What Has Happened to Lien Waivers?

Soon after the lien came the lien waiver, said to be necessary to protect property from specious claims. What started out as a simple means of proving that an owner had paid, however, has taken a long and tortured path to becoming a means of depriving contractors of their rights, as owners and upper-tier contractors use the “lien waiver” to release, indemnify, insure, warrant and all manner of other things.

In the course of preparing a more “scholarly” article, I recently learned that the earliest version of a mechanic's lien statute in the U.S. was passed by the Pennsylvania legislature in 1784 — not to attach to real property, however. Neil v. Kinney (Ohio 1860) referenced the Act of 1784 created to protect the rights of shipbuilders in Philadelphia. We have come a long, long way since then.

The closest thing to a present day lien on real property most likely came out of Maryland in 1791, out of a desire to establish and improve the city of Washington as speedily as possible as the permanent seat of government of the United States. Thomas Jefferson and James Madison urged Maryland to enact a statute assuring that “master builders” operating on the project would have a lien on their work as security for their payment. Some have suggested that Jefferson learned of the remedy while studying major European cities in connection with the planning of the national capital.

Soon after the lien came the lien waiver, said to be necessary to protect property from specious claims. What started out as a simple means of proving that an owner had paid, however, has taken a long and tortured path to becoming a means of depriving contractors of their rights, as owners and upper-tier contractors use the “lien waiver” to release, indemnify, insure, warrant and all manner of other things. It is not uncommon for a modern “waiver” to address:

The relief being released or waived: Just because the document is titled “Lien Waiver,” the claimant cannot be sure that it does not cover much more ground such as: the mechanic's lien rights; statutory or contractual payment bond rights; breach of contract rights; or unjust enrichment or non-contractual rights.

The monetary value of rights being released or preserved from the document: Frequently, the lien waiver/release form requires the claimant to give up rights to lien security for funds that are not being paid currently including: the amount paid in exchange for the release/waiver; unpaid retention earned but unpaid as of the effective date of the release/waiver; extra work not yet finalized in change orders as of the effective date of the release/waiver; and claims and disputes as of the effective date of the release/waiver.

The effective date of the waiver: The trap for the unwary contractor here is that the document could become effective before payment is actually received (an “unconditional” waiver), rather than only becoming effective when the check has been negotiated and paid out by the issuing bank (a “conditional” waiver).

The temporal extent of the waiver: What is the earliest date of work being removed from lien protection and what is the latest date? Unfortunately, the time period often is not tied to the period of the work for which payment is being made.

I see waivers written to release work: from the day work starts, constituting an advance waiver of all lien rights; through the date of the last work for which payment is being received; through the date of the payment application; through the date when payment is received; or through the date when the check is negotiated and payment is received.

Certifications and attestations: There is now no end to the creativity of counsel (including counsel for lenders, designers, consultants and others) who inject additional contractual terms via the lien waiver or release such as:

  • Certification that all work was properly done in conformance with contract requirements.

  • Certification that all payments to sub-contractors and suppliers have been made, including tax liabilities.

  • Attestation that funds received will be treated as “trust funds” for payment of subcontractors and suppliers first.

  • Indemnification of identified parties in the event any claim or threat of claim arises against them.

  • Acknowledgments that third parties will be entitled to rely on the accuracy of all certifications and attestations in the lien release/waiver forms.

Personal liability of signing party: Construction contracts are enforceable against the entity signing them, and the liability of the individual signing in a representative capacity is limited as in other spheres of law. However, many lien releases/waivers are drafted to require personal attestations by the individual signing them. The individual could then be personally liable for misstatements upon which the recipients or third parties relied to their detriment.

Some states have enacted laws limiting what can be required in a lien waiver and even dictate the form that is allowed. However, there are still way too many states where a contractor or supplier has to have a law degree to know what it is being asked to give up and a stiff backbone to refuse to give up more than is fair.

Susan McGreevy is a partner at Stinson, Morrision, Hecker LLP, Kansas City, Mo., 816/842-4800, e-mail to [email protected].

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