This article was taken from a webinar presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer who serves clients in Florida. We will discuss the pitfalls to avoid when exchanging releases for payment.
Understanding the Legal Significance of a Lien Release
Now we will talk about what a lien release is and why it is legally significant.
1. What does a lien release do?
The first thing you have to understand about a lien release is that it is a document that will release certain rights. Most of the time they are just lien rights, but depending on the document itself it could be more than just that.
2. Why is a lien release important?
Typically, through a period of time when a dispute happens, one of the first things we do is look at the releases and the reason is because your attorney can line up the releases. They can extinguish certain claims through the date of those releases.
So, it is really important that you understand what the release is doing when you are exchanging it for payment. Because you do not want to give up more rights than you are expecting for the check that you are receiving.
3. Can’t release rights other than just lien rights?
In construction, almost every release is called a lien release or a lien waiver. Depending on the language of the document, you may be releasing rights far in excess of just your lien rights. So, you have seen or have to sign one of these releases that is the better part of a page and has a lot of fine print.
You are probably releasing rights far in excess of your lien rights. It probably says that you are releasing any claims for change orders, delays, impacts, and costs. This may not be a problem so long as you do not have those claims. But if you think that you have those claims and you wish to assert them later when you sign a release that releases those rights, then you are giving those away.
For example, there is a contractor making partial payments to a subcontractor. The terms of the release that the subcontractor was signing every month was the broad form release. So, while the document itself was titled lien release, it was very broad.
As a result, every month that the subcontractor was releasing all of his rights, when a dispute arose the first thing their attorney did was take all the releases and show the subcontractor that every month, they were releasing all these rights that they thought they had. Fast forward to the end of the case, the contractor won and the subcontractor lost. This happened primarily because of the releases.
4. Your perspective should be different when you are giving vs. getting a release
Finally, remember that the perspective that you have on a release is dependent on whether you are giving a release or getting a release. So, if you are giving a release in exchange for payment, you want to make sure that you are protected. But if you are expecting a release from someone else, you want to make sure that you get the broadest release possible.
Pitfall #1: Not Negotiating the Form of Release at the Time of Contract
Now we will talk about pitfall number one, which is not negotiating the form of release.
1. What form of release is required by Florida law?
Florida Statute has a form of release and that release is very basic. The law says that no one can make you sign a release form other than the one in the statute.
2. But my contract says I need to use a specific form
However, what it is important to know is that if you sign a contract and that contract says that you will use the form of release prescribed by the owner or contractor, or the sample form that you are going to use as part of the contract.
That is the form you have to use. Therefore, when you are negotiating and reviewing your contract, do not just skip over the exhibits. You need to look at all of them and make sure that the release you are agreeing to provide every month is consistent with the release that you are willing to give.
So again, if your contract requires a specific form, that is the form you have to use. So, you need to negotiate that at the time of contract.
3. My contract is silent on the issue but the contractor demands I use his form. What do I do?
What if your contract is silent on the issue but the contractor demands that you use his form? This is called the Golden Rule which means, he who has the gold makes the rules. So here, you have to make a business decision. Unfortunately, whether or not you are going to give up rights in order to get a check, is not that the contractor has the right to demand the release other than the statutory form.
It is just that you have to make the decision of whether you are going to keep waiting in order to get paid, or you are going to sign the release or try to work out some compromise. The best way to avoid this in the future is to have an understanding at the beginning of what the release forms are going to look like.
Pitfall #2: Having the Wrong Through Date or No Through Date
Now we will talk about pitfall number two, which is having the wrong through date or no through date.
This release says that it is effective for the materials furnished through, and it has a date.
1. Why is the through date important?
So, the effective date of this release is the one that is inserted there. You want to make sure that the through date on the release matches the amount of money that you are expecting. This release has a spot where you can put in the amount.
2. Does the through date match the dollar amount?
So, you want to make sure that if you are expecting a check for $25,000 that the date you are putting as the through date in the release is the equivalent of the check that you are receiving.
3. What if there is no through date?
If there is no through date in the release, then the release legally speaking, is effective as of the date that you sign it.
That means that if you are expecting a check for the work through the end of December, you sign the release today and it has no through date, the legal impact of that document is that it is a release as of today. So, you have to be very careful about that.
