This blog is taken from a webinar that was presented by SunRay Construction Solutions and Patrick L Edgerton from Edgerton & Edgerton, Attorneys at Law. Patrick is a board-certified construction attorney, who serves clients in the state of Illinois. In this blog we will discuss the concepts of waivers of liens, contractors' statements, and release of mechanic’s liens.
You could talk about the one thing you want in a release, but when it comes to wavers, the concepts of waivers versus contractor statements to release the mechanic’s liens come into play. A lot of individuals are already somewhat experienced, so they know the difference.
Waivers – Partial and Full
First, we have partial and full waivers.
a. Partial waiver
Keep in mind that for a partial waiver, you have to be careful. You are basically under oath saying that as on the date you sign the waiver, you are owed ‘x’ amount of money, and there is still a balance due.
The problem is that in the industry, many times, a partial waiver has more to do with the waiver of lien for what is available for payment that day. It is usually that you have done substantially more work than what you have listed in your partial waiver.
At one point, lenders are having some fun with this trying to argue that if you signed a lien waiver on today's date saying that you are owed $15,000, and you did $15,000 because that is what the title company said.
Be careful of lag time if no work is performed after date of partial waiver
Let us say that something happened; you did not work after that. But even though on the date you signed that waiver, you were really owed $30,000, they were arguing that you were under oath and said that you were only owed $15,000 on that date. You are only entitled to $15,000.
Generally speaking, there are a lot of cases out there where you will have to argue quite a bit for a while that in the construction industry you generally treat it as a waiver of lien for what is available for payment.
One way to avoid that is to ‘backdate’ it. If you really owe $30,000 today but the title company says that they have $15,000 for you backed to the date where you were owed approximately $15,000. That way if something goes wrong, you do not have a sworn statement saying that as of today’s date, you are only owed $15,000 when you are really owed $30,000.
So that is something that we recommend doing. It does not come up as often anymore because the lenders give up and other lawyers defeat them quite a bit. There is also some case law on there that helps you, but it is better to avoid the fight. It is an expensive fight to fight.
b. Full waiver
The second waiver is the full waiver. This type of waiver waives all lien rights.
a. As a subcontractor, be careful of unscrupulous generals usurping the money
Be careful of unscrupulous general contractors taking the money. As a subcontractor sometimes you give a full waiver, then they use that to get the money from the owner and they abscond with the money.
So keep that in mind. You can require a joint check or indicate ‘only effective upon payment to help do it. There is a section under the Mechanic’s Lien Act that says failure of a contractor to turn over the money to the subcontractor is a violation of the Act under §21.01.
The Illinois Mechanic’s Lien Act provides:
This section talks about a Class A misdemeanor if they take the money and keep it. However, you will not see the State Attorney’s Office go after a general contractor for doing this.
Attorneys have argued successfully that under combining §21.01 and §21.02 that because it is held in trust, if the general contractor absconds with it, and they breach that trust, that they are individually liable. This is for at least the amount they absconded with, maybe not the full amount you are owed.
But at least that amount as you know sometimes, companies either subcontractors, owners, or general contractors if they are a Corporation LLC, go out of business, and you cannot pierce the corporate veil and you are stuck with a company that has no money to pay.
Well, if they abscond, you have an argument to go after them individually because they violate the funds. It is usually a heavy battle. They do not like to roll over too quickly when you start going after them individually. It is an expensive battle so try to avoid the issue regularly if you can.
Sworn Contractor’s Statement
Next, is the contractor’s statement. Sometimes people confuse a waiver with a contractor statement. A waiver waives a lien and a contractor statement, if you have seen them at the title company, Chicago Title has the most common one.
The top part is a waiver, and the bottom part is the contractor statement. Or you just have a contractor statement. The contractor statement is a general contractor, a subcontractor, or a sub-subcontractor listing. Under oath, their contract amount, their subcontractors’ or sub-subcontractors' amount that has been previously paid or the amount of this payment and the balance to become due.
a. Demand Contractor’s Affidavit/Statement from general contractor under Section 5
Keep in mind that these are important under the Mechanic’s Lien Act. Under Section 5, a homeowner can demand that you provide a contractor statement and if you do not provide one, then you try to foreclose a mechanic’s lien. You will be dismissed out.
Under Section 5, the Mechanic’s Lien Act provides in part:
In the case below someone refused to provide a Sworn Contractor Statement and the court knocked out the Mechanic’s Lien Act.
You are still allowed to have a contract action or a quantum meruit. If you do not provide quantum meruit, you file suit, and you get dismissed out, you can still proceed with your contract action in your quantum meruit claim. This generally is not bad if you can do that. It is just that a mechanic’s lien carries more teeth than just a contract action.
