This article is taken from a webinar that was hosted by SunRay Construction Solutions and features Kevin M. Estevez who represents Arizona business owners, contractors, subcontractors, and construction suppliers. He is a partner at Holden Willits as well as a prolific writer with his own blog called ‘Arizona Construction and the Law.’ This is the eighth part in our series of articles on lien and bond claim laws, and general construction law in Arizona.
- Part 4: Bad Checks and Credit Card Chargebacks – How to Deal with Them in the Context of Construction Debts
The focus of this article is on how to be careful with what you sign in Arizona and about some of the tricks, traps, and pitfalls with lien waivers.
How to Preserve Mechanic’s Lien Rights in Arizona
Prior to getting to what to sign in terms of lien waivers, we’ll first do a recap on how to preserve your mechanic’s lien rights. This has been covered before in previous articles, but it is one of those things that bears repeating.
a. Timely serve a proper Preliminary 20-Day Notice
The first and most important step to preserve your mechanic’s lien rights is to timely serve a proper Preliminary 20-Day Notice. If you do not serve a 20-Day Notice, you waive all your lien rights in Arizona and if you do not serve a timely 20-Day Notice, you waive a portion of your lien rights. So it is important on any project that you work on to get a Preliminary 20-Day Notice sent.
b. Do not forfeit lien rights by signing improper and/or incorrect lien waiver
This is the main part of what will be discussed in this article. Do not forfeit your lien rights by signing an improper and/or incorrect lien waiver.
c. Timely record statutorily compliant Notice and Claim of Lien with county recorder
Say you serve a 20-Day Notice. You preserve your lien rights by not signing a waiver that waives them.
d. Timely serve the Notice and Claim of Lien
This step is if you do not get paid, to timely record a statutorily complaint Notice and Claim of Lien with the county recorded in the county where the project is located. And you have 120 days after completion to do that. Completion is defined in the statutes in a number of ways.
Completion is 30 days after a Certificate of Occupancy is issued on a project where a Certificate of Occupancy will be issued. It is 60 days after work is stopped on a project where work is abandoned or if there is no Certificate of Occupancy issued on a project. Put simply, it is the last day that work is performed.
You want to make sure you get that Notice and Claim of Lien recorded in a timely fashion.
e. Sue to foreclose the lien within 6 months of recording
Then you want to serve the Notice and Claim of Lien and then after it is recorded and served, you want to sue to foreclose. And you have six months from the date that the Notice and Claim of Lien is recorded.
So that is how you preserve your mechanic’s lien rights.
Lien Waivers in Arizona, Generally
In Arizona, generally speaking, waivers are a creature of statute.
a. Arizona lien waiver are creatures of statute and A.R.S. § 33-1008 identifies the types and forms that may be used
A.R.S. § 33-1008 identifies with specificity, the types and the specific forms of lien waivers that may be used in Arizona. Pursuant to statute, there are four types of lien waivers:
- Conditional Waiver and Release on Progress Payment;
- Unconditional Waiver and Release on Progress Payment;
- Conditional Waiver and Release on Final Payment; and
- Unconditional Waiver and Release on Final Payment.
So you have conditional and unconditional for both progress and final payment, and it is important to know what you are singing in that regard.
b. Waivers that do not substantially follow statutory forms contained in A.R.S § 33-1008 are not enforceable
It is also important to make sure that the waivers follow the statutory forms substantially. That does not mean you cannot make edits and there are certain circumstances where you may want to make edits to a lien waiver you are being asked to sign. But the lien waiver needs to follow substantially the statutory from or it is not enforceable. Again, those forms can be found in A.R.S § 33-1008.
c. Progress Waivers vs. Final Waivers
So as the name implies, you have a distinction between progress and final waivers.
i. Progress waivers
Progress waivers are used where a lien claimant is required to execute a waiver and release in exchange for in order to induce the payment of a progress payment.