4. Is the through date really the through date?
Next, you have to make sure that the through date is really the through date for the materials and materials that you are providing.
For example, there is someone who has a release which has a through date, but the through date is the date in which the person was giving the release to verify that he paid all the bills through. So, the through date for the effectiveness of the release to the subcontractor was not that date, it was the date he or she signed it.
But if they had read the document carefully, they would have seen the words “through date” and the date that matched the amount of money they were expecting. But legally, it was not the same.
Pitfall #3: Not Using Conditional Release Language
The third pitfall is not using conditional language.
1. What is conditional release?
So, what is a conditional release? An example of conditional release language is as follows:
This waiver and release is expressly conditioned upon the undersigned's actual receipt of the above referenced amount in paid funds, otherwise this waiver and release is void.
So, if you are giving a release before you are actually receiving payment for a check, you should use conditional language in your release.
2. Avoid the use of $10 and always state the amount to be received
It is also important that when you use conditional language you do not use the normal recitation of consideration of $10. You should use the amount that you are actually expecting to receive. So, if you are giving a release in exchange for $25,000 then the release should say $25,000. It should not say $10 because obviously the condition is not receipt of $10, it is receipt of $25,000.
3. But I kept the original. Isn’t that enough?
One thing heard a lot is whether or not keeping the original is enough. The short answer is no. The fact that you have an original and someone else has a copy that is in fact a true copy. So it is not a forgery, it is the real thing, but just a copy. You will have no leverage because you are holding the original. Sometimes people want the originals but legally speaking, a copy is as good as the original.
To give you an example of how significant that is, when attorneys handle recording for certain clients. The attorney will never get an original because all of their recording with the clerk and in the court is done electronically. So, clients will sign documents, notarize them, scan them, and send them back. The attorney will never get a piece of paper and they will have recorded with the clerk and filed with the court.
One of the things that we recommend just to speed up and increase the use of conditional language is to make a stamp. Take the conditional language mentioned above, spend $10-$15, and turn it into a stamp so that when you give a release, you can make it a process where you can just stamp it and make that release conditional every time you issue a release.
Pitfall #4: Not Creating Exceptions to the Release
Pitfall number four is not creating exceptions to the release.
1. How do I preserve other claims when I sign a release, like delays or unexpected change orders?
If you have other claims that you know exist, the two most common ones that we see all the time are claims for delay or claims for unexecuted or not fully approved change orders. Keep in mind that if you sign a release and that release has broader language than the standard form that is in the statute, which again are broader than most releases that people sign or are in the statute.
It probably says that you are releasing claims for cost, expenses, work, unexecuted changes, and delays. There is probably a long list of items that you are releasing. If you do not preserve your claim then you will lose it by signing those releases.
So, the question now is how do you preserve it?
Notwithstanding the foregoing, this waiver and release specifically excludes _____ which is reserved by the undersigned.
Above is another sentence you can use and add to your document. You can handwrite it; you can make a stamp. In the blank is where you are going to put in certain invoice numbers, a delay claim based on a description, maybe you submitted a change order, maybe you have a list of RCOs or potential change orders (PCOs), or unexecuted change orders that you are waiting for approval on. You would list those there so that you can preserve them there for the future.
2. Do I have to do it month after month?
The next thing to remember is that you have to do it month after month. So, if you do it in month one, forget to do it in month two, but sign a release that releases everything from that date back, you have lost those rights. So, you need to make sure that if you have exceptions to the release, that you carry them forward month after month as exclusions in the document.
3. But they won’t accept modified releases?
But what if you modify the release and the contractor won’t accept it? This again comes back to the golden rule which is if you are expecting a check and you want to carve out issues from the release. Then you may have an issue with getting that relief accepted by the contractor because you have modified the release. You may have to decide whether or not you are going to take a stand and let the contractor know that you have other claims so you can’t give them a release for those. So, they need to exclude them from the release.
Using the SunRay Release System
If you use the Sunray Release System there are statutory release forms, such as the Sworn Statement of Account, the Waiver and Release of Lien Upon Final Payment, and the Waiver and Release of Lien Upon Progress Payment. These are some of the forms in the system and many are familiar with our system.