This blog has been taken from a webinar presented by SunRay Construction Solutions and Alex Barthet. Alex is a board-certified construction lawyer who serves clients in the state of Florida.
In this blog, we will discuss what form of release to use when you get or give a check and why it is probably not what you think! We will go over different variations of releases so that you understand why this is such an important topic. We will also discuss why some people lose their money when they did not pay attention to some of these rules.
Releases and Their Various Forms
We will start by talking about the various types of releases.
1. It depends on if you are a general contractor or subcontractor
The first thing you should know when reviewing a release is knowing where you are in the construction process. The general rule is as follows:
You want to give a narrow release when you get a check and get a broad release when you give a check.
For example, if you are a subcontractor on a project and you are getting a check from a general contractor, you would like to give that general contractor a release that is as narrow as possible, meaning that you are giving away the fewest number of rights for the least amount of time for the most amount of money.
Now the converse is also true. If you are a general contractor and you are giving a check to your subcontractor, you want that subcontractor to release more rights for the check that you are giving him or her to release any and all rights they possibly have. This includes claims, extended time, general conditions, delays, and change orders. You want them to release absolutely everything through the latest date possible.
So, understand that dichotomy that is happening when checks and releases are exchanged.
Also, as a general contractor, with the property owner, you would like to give the fewest number of rights away when you get your check from them. The same is true for a subcontractor and if you have sub-subcontractors working for you, you want to make sure that they give away the greatest number of rights when they pick up their check.
So, do not think that if you are a subcontractor that you just have to worry about the releases you give to the general contractor, you should also worry about the releases you are getting from your sub-subcontractors.
2. Statutory releases in Chapter 713
Now we will take a look at what everyone considers the basic standard release which is found in Chapter 713 of Florida Statutes.
The above form is a waiver and release on progress payment. You can find it right in the Florida Statutes Chapter 713, and notice that it is very basic. It has a blank for the dollar amount that you are going to put in. For example, if you are getting a $25,000 check, you’ll put $25,000 there. And it has a through date. That date the date that the check represents you are paid in full through.
So, if you are getting a check for $25,000 and that pays you to the end of the month then you will put $25,000 in the blank for the dollar amount, and the end of the amount for the date.
Next is the final payment release form, which is the standard form found in Chapter 713.
You will notice that one big difference between the last form and this final release one is that this has a blank for the dollar amount, but it has no through date. This is because it is effective on the day you sign it.
So, if you sign a release today that has no through date, then it is effective from today back. That is the main difference and quite frankly, the only difference between a progress payment release and a final payment release.
Now, be aware that you cannot release any rights under Florida law in advance. You cannot make someone sign a release or a contract that includes their release today that releases their rights for work they have not yet done tomorrow. So, if they sign a final release today go out on the job two weeks from now and do more work, they have more lien rights that they may be able to enforce.
Now we will take a look at another release form.
Now what is interesting about this form is that it is much longer and it has a lot more words in it. And the more words there are in a release, the more rights are probably being given away.
We will break this release down into its component parts. It does not have a dollar amount, it says $10. It also releases many things beyond just lien rights, which are the only rights that are released under a standard Chapter 713 partial and final release.
This release reads that it is releasing all of your lien rights as well as any claims, change orders, works, materials, delays, fees, costs, losses, expenses, damages, or sums for the labor, services, and materials furnished to the improvements. It is a broad form release meaning that you would be hard-pressed if you signed a release like this to come back later and say that you know you signed the release but that you have a claim for delays on the project.
This release specifically enumerates that one of the things you are releasing or only claims for delays. So be careful when you sign releases that have lots of these words in it. Because you could be giving away lots of your rights.
In addition, the release has a through date and the last three sentences include certain representations. This is seen a lot in releases as well. The last three lines mean that when you sign that release, you are not only saying that you are releasing all of your rights, but you are affirming that everyone under you has been paid through the through date. If that is an accurate statement or it is not, you have to be careful when you sign the release.
It further has representation looking to tie you down in case there is a claim later that something was not built correctly. They can always come back, say that you violated the contract, and signed releases every month that said everything was built correctly.
So, be careful about these additional statements in a release. They may be fine, but you just need to be aware of them.
Now, the release says $10 because the person who is giving you this release to sign does not want to have an argument later that they shorted your payment.