Generally, they only release lien rights for a specific period of time. So when you are looking at progress payment waivers and you are filling those out, it is very important to accurately fill out the date through which the progress waiver runs. That is a situation where some folks make mistakes on a regular basis, so you want to avoid that.
ii. Final waivers
Then you have final progress waivers. They are used where a lien claimant is required to execute a waiver and release in exchange for or in order to induce a final payment. Generally speaking, final waivers release all lien rights on a project and there are some caveats, but generally, when you are signing a final waiver, you are saying that you have been paid here. Or if it is a conditional final, when you get paid, you are releasing all your lien rights on a project.
Conditional Waiver vs. Unconditional Waivers
Now we will talk about conditional versus unconditional waivers.
a. Conditional Waivers
Conditional waivers are used where a lien claimant is required to execute a waiver and release in exchange for or in order to induce payment, and the claimant is not in fact paid in exchange for the waiver in release, a single payee check, or joint payee check is given in exchange for the waiver and release.
So what that means is that conditional waivers are signed and provided to the upstream party on a project in order to induce payment. So these are what you sign when you have not received payment yet. And they are generally only affective if the payment is identified, and the waiver is made.
The exact language and the waiver that leads to that result will be discussed further down in the article. But the general rule is that a conditional waiver plus a check for the amount in the waiver equals an unconditional waiver.
So the big takeaway is that it is only effective if the subsequent construction payment is made.
b. Unconditional waivers
Unconditional waivers on the other hand are used when a lien claimant is required to execute a waiver and release in exchange for or in order to induce payment, and the claimant asserts in the waiver that it has been paid the payment.
So unconditional waivers in a typical construction project are the waivers you give after you have been paid, not only after you have been paid, but after you make sure the check is cleared. It is important to make sure payment is cleared before you ever give an unconditional waiver. You will see in the language in unconditional waivers.
They are generally effective even if the payment identified and the waiver is not paid. So it is particularly important to make sure that there are no problems with the payment before you turn over and sign an unconditional waiver
c. Conditional Waiver and Release on Progress Payment
Below is the statutory form for the Conditional Waiver and Release on Progress Payment.
There is some important language that gives this waiver its characteristics. You will see in the first line that it says ‘on receipt by the undersigned of a check’ which means the waiver is conditional. This waiver is conditional upon receipt of a check. So you waive rights when you receive a check.
The line below that says ‘and when the check has been properly endorsed and has been paid by the bank on which it is drawn’ which means that when the check is cashed or deposited, and it has cleared the bank on which it is drawn, that is when the conditional waiver becomes effective.
Because this is a progress waiver, as mentioned in the line ‘This release covers a progress payment... or items furnished after that date.’ It is really important that you are mindful of the dates being put there. It is particularly important if you are working on a project, and you have not been paid on a pay application. You need to be mindful of that when you submit a subsequent pay application and not waive rights on a pay application that has not been paid.
It cannot be said enough – you need to be careful and mindful of the date you put in. Make sure you are not inadvertently waiving lien rights through putting a date in the form that may be at odds with rights that you have for payments that have not been made.
d. Unconditional Waiver and Release on Progress Payment
Next, we move on to the Unconditional Waiver and Release on Progress Payment.
This is a statutory form and because it is an unconditional waiver, there is language that says in two places, first in the first line, ‘The undersigned has been paid and has received a progress payment in the sum of $__________...’
That line indicates that by signing this waiver, you are acknowledging that you have received the payment. And if you look at the bottom of the document, there is a notice that says, ‘The undersigned warrants that he either has already paid... for or to the above referenced project.’ It says that the document waives rights unconditionally and states that you have been paid for giving up those rights.
This document is enforceable against you if you sign it, even if you have not been paid. If you have not been paid, use a conditional release. This is extremely important; the notice is in there for a reason. You have situations all the time where upstream parties may insist for some reason that downstream parties sign unconditional waivers in exchange for a check or they sign unconditional waivers before a check is issued.
That should not happen. You should not be signing unconditional waivers in those circumstances because if you do, you have effectively waived your lien rights and rights to payment. If you look at the language in the middle of the waiver, it not only waives rights to payment, but it waives any bond right, and any claim for payment. So it is a broad waiver.
