This blog is from a webinar hosted by SunRay Construction Solutions, featuring Alex Barthet. Alex is a Florida board-certified construction lawyer serving clients within the state. We will discuss the very scary lien waiver process, how to exchange a check for a release, and still protect your rights.
The legal significance of a lien release
Let us talk about the legal significance of the release.
What does a lien release do?
To understand what a lien release does, you must look at each lien release form you are being asked to sign. The reason this is important is because whatever that lien release says is what it does.
For example, the standard statutory release form that is found in Chapter 713 of the Florida statutes – which is the lien statute in Florida – only releases the lien rights that you have or that you could have from any period working backward from today. Again, the effective date will be governed by the through date which we will discuss later.
But this lien release, even though it is only called a lien release on the title, can release a lot of other things. This includes rights that you must change orders, for delays, for extended time, and extended general conditions. You must read the construction documents to understand what rights it is asking you to give up.
Why is a lien release important?
When a legal case occurs, good construction lawyers look at the releases right away. They act as a get out of jail free card for various claims that may be asserted.
For example, if you have a claim and you say that you are owed money through the end of the last month, you file a construction lien, and you file a lawsuit to foreclose on that construction lien. In prior months for which you are saying you were owed money - maybe you did not get paid that amount – maybe you happened to have presented releases in exchange for some partial payments, but the through date of that release is past the amount that you were accepting. If you know in a prior month that you were expecting $100,000, you only got $20, but you did not change the through date, those releases can be used against you later.
Sometimes people have perceived claims in the hundreds of thousands or even millions of dollars. But when the releases are reviewed, they had signed releases giving away more rights than they understood. So, you must be careful about signing releases and understanding their significance.
Can it release rights other than lien rights?
(Ex: delays, change orders, etc.)
As mentioned above, lien waivers can release rights beyond just your lien rights. For example, if you believe you have a delay claim as a right that you have. Maybe the job went over a few months, you want to make a claim for that delay because it costs you more money. But every month you were signing a release to get your draw and it said that you are releasing all rights to delay claims. You won’t be able to bring that claim in the future. You need to understand what the release says.
Your perspective should be different when you are giving vs. getting releases
Your perspective about what the release is giving up is dependent on where you are in the construction process. For example, if you are a general contractor, you want to make sure that the release you get your subs to sign and give to you every time you pay them is a broad release. It releases many of their rights, claims, delays, change orders, extended general conditions, in addition to lien rights.
So every month you pay them, you know that they are releasing all those rights. Therefore your plumber for example, can’t come back later and say that the job went on for a few more months and that they want another $30,000. You can acknowledge that it did go on longer, but that you don’t owe them that money because they signed away those rights.
Also remember that if you are a subcontractor and you sub out work – like if you are a mechanical contractor, and you sub out the sheet metal work – you want to get broad releases from your sub-subcontractor for the same reason that a general contractor wants a strong release from you.
Negotiate the form of release at the time of contract
Now that you understand the legal significance of the release, let us discuss how to deal with that release form at the time of contract.
What form of release is required by Florida law?
The short answer to this is, the statute has a form release but many times you are going to sign a contract that says you must use a specific form of release, and that is usually attached as an exhibit in your contract. So, if the contract requires that you use a specific form of release to get at your payment. That is the form that you must use. So, when you are presented with a contract that has those forms as an exhibit, you need to negotiate the form of release that you are going to use when you sign the contract.
Even if there is another that you need to use, if you try to negotiate the language below in your contract then when it comes time to get paid you can say that you don’t want to use the form that is in the contract because of this sentence that you can use the Chapter 713 release forms:
Notwithstanding anything herein to the contrary, the progress and final release forms in Florida Statutes Chapter 713 can be used by subcontractor in exchange for payment.
The Chapter 713 release forms are the ones you want to use because they give away the least number of rights. If you are a subcontractor, the form that you would like to use with your general contractors (that means the release that you give when you get a check) is found in that chapter.
If the contract does not say what form to use, but the contractor demands that you use the form he is presenting to you, what do you do? You must make a business decision. Are you going to use that form to get payment or are you going to stand firm and say that you don’t want to?
If you do not agree in a contract to use a specific form, or a form that is acceptable to the contractor (because sometimes it says so in the contract), then technically they should not require you to sign any form of release other than the one that is found in Chapter 713.
Sometimes many contracts do not care what the law says, and they say that you need to sign their release. Unfortunately, you will then have to make a business decision on whether you are going to follow that request or stand firm in your position.
Use the correct “through date”
Now we will talk about the through date in your release and why that is important.
The through date is important because people believe that the amount of money that is listed in the release or that is in the pay request for that month is what matters. So, if you get shorted a payment, then you can always just add that short pay to the future claim amount or the next pay request. That is not true if you sign a release that gets you through the end of the month for example.
Does the through date match the dollar amount?
Let us assume that you wrote $100,000 for October and you put in your release that in exchange for $100,000 you are going to release your rights through the end of October. But they say they are not going to pay you the full amount, and that they are only going to pay you $70,000. Then what you need to do is change the through date in your release. Because if $100,000 is the equivalent amount of work that would get you paid through the end of the month, you need to change the date so that it matches the period that equals the amount of money you are getting.