For example, let us assume that you are looking to collect $10,000 for this month’s payment and you get to the contractor’s or subcontractor’s office. They give you a check for $8,000 and not $10,000. The through date on the release is till the end of the month but the release does not say $8,000 or $10,000, it just says $10. You decide to sign the release, take the $8,000 check, and you decide to deal with it next month because your accounting is going to show that you were shorted $2,000.
The problem that you have is that because this release says $10, a court is going to interpret that to mean that you decided to take some amount of money to give away your rights. And the court is not going to second-guess whether or not you made the business decision to take $8,000 versus $10,000 to give away all those rights through the through date.
So, be very careful about signing $10 releases, especially if the amount of money you are getting that month is less than what you agreed to.
3. The two reasons why a release would say $10
Now, there are two valid reasons why a release would say $10.
One is that you sent a Notice to Owner and you have not done any work during that time. A contractor and owner should be getting releases from you every month. If you have not done any work and you are not getting a check that month, then how do you give a release? They don’t write in “0,” they usually put $10.
So, if you sign a $10 release for a month, where you are owed nothing, then you should be fine doing that.
The other time that people want $10 release is when contractor do not explain or disclose to the owner how much the project actually costs. For example, the contractor signs a million-dollar lump sum contract with an owner. The contractor does not want the owner to start adding up all the amounts in the releases, that they were charged a million, but it is actually only costing $600,000.
Contractors sometimes put $10 so that even though the amount of money you are getting that month is correct, they put that amount so that the owner cannot stack up all the releases, do all the math, and realize what the project actually costs.
This is again, a valid reason why someone wants $10 but just be aware and be very careful if the release says $10 and you are picking it up for an amount less than what you expect.
4. If you agree to a form of release in your contract, you may be bound to use that form
How do you change the form of the release that pays you? Well, there are a couple of ways. First you need to know that if you agree to a form of release in your contract, whether it has a specific form of release. For example, if it says you agreed to sign all the releases attached as Exhibit Q, R, and S to this contract, then those are the releases you have to sign. It also may say something like you agree to sign all releases in a form acceptable to the general contractor. Then you may be bound to sign the form that you are given.
5. Negotiate the form of release as part of your contract negotiations
So, what you need to do is negotiate the form of the release as part of your contract negotiations. When you are reviewing the contract for price, scope, and time, make sure that you are also reviewing it for legal terms and conditions like pay when paid, the ability to stop work if you have not been paid, notice an opportunity to cure, and as mentioned above, a form of release that is acceptable to you every time you get paid so that you are not giving up more rights than you should.
What Is the Through Date?
1. Match the through date with the dollars
You need to match the through date on the release with the dollars that you are getting.
2. The “through date” is the effective date of your release
The most important thing to remember is that the through date is the effective date of the release and it will control over the payment amount.
3. The “through date” will control over the payment amount
If you are supposed to pick up a $10,000 check that gets you to the end of the month for the work or materials that you provided to the project, you get there, and they say they are only going to give you $6,000, you have two choices.
Option 1 is you change the through date on your release. So, if $10,000 got you to the end of the month, $6,000 maybe to 20th of the month. You have to figure out which it is and you then have to change the through date. Because the through date is what is going to control.
If you sign a release with a through date that is the end of the month, even if you do not get all of your money, you will have at least released your rights all the way through the end of the month. The other option is to reject the release and say that you cannot sign that release with a through date that does not get you equal to the amount of money that you get.
So, you can ask them to change the through date (Option 1) or Option 2, to give you more money. Which means that instead of the $6,000 they have to give you the $10,000.
4. If the “through date” and payment don’t match, you need to change one or the other, or both
Remember that the through date is what governs, not the amount of money that you are collecting.
What about Conditional Releases
Conditional releases are something that you should be using on a regular basis.
1. What is a conditional release?
A conditional release is a release that is expressly conditioned upon the payment listed in the release for you to receive that in cleared funds.
2. Sample conditional release statement
Here is a statement that you can handwrite or type, it does not really matter. It reads as follows:
Notwithstanding anything to the contrary, this waiver and release is conditioned upon and not effective until the undersigned receives paid funds of $___.
In that blank you put in the amount you are expecting, whether that is $10,000 or $100,000. That means that if you sign a release that is conditional, then until you receive the money, the amount is no good.
3. Watch out for releases titled “conditional” that are not
You also need to watch out for releases that are titled conditional but are in fact not conditional. That is seen sometimes so the title of the document says “conditional partial release” but when you read the document it has no conditional language in it. If that happens, then that release is not conditional. So be very careful, because you cannot just rely on the title and think that you have a conditional release.
