Lien waivers: what am I really waiving?

Sept. 1, 2011
Just because the document is called a "lien waiver" doesn't mean that's all you will be waiving if you sign it.

Lien waivers are part of doing business for contractors. If you want to get paid, most owners or general contractors will require that you submit a signed lien waiver with your payment application.

On the face of it this seems like a fair trade. Payment in return for a lien waiver. Basically, the owner wants to make sure that if its paying for the work — either directly or through the general — the property won't be encumbered by a mechanic's, which could then subject the owner to double payment to remove the lien.

But whether this truly is a fair arrangement often depends on what is in the lien waiver. Is it really just a lien waiver? Is the contractor waiving only the right to lien the property to the extent of the amount of the payment? Or if so, then that is probably a fair arrangement. Unfortunately, not all so-called lien waivers just waive liens. Sometimes they waive much more than the contractor realized, which can be a big problem if the need to assert a claim arises later in the project.

So what started out as a simple way of proving that an owner had paid has turned into 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 therefore very important to read the lien waiver and understand what you are waiving or what you are giving up to get paid.

In other words, just because the document is called a "lien waiver" doesn't mean that's all you will be waiving if you sign it. Modern lien waivers often cover much more ground than just mechanic's liens. In fact, it's not uncommon for lien waivers to waive a contractor's mechanic's lien rights along with any statutory or contractual payment bond rights, breach of contract rights, and even extra-contract claims like unjust enrichment.

Here are a few things to watch for:

• Make sure you understand the nature of the rights you are waiving. Are you waiving just lien rights or are you waiving and releasing other rights? Watch for language that includes claims, suits, causes of action, and other terms that suggest you are giving more than just lien rights.

• Make sure you understand the monetary value of any rights being released or preserved. 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.

• Pay attention to 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). It's usually preferable to sign a conditional waiver if you are being asked to provide the waiver before the money is in the bank. If you have already been paid for the work being released, then this doesn't matter.

• Pay attention to the temporal scope of the waiver. In other words, what is the earliest date of work being removed from lien protection, and what is the latest date? Sometimes the time period in the lien waiver is not tied to the period of the work for which payment is being made. Lien waivers can be written to release work. For example, 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; and through the date when the check is negotiated and payment is received.

• Beware of additional certifications or attestations that may expand your obligations and contractual responsibilities. Sometimes this is the result of lender requirements, but it is often the result of overzealous lawyers (including counsel for lenders, designers, consultants and others) who inject additional contractual terms via the lien waiver or release. These types of additional certifications include 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; and acknowledgments that third-parties will be entitled to rely on the accuracy of all certifications and attestations in the lien release/waiver forms.

• Finally, be careful that you don't expose yourself to personal liability by signing the lien waiver. While construction contracts are enforceable against the entity signing them, and the liability of the individual signing in a representative capacity is limited, many lien releases/waivers are drafted to require personal attestations by the individual signing them, who could be then 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, but there are still many states where a contractor or supplier has to be vigilant about preserving their rights so as not to give up more than is fair.

Michael Callahan is a partner at Stinson Morrison Hecker LLP (the same firm as long-time columnist Susan McGreevy) where he assists clients with all aspects of their construction law needs, including litigation.

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