The reason this is important is because of short pay, but if you sign a release through the end of the month, you will release all your rights through the end of the month. You cannot claim later that that shortage is due to you. When a judge is presented with that argument, it almost never works. The judge is going to say that you decided to take $70,000 to release your rights through the end of the month. And the judge will not renegotiate the deal you decided to make at that time.
What if there is no through date?
Sometimes, you must be careful if there is no through date in the release. If that is the case, then the release is effective as of the day you sign it. So, if you are going to pick up a check and you realize that there is no through date in the release, it is not releasing. If you go to pick up your check today, let’s say October 31st for August, and you would like to sign a release, what you would like to have in there is that the through date is the end August.
But there is no spot in the release to do that. Or the release is unclear as to the through date and you sign it today. Then what you have done is you have accepted a check for some amount of money that for you is the time you spent working in August. But the release is effective through the day you sign it, which in the example above, is October 31st.
That is a big problem and obviously you are not intending to do that. So, know that if there is no through date for when your release is effective, it will be considered through the day that you sign the release.
Is the through date really the through date?
Be careful to make sure that the stated through date is the actual through date. There are releases that have what appears to be a through date, but when you read the language, it is a date that is an affirmative statement by you some other issue and not the effective date of the release.
For example, there are some releases that appear to have a through date but when you read it, it says that you have paid all your bills for subcontractors and vendors through the end of August. It does not mean that this release is effective as of the end of August. It is effective as of the day you sign it. So be careful that the through date is in fact a through date of when your release is effective.
Use conditional release language
Now we will discuss conditional release language and that is why it is important.
1. What is a conditional release?
A conditional release is a release that is not effective until you get the money that is recited in the release. Most releases we see are not conditional, so you must make them conditional. Here is a sentence that will do that:
Notwithstanding anything herein to the contract, this waiver and release is expressly conditioned upon the undersigned’s receipt of $___ in paid funds, otherwise this waiver and release is void.
So, for example, if you are expecting a $25,000 check and the release is not conditional, you could handwrite this in to your release and you want to make sure that the amount that it is conditioned on is the check you are expecting to receive. In the example above, this was $25,000.
You can give a release with this conditional language to somebody and know that if you never get the $25,000, that the release is no good.
Here are some other things to remember:
2. Avoid the use of $10. Always state the amount to be received
You want to avoid the use of $10 in a conditional release. That is why in the language that was mentioned above, it says some specific amount of money. Because obviously it is not conditioned on $10, it is conditioned on the specific amount that you are expecting.
3. But I kept the original. Isn’t that enough?
Another mistake happens when people believe that they can give a release to the other side in advance that is not conditional. It does not have the conditional language but because you gave them a copy and you are holding the original, that is the one with blue ink, your notary stamp, and your corporate seal. You may think that since you are holding the original that what you send them is invalid. That is false.
Do not fall into the trap of sending anyone a copy thinking that it is invalid. The copy that is sent is 100 percent valid and enforceable according to its terms. That is why you want to add a term that says it is only valid if you get your money. Where we see people make a mistake is, they will receive a request saying here a copy via email of your check, please email me a copy of your release.
If you send them that signed release via email and you never get the original check, you cannot deposit that emailed copy of a check that you got. The bank will not accept it, but they can use your photocopy or the electronic copy of your release and present it to the contractor to get paid. You will be bound by that release and you will lose your lien rights for that period even if you did not get paid. That is why adding the conditional language is so important.
4. Creating a conditional stamp
You should make a stamp with the conditional language so that you can use it with every release you make. You can just fill in the amount and send it off, knowing that you are protected. You can go online, make that stamp yourself, and use it whenever you need to.
Create exceptions to the release
Finally, we will talk about how to create some exceptions to your release.
1. How do I preserve other claims when I sign a release, like delays or unexecuted change orders?
This works like the conditional language. You need to add an exception to your release. Here is a sample sentence:
Notwithstanding the foregoing, this waiver and release specifically excludes ___ which is reserved by the undersigned.
So, for example, let us assume that you have a delay claim, and you wrote an email on June 1st setting forth your delay claim. Hence, when you signed the release, you would add in this sentence and fill in the blank with something like “the delay claim sent via email on June 1st.”
You have some reference to it, which is the blank and you exclude it from the release so that it is not part of what you are releasing. This can apply to an executed change order, so you could write in that blank “RCO,” or “PCO 7, 9, 14 and 21,” or any other thing that you wish to reserve or exclude from the release so that you preserve it month after month.
2. Do I have to do it every month?
If you exclude an item from your release in one month and you forget to exclude it in the next month, you may have lost your rights to do it. Meaning if you have a claim, let us say in June, for that release in that month, you will have to put that exclusion in. In July, if it has not been resolved, you also must put it in as an exclusion in July.
Fast forwarding to August, if it still hasn’t been resolved to your satisfaction via payment then you need to include that exclusion as well in August. Every month you need to include that exclusion, because if not then you will lose that potential claim in the future.
3. Will they not accept modified releases?
This is another business decision that you will have to make, on whether you want to fight about the issue now or try to have some resolution with the other side. But at the end it is a business decision on how much risk you are willing to take and how you want to deal with that.