If you have not been paid, you need to sign an unconditional waiver and check if it is a progress or final until you receive the payment, and again, make sure the check has cleared and the funds are good before you sign the unconditional waiver.
Because this is an unconditional waiver on progress payment, if you see this line, you will see that it talks about ‘the release covering a progress payment for all labor, materials, services, and equipment though a specified date.’
e. Conditional Waiver and Release on Final Payment
Next is the Conditional Waiver and Release on Final Payment. This is a conditional release as you can see in the first sentence, and again, it is conditional upon receipt of a check and the payment of the check by the bank on which it is drawn.
Receipt of a check and clearing of that check is when this waiver and release becomes effective. As mentioned above, final waivers generally release all lien rights on a project, but the one caveat is that there is a place in the statutory forms for disputed amounts so if you look at the last couple of sentences in the first paragraph, it says that the release ‘covers final payment to the undersigned for all labor, services... except for disputed claims in the amount of $__________.’
It is really important to take advantage of this if you are in a situation where there is a dispute as to monies that you are owed on a project and you are still being asked to sign a final waiver. It is important that you include those disputed amounts in this waiver before you sign and submit it.
f. Unconditional Waiver and Release on Final Payment
Lastly, is the Unconditional Waiver and Release on Final Payment.
Because this is an unconditional release in which the first highlighted section says ‘the undersigned has been paid been paid in full for all labor, services, equipment or material furnished to the jobsite or to __________ (Person with whom Undersigned Contracted)…'
This indicates that their payment has been made and then you will see the same notice that is in the Unconditional Waiver and Release on Progress Payment at the bottom indicating that if you sign it and you have not been paid, that it is effective, and you have waived your lien and other payment rights.
But again, as with the Conditional Waiver and Release on Final Payment above, there is a section for disputed claims for extra work and the amount. For the same reasons that it is important to include that information on a Conditional Final Waiver. It is also important to include it on an Unconditional Final Waiver.
Lien Waiver Dos and Don’ts
Now that the statutory forms have been covered, we will discuss some lien waiver dos and don’ts.
a. Lien waiver dos
First, we will discuss some lien waiver dos.
i. DO exercise extreme caution when executing any lien waiver
Exercise extreme caution when executing any lien waiver. When a construction project is going on, there can be a frantic dash to get materials or to get documents filled out and get them submitted to secure payment.
But it is advised generally to use extreme caution when executing a lien waiver. You do not want to inadvertently complete one in a fashion that waives lien rights, that you did not intend to waive.
ii. DO be sure you use the right type of waiver
Be sure that you use the right type of waiver. Do not sign an unconditional waiver whether it be progress or final unless you have received payment unless payment has cleared.
iii. DO be mindful of the time period covered by prospective progress waivers
The third thing to do is to be mindful of the time period covered by prospective progress waivers. You want to make sure that if you fill out a progress waiver that you are not inadvertently waiving rights to payment for things you may not have been paid for in the past.
Because maybe you will be in a situation where you have not been paid or the amount is disputed, and you will submit a subsequent pay application. So be very careful and mindful of the dates and progress waivers.
iv. DO seek legal assistance before you sign a lien waiver if you are at all uncertain
The last do is if you have a situation where you are unsure of what lien waiver to use, what language to add, or what date to use, then seek legal assistance before you sign a lien waiver. If you are at all uncertain, seek out a qualified attorney, present your special issue to them, and have them give you some advice on how to handle that issue.
b. Lien waiver don’ts
Now we will discuss lien waiver don’ts.
i. DO NOT sign an unconditional lien waiver until your payment clears
The biggest do not, is to never sign an unconditional waiver until you know that the payment you received, has cleared. So make sure you get the payment and make sure it is cleared. Because once you sign that unconditional waiver, your payment rights are waived.
ii.DO NOT neglect to include disputed amounts in final waivers
The second do not, is something touched above with final waivers. Do not neglect to include disputed amounts in final waivers. If you do, there is a chance that you have waived your right to recoup payment of those disputed amounts.
Those are the lien waiver dos and don’ts.