In essence, a mechanic’s lien is a non-consensual mortgage against the real property by the general contractor or the subcontractor. So keep that in mind.
People always forget about the next section, which has to do with making a demand on the contract to provide a sworn contractor’s statement.
Section 22 also has those requirements where an owner or general contractor can demand from a subcontractor to provide a subcontractor’s sworn statement and if they do not, they would likewise be barred from proceeding under the Mechanic’s Lien Act. For some reason, this does not come up much in the litigation.
This could be because the general contractors are out, or the subcontractor is out too.
b. Demand a Subcontractor’s Affidavit/Statement from known subcontractors under Section 22
Demand from known subcontractors a Subcontractor’s Affidavit/Statement under Section 22. The Mechanic’s Lien Act provides, in part:
Keep in mind that you have to keep in mind that you can make the demand on a subcontractor as well if you have a shifty subcontractor out there for example, who is not cooperating, there is a battle, and you just need them to commit.
As a general contractor, they talk about extras that people do not get signed, change orders are quite regular in the industry. You sometimes need someone to commit as to what they are claiming under oath. You may disagree but at least they commit under oath, and that can help quite a bit.
c. 770 ILCS 60/22
Next is the part that may surprise you. What is odd is that the owner did not have to prove that they paid out on the lien waiver or the subcontractor statement, just that they had one. That is a change in the lien law.
Usually, the owner has to prove a reasonable reliance on the waiver that they paid out. Possession is usually not enough, but if you get a motion to dismiss claiming that they possess a lien waiver, you can do what they call a ‘191 Affidavit’ to say you need to find evidence of when they paid.
Because you have to rely on the lien waiver as an owner to defend yourself from a lien claim. Keep in mind that what sometimes happens as a general contractor gives a contractor’s affidavit to an owner and the owner pays out on it in good faith, then a subcontractor serves a subcontractor notice.
If the contractor statement shows zero amount due to the subcontractor, and zero balance due to the subcontractor (those are the last two columns of a traditional contractor statement) then the subcontractor would be out.
But say an owner gets a contractor statement listing, but then gets a subcontractor notice from a subcontractor, then pays out, that is a wrongful payment. Now if they paid on good faith before receipt of the subcontractor’s notice, in good faith reliance on a sworn contractor statement, that would be a valid defense to a mechanic’s lien.
It can be tricky, but Lazar was an unusual decision. There are ways around it to force an owner to prove when they paid out the fact that they have a contractor statement dated today does not mean they paid today. It could be that they paid 60 days from today or even six months from today.
Now, keep in mind that you have three forms that sometimes come up. One is the waiver or partial waiver, two is the contractor statement and three is the release of mechanic’s lien. The release of mechanic’s lien only comes into play if someone perfected the lien.
Your attorney will sometimes get a call from an owner or from you saying that the other side wants a release of mechanic’s lien. Before you pay the attorney, the attorney will ask if you perfected the lien, and if you say no, the attorney will explain to you why you cannot really believe something that is not there.
Basically, what you need is the final waiver and the contractor statement showing nothing doing only to any subcontractors. That is what an owner should require if there has been no perfection of a mechanic’s lien.
As a general contractor, you have to record the claim for lien verified within four months of the last date you did substantial work. The subcontractor has to serve a subcontractor’s notice within 90 days on the owner and financial institution (the mortgage companies) within 90 days of the last day that they did substantial work and then also record a verified claim for lien within four months of the last day of substantial work.
But unless that has been done, there is no reason for a release. You will see some owners still insist on one. So you can provide one and leave it blank. Why battle with them, tell them they do not need it. You can always prepare one and basically say there are none recorded. It is not necessary but if you want it, you can prepare one.
If the other side wants a document that you do not need, it does not hurt you to just give it to them.
d. Release of mechanic’s lien
There is language that has to be on the release of mechanic’s lien. According to 635c, there is this language:
Other Important Considerations
Now we come to other important considerations, and this is where it gets tricky.
a. No subcontractor’s notice needed if sworn statement of contractor or subcontractor provided for shall serve to give owner notice
Let us say you are a subcontractor and you do not serve your subcontractors those within 90 days. But when you do a small job, many times, it is not a construction escrow or there are not a lot of procedures regarding contractor’s damage but if there is a big commercial job, there are many times in a construction escrow where the title company requires a sworn contractor statement from the general contractor to the owner.
No subcontractor’s notice is needed if..
Well, a subcontractor is technically perfected for the amount that is listed in a subcontractor statement, as especially the last two columns you might do this payment if it has not actually been paid and the balance due. This is important because many individuals are beyond the time.