4. Must indicate the amount of money to satisfy the condition (not $10)
The conditional release must be for an amount specifically that you are expecting in the form of a payment either to be received or a check to clear and it cannot be $10. So you cannot have a conditional release for $10.
5. As a general contractor, watch out for conditional releases from sub-subcontractors or suppliers to your subcontractors
As a general contractor, you need to be very careful about accepting conditional releases from sub-subcontractors or suppliers to your subcontractors. For example, let us say you are a general contractor. Your electrician is owed $100,000, and you have a Notice to Owner from the electrician and the electrician supply house.
You as the general contractor need to make sure that you get a release from the electrician and the supply house. Now, the time comes for you to cut the check for $100,000 and hand it over to the electrician. But when the electrician comes, he has his own release on a form that you accept. But he has included in his package of releases his supply house release that is conditional.
If you hand the $100,000 check to the electrician and the electrician never gives the money to the supply house, the conditional release that you have from the supply house is no good and that supply house still has lien rights or claim rights against your bond.
So, if you are a general contractor, you have to be very careful about accepting lower-tier conditional releases because you are not in control of that condition. In the example above, if the electrician never pays the supply house, you are going to be left holding the bag.
You have two choices – Option 1 is to tell your electrician that you need an unconditional release from their supply house. Option 2 is to tell the electrician that you are not going to pay them the $100,000 because you cannot accept the conditional release from their supply house. But you can offer to issue a joint check to them and the supply house for the money they are owed. Then you can accept their conditional release because now you are controlling the condition which is you giving the money to the supply house directly.
PRO TIP #1: Having the “original release” is worthless. A copy is valid according to its terms
Having the original release is absolutely worthless. A copy of the release is valid according to its terms. People these days still say that they will send a copy of the release but you do not have to worry because you are holding the one with the actual notary stamp and the blue ink that has the original signature. And you think that until they get that original, you have not given up any rights. This is false.
If you give someone a release via a scan, email, or fax, that release is valid according to whatever the terms are on the lease, the fact that you have the original means nothing. Do not think that just because you are holding the original that you have some additional rights until they get the original. So, you need to make sure that you use conditional language on all releases until you get the funds.
PRO TIP #2: A forged release is still “valid” if the person paying did not know it was forged
A forged release is still valid if the person paying the funds did not know it was forged. It is hard to imagine but we have a specific story to help you understand.
For example, there is a supply house that over the course of five months was owed about one million dollars from an electrician. Letters are sent to the owner and contractor by the supply house saying that the supply house is going to put liens on all of their properties and make claims on their bonds unless they are paid. They all uniformly wrote back asking what the supply house was talking about and said that they had releases every month from them.
They sent copies of the releases that they had and what happened is, the electrician was forging releases. He had taken a good release that was issued early on in the project cutting out the signature and notary block and changing the upper portion of the release to match it every month. So, the supply house was not getting paid, the electrician was forging releases, sending those forged releases to the contractor and the owner, and getting paid by both.
Now you would think that as the electrical supply house, you did not participate in the fraud, and as a result you still have your lien and bond rights. Unfortunately, there were two cases in the state of Florida with this exact issue and the answer is unequivocally that between an owner or a contractor, who have no reason to know that the release is forged, and the supply house that did not participate in any forgery, the owner and contractor win and the supply house loses.
So, know that even if you did not participate in the fraud, you could still lose your lien rights if your releases get forged and passed up the line. So, what do you do to prevent this? You need to stay on top of your accounts receivable. If you can ensure that payments are not being made timely every month, then you can minimize the risk because the problem in the example above, the problem was that the supply house waited almost five months before they moved forward with their collection efforts.
PRO TIP #3: Preserve change order or other claims by adding an exception to your releases
The last pro tip is if you have change orders or other claims that may not be fully matured or you do not know how much they are worth, but you know that you intend to make that claim later, you need to include an exception in your release.
Below is an example of sample language of an exception that you can add to your releases every month to preserve those rights:
Notwithstanding anything to the contrary, this waiver and release excludes __________.
In the blank you could write in PCO 11, 14 and 7, or it excludes delay claims set forth in our June 17, 2020 letter. So, as long as you include some reference that that is what you are trying to preserve, then it will exclude it from the release. If you sign one of those broad form releases which most contractors will demand of you every month, you will release those rights and it will be very difficult if not impossible to recover those rights later.