In this blog, presented by SunRay Construction Solutions and Leslie A. Boe, Shareholder/Director, Dysart Taylor, you will learn in-depth about how to deal with releases and waivers and what are the steps and processes you should consider or follow to ensure that the releases and waivers you sign do not impact your ability to successfully pursue your lien and bond claims.
What are Lien Waivers and Releases?
In the construction industry, the terms lien waiver and release are often used interchangeably. However, they do mean different things.
- A lien waiver is a document that you would sign or include in your contract before you actually file a lien. It means that you are giving up your right to file a lien even before you file one.
- A lien release is something that you would execute and file after you have already filed a lien. In Missouri, you file a lien in the court records and when you want to file a lien release, you will do that as well in the court records. So, if somebody runs a title search on a property and sees that a lien was filed in 2023, they will also see that the lien was released. This will let the future owners know that there is no lien encumbering the property.
What is the Typical Lien Waiver/Payment Process?
Typically, a lien waiver is used in the payment process:
- A progress payment is due from the owner to the general contractor on a project.
- The general contractor will then require the subs and suppliers to sign a partial lien waiver.
- The general contractor will submit his partial lien waiver along with those of the subs and suppliers and include it in their payment application to the owner.
- Once the owner receives all the documentation, including the lien waivers, and if everything looks good, they will release the funds.
- The general contractor will pay the subs and suppliers once they receive the payment from the owner.
Although the process may look quite simple in nature, it often requires several days to get things done successfully.
What are the different types of Lien Waivers?
As you are aware, you can waiver your mechanics lien or bond claims either through a partial waiver or a final waiver. The type of lien waiver you are signing plays a crucial role, so it is important to be aware of what each of them mean:
- Partial Waiver – You will use a partial waiver in exchange for a progress payment.
- Final Waiver – You will use a final waiver in exchange for a final payment due under a contract.
A lot of people are aware of what a final waiver entails; however, they don’t pay much attention to partial waivers. Typically, a partial waiver is signed for the amount that you receive during the course of the project. But if the language of your partial lien waiver does not match up to what you intend your partial waiver to be, then it can cause a lot of problems for you.
When we look at the types of lien waiver, there are two primary types of waivers that will quantify what you are releasing:
- Time-based Lien Waiver – when all lien and bond claims are waived off as of a certain date; and
- Amount-based Lien Waiver – when all liens and bond claims are waived off based on the amounts you are getting paid, or the amounts listed in the lien waiver.
What is the Typical Lien Waiver Language?
Here is a typical lien waiver language that you may seem based on the two types we mentioned above:
- Conditioned upon receipt of $_____
- As of a specific date (date of invoice, date of payment, date of execution, etc.)
Now, there are quite a few problems that you can run into, especially when you use a time-based lien waiver. Typically, what you should aim for is an amount-based lien waive because when you have a time-based lien waiver, there is scope for you to waive off your lien rights which fall beyond the date of your actual payment or when you performed work on the project or supplied materials.
This is why it is always recommended that you use an amount-based lien waiver. And, if you do have to use a time-based lien waiver, then make sure that you scrutinize the date that you are mentioning.
What are Problem Lien Waivers?
Below are some of the common problems that you may encounter with lien waivers.
- Contractual Lien Waiver – This is a lien waiver which comes up in your contract that you signed even before you started working on the project. The good news is that a contractual lien waiver is not enforceable in Missouri; however, it is enforceable in other states. So, anytime you are signing a subcontract, if it references the prime contract, then you must check if there is a contractual lien waiver.
- Unconditional Lien Waiver (not conditioned upon payment) – As mentioned earlier, the language used in your lien waiver is absolutely crucial. One of the reasons why lien waivers are enforced by the courts against parties is because third parties are relying on the language.
- So, make sure that your lien waiver contains language such as “conditioned upon receipt of”. This way, even if you sign the lien waiver before the payment is made, it will not be enforceable until you do receive the funds.
- Avoid language such as “receipt of which is hereby acknowledged” if the payment has not been made at the time of signing the lien waiver.
- Lien Plus Waiver – If you remember the language we mentioned earlier, it states that you are waiving all your lien rights to file a mechanics lien or claim. However, we do not want to include the phrase “waives ‘and all claims’”. This is because if something happens later, and for some reason you are not able to enforce a lien or bond claim, you do not want to waive off your rights to file a breach of contract claim against the other party.
- Indemnification Clauses – A sample indemnification clause will read as “Signor agrees to indemnify and hold lender and owner harmless from any and all liens, claims or actions made against lender, owner and/or the property for said labor and/or materials.” Now, if your lien waiver is appropriate (with regards to conditioned payment language, correct amount, actual time, etc.), then an indemnification may be appropriate. However, if there is any problem with your lien waiver, then you may end up with certain problems like whether you have the right to file a lien or bond claim for certain amounts, etc.
- Lien Waivers on Checks – If you ever receive a check with a tiny print on the back where you would endorse the check, that could be a problem. Here is a sample language, “by endorsement hereon, the undersigned hereby acknowledges payment in full and does release and waive any and all right and claim against maker hereof and the real property described by address on the voucher attached to this check…on account of equipment or material furnished and/or labor performed to date in relation to the said real property.”
This is another situation where your date might come into play. Now there are various situations that can come up, such as you may have unapproved outstanding change orders, dispute related to some work, etc. Now if someone signs and deposits the check, you have effectively waived off your lien rights and bond claims through that date on the check. This also impacts the third parties who are relying on the fact that you signed a lien waiver.
Here is a case example to show how impactful the language included in your lien waiver is:
Case Name: Polack Plumb. & Heating v. A.S.A. Builders, Inc., 534 S.W.2d 505 (Mo App 1976)
- So, this was a construction project where the general contractor rounded up seven lien waivers from seven different subs.
- Five of those subs added the language, “issued pending clearance of [GC’s] check” in their lien waivers, while the remaining two did not make any amendments or include any conditions in their lien waivers.
- Once the owner received the payment application from the general contractor, they reviewed all the lien waivers and issued the payment to the general contractor. However, the GC absconded with all the subs’ money.
- All the seven subs then filed a mechanics lien on the property. But, when it came down to litigation, the court held that the five subs who had included a condition in their lien waivers were allowed to pursue their lien claims. The remaining two subs who did not modify their lien waivers and just signed it were unable to pursue their lien claims.
As you are aware, in many cases, a mechanics lien is often the only way to get paid, so it is extremely important that you use the right language in your lien claims and waivers to ensure that your lien rights are well protected.
Preserving Lien and Bond Rights
The key takeaway here is that to preserve your lien and bond rights, you must always read your waivers and you may need to modify them before you sign the waivers. Some people think that they cannot modify a waiver, but you can. It is very important you clarify everything, such as if there are any outstanding change orders to be approved, or any confusion about what time it applies, how much it applies to, etc. The best way to ensure that your lien waiver is drafted properly is to consult a lawyer who can look at your waiver and suggest modifications, if required.
Here is a sample language that you can use in your lien waiver just to ensure that you have everything in order:
This release or waiver shall apply only to work, or material furnished for which payment has been received in full and shall not apply to retention, unbilled changes, claims which have been asserted in writing, or claims which have not yet become known to Subcontractor/Supplier; and shall be conditional upon receipt of funds to Subcontractor’s/Supplier’s account.
We hope this blog helps you in gaining a better understanding of how to successfully deal with lien waivers and releases.