located for private jobs or you can do a search for the bond itself for public jobs. So, there is no Notice of Commencement for public jobs, but they are obligated to record a copy of that bond in the public record where the project is located.
You can also ask us at SunRay to do your notices. We can also look for and send you a copy of the bond or the Notice of Commencement. If the job is bonded, instead of asserting a lien claim, we will provide the necessary information for you to secure your rights on one or the other, whichever one is appropriate.
2. Notice to Contractor
a. Written notice must be served by the lienor to the contractor
Similar to that of a Notice to Owner, the first step in protecting your rights on a bonded job is a Notice to Contractor. Now, when you use SunRay, we use what is called a “combined form” which is a Notice to Owner and Notice to Contractor form put together. So, whether the job is bonded or not, we use one form which is called the Notice to Owner/Notice to Contractor. It covers both jobs where you have lien rights and jobs where you have rights on the bond.
b. A subcontractor to a bonded contractor need not serve the Notice to Contractor
What is important to know, is if the job is bonded by a contractor, you technically do not need to send a Notice to Contractor because you do not need to send notice to that contractor that you are going to make a claim on their bond. They know you exist because they signed a contract with you.
We still recommend that you have a process in your office, where for any job over a certain amount, you automatically notice no matter what. This avoids any confusion. Notices to Owner are relatively inexpensive and they provide good security to make sure that you get paid.
c. What happens if the Notice of Commencement is not recorded or reference to the bond is not given in the Notice of Commencement
If the Notice of Commencement is not recorded, or the bond is not referenced in the public records, then the 45 days that you have to serve this notice does not even start to run. This is important because there are certain times when you may think that you do not have lien or bond rights because you did not send a notice.
For example, there is a sub-subcontractor who is owed about $100,000 on a construction project. The subcontractor went out of business, and the sub-subcontractor did not serve their Notice to Owner/Notice to Contractor on time. So, the sub-subcontractor thought that he had no rights there.
But after doing some research, they realized that the contractor did not timely record and had never recorded a copy of the bond in the public records. The sub-subcontractor was done with the job but his 45 days to serve that notice, which was actually more than a year ago, had not even started to run.
He then served the Notice to Contractor right away, followed by the Notice of Nonpayment, and the next day a lawsuit. It took around 60-90 days, but he was able to get all of his money – the full $100,000, plus interest and legal fees. So, one little exception in the lien law gave him rights to pursue a claim because the other side had made a mistake.
Is this going to happen all the time? No, but it is worth noting that before you give up your claim, you at least retain the services of a seasoned construction attorney to look to see if there are exceptions to the rules. Because maybe there are and maybe you can get paid.
d. Lienor needs to serve written Notice of Nonpayment to the contractor and surety
Within 90 days of your last work or serving materials to the job site, you need to serve what is called a Notice of Nonpayment. It is like a Claim of Lien, it is notarized, it provides certain information to the surety and the contractor, and this has to be sent no later than 90 days from your last work on the job.
3. Filing suit
Finally, you need to file your lawsuit against the surety no later than one year from your last delivery of materials or work on the project. But remember that to secure your lien rights, you have one year from the recording date of the Claim of Lien, and you have 90 days to record the lien from your last work.
On a bond claim, you have one year from your last work. So technically, your bond claim has to be brought 90 days sooner than the last date that you have to bring a claim. You should not be waiting for a year anyway.
We advise that you should bring your lawsuit to foreclose on a Claim of Lien or to make a claim against a payment bond within 60 to 90 days following your serving of the Notice of Nonpayment or Claim of Lien. Because if you have not been paid within 60 to 90 days, then it is unlikely that just by waiting is going to get you paid.
Step 4: The Right Way to Exchange A Release for A Check
You may be wondering what type of form you should be using. Well, there are a few things to consider:
1. Forms of Release
Statutory forms found in Chapter 713
The first thing to consider is the lien statute found in Chapter 713. It has a partial release form and a final release form. It is very simple and only releases lien rights. It is about four sentences long and that is the form you should ideally be using.