If you have a well-planned demand for contractor statement and they can at least give you a copy of one of the contractor statements that might be prior. You can sometimes plead upon best information and believe and allege that there is a contractor statement listing amounts due and owing and then find out that they do have lien rights.
b. Even if subcontractor does not serve subcontractor’s notice, subcontractor may still be perfected
Now even if a subcontractor claims $100,000 is due and owing, they did not serve their subcontractors notice properly, but the contractor statement claims only $50,000 is due and owing, they will be limited to that amount.
But it is important to know that there is a lot regarding the Mechanic’s Lien Act that is not only about knowing the general rules but all the exceptions to the general rules. The Mechanic’s Lien Act can be a little complicated.
Basically, if a subcontractor does not exercise the right to perfect, they might be perfected, but as a subcontractor, do not count on it. General contractors sometimes think lower amounts than you do. If you really are owed substantial amounts, serve your subcontractor’s notice. Do not rely on the general contractor to do it.
c. Parties furnishing labor, materials, fixtures, etc. must cause a written notice of his/her claim
Under Section 24, under the following two sections, you can serve your subcontractor’s notice within 90 days of completion.
In Section 24, where it talks about you having 90 days to serve the subcontractor’s notice, it says such notice shall not be necessary when the sworn statement of the contractor or subcontractor provided for here in shall serve... due to him or her...”
This is very important, and keep in mind that it can save you on more than one occasion.
Now the next case is the Weather-Tite case. It is a very famous case under Section 24 and 21 where the university in essence paid the general contractor; they demanded the sworn statement but did not actually look at it.
It actually listed amounts due and owing to the subcontractor and they did not require or demand any waiver from the subcontractor, sworn contractor statement from the subcontractor, or even appeal to the subcontractor. They just paid the general contractor, and they tried to argue that because they had a sworn contractor statement that they did not have to pay out again.
What happened was just the opposite. They had a sworn contractor statement listing amounts due and owing, and they paid twice. So just demanding is not enough. Owners actually have to look at it and then understand and recognize that those last two columns show anything due and owing to a subcontractor or even a general contractor.
The owner has to provide for payouts to those subcontractors but the Weather-Tite case with the Illinois Supreme Court cases is not even that old. It is from 2009 and the university had to pay twice in substantial amounts too. The amount was substantial. Keep this in mind because it is an important factor when you deal with contractor statements.
d. What if owner pays general contractor without requiring a contractor’s affidavit from owner or known subcontractors?
Next, this is the law that talks about how under Section 32, no payments to the contractor or other consideration are valid unless they do it right. This means you should demand a Section 5 contractor statement or a final waiver from a contractor or the subcontractor.
e. If owner pays general contractor without requiring Contractor’s Affidavit and subcontractor complies with perfection requirements of Mechanic’s Lien Act, owner required to pay subcontractor
Then there is a situation where both parties can be right. You actually have a situation where the owner did everything right and the subcontractor did everything right. The owner demanded a Section 5 contractor statement from the general contractor and the general contractor gives it sworn under oath that no subcontractors are due and owing.
The owner pays in good faith on reliance on the contractor statement. Then the subcontractor after the payout serves the subcontractor’s notice on the owner, within 90 days. And then also perfects a claim of lien within four months of the last date that substantial work was done.
You now have an owner and a subcontractor who have done everything right under the Act. The courts had to decide who wins when you both have done everything proper under the Act. In this case they said the owner wins.
If you think as a subcontractor that there might be an issue, send that subcontractor notice as soon as possible.
That plaintiff’s lien claim was not limited to the amount owed to its immediate contractor
Now there is a law in there for when you are serving a subcontractor’s notice and you are a sub-subcontractor. Let us say you claim there is a further amount due and owing. But remember, a general contractor does not know about sub-subcontractors.
If you do not perfect properly, or even if you do, many times you will be limited to the amount due and owing your immediate contractor; that would be the subcontractor. As is traditionally known there is a general contractor, the subcontractor is for example, the electrical contractor and then the material-provider for the subcontractor would be the sub-subcontractor.
But there if there is only an amount due and owing to the subcontractor, and the sub-subcontractor disagrees, but the sworn statements indicating otherwise are generally limited to the amount due and owing to their immediate contractor.
So that can be a problem if there is a dispute amongst the owner, the general contractor and the subcontractor, many times the sub-subcontractors do lose out.
f. Amount due from owner to contractor refers to amount owed to lien claimant’s immediate contractor
Doors Acquisition, LLC v. Rockford Structures Construction Co., 2013 IL App (2d) 120052; Bricks, Inc. V. C & F Developers, Inc., 361 III. App. 3d 157, 836 N.E.2d 743 (1st. 2005). See also GX Chicago, LLC v. Galaxy Environmental, Inc., 2015 IL App (1st) 133624, 38 N.E.3d 60