But there are two exceptions to using this form:
i. Signing a contract that requires a specific form of waiver
Did you sign a contract with the contractor that says you are going to use a specific form of release? Many times when you sign a contract with a general contractor, one of the exhibits is the release form you agree to use. You need to negotiate this release form at the time you negotiate your contract. Because if you agree to that form, then that is the form you have to use.
ii. The “Golden Rule”
This is what Alex Barthet calls the “Golden Rule.” As the saying goes, he who has the gold makes the rules. So, even if you did not sign a contract that says the other party has this right, if you need to get paid, the contractor has your money, and you tell them that you have a form that you are willing to give them (which is the one in the statute), they may say no.
They might say that you need to use their form, or you are not getting paid. You are going to have to make a business decision on what you are going to do and what this release is going to look like depending on how important it is to get paid.
Because if you sign a release that gives away more rights than you should, it is going to be hard later to argue that you were forced into signing that release.
2. Lien Waivers
Now we will talk about some important things to keep in mind with respect to lien waivers.
a. Is the waiver for a sum certain or a period of time?
This is an important question to ask. And the waiver is almost always a time-based release, which is why it has a through date
b. Whatever method is utilized, does the waiver reflect the appropriate amount and time?
When you look at this release, you need to make sure that the amount of money and the amount of time match.
c. The date almost always controls over the amount in the release
The reason this is important is because the date is going to control over the amount. For example, let us say that you are ready to pick up a $50,000 check which gets you released through the end of the month. They tell you that they have only $30,000 and you say that it is okay, you will take the $30,000 and sign the release. Even though the release is through the end of the month, you are thinking that you only got $30,000 and that you have not given up your rights for the remaining $20,000.
This is incorrect. The release that you sign that says it is effective through the end of the month, means that even if you received only $5,000, you have agreed to release your rights through the end of the month almost always.
So you are not going to have a good legal position to argue later that you were expecting $50,000, you got only $30,000, and that the other side still owes you $20,000. The judge is going to look at the release and say that you signed a release that says you gave away all your rights through the end of the month.
So, be absolutely certain that the amount of money that you are getting, equates to the date of the release. And if they do not match, then you need to change the date. So, if you are expecting $50,000 that gets you to the end of the month, and they have only $30,000, maybe that amount represents the 7th of the month, or 22nd of the month. Whatever the appropriate date is for the money you are getting, is the through date or effective date that the release has to say.
d. Do not believe that releases titled “partial” mean you still have rights
Be careful in thinking that just because a release is titled as a partial release. A partial release means that you still have some rights later. A document titled partial release that has a through date of today, means that you are effectively releasing all of your rights through and including today.
So it may be partial because you have more work to do, but it is not partial because maybe there are rights that maybe you think are being preserved. Because they may not be.
e. Are there any other claims?
Do you have any other claims like retainage, pending claims like RCOs or PCOs, or delay claims? If so, have these been removed from the release so that you have the right to secure them later? If you do not create exceptions in the release, and you can write them in the release yourself.
You can add something like this release does not waive or release my rights to RCO or PCO, 7, 11, and 14. If you do not do this in the release, it will become a waiver of all those rights.
3. Conditional Releases
Finally, if you are exchanging a release for a check that you do not have yet. Effectively it is a promise to get a check; a promise to get money. You need to make the release conditional. Below is some sample language:
This release is conditioned upon payment of the consideration described above and is not effective until said amount is received in paid funds by the undersigned.
So, if you are expecting a $50,000 check, when you send them that release and you do not get the check, you may have a problem. The release hence needs to say $50,000 which is the amount of the consideration described above. You can handwrite this in or type it in, but you want to make sure that unless you are getting a check at the moment that you are giving the release, that you make your releases conditional.