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Should You Sign a Lien Waiver? Read This First

Should You Sign a Lien Waiver? Read This First

September 3, 2019

Lien waivers are among the most important documents in the construction industry when it comes to payment. A lien waiver upholds a payment agreement between two construction stakeholders, specifically the payer and the payee. The payer is typically the property owner or the general contractor, while the payee – the party receiving the payment – can be a contractor, subcontractor, material supplier, equipment lessor, or any other party who provides service to a project.

A lien waiver may also include clauses that can waive other rights or include additional obligations. It can ask you to waive your rights to retainage claims and other contractual rights, and it can include other tasks that you must complete even if they were not indicated in the original contract.

The basics of lien waivers

When a payee signs a lien waiver, they are essentially waiving their right to file a mechanics lien against a property. The waiver may cover all or part of the work that the payee has performed on a project, depending on the type of waiver and the amount that is stated in the document.

For example, a general contractor pays a material supplier $50,000 for furnishing lumber to a project. The general contractor may require the material supplier to hand a signed lien waiver in exchange for payment.

In this scenario, the material supplier who signs the waiver will not be able to file a mechanics lien worth $50,000 for the lumber that they delivered to the project. If they continue supplying more lumber to the ongoing project, they can still file a mechanics lien for the additional work unless another waiver is signed.

Why is a lien waiver needed?

There are many reasons why signing a lien waiver is beneficial, not just for you as a payee but also for other construction parties up in the contracting chain.

Avoiding a mechanics lien

Nobody wants to deal with a mechanics lien and all the complex procedures that come with it. When you sign a lien waiver, you give the property owners peace of mind that they will not be dealing with a surprise mechanics lien sometime in the future.

Avoiding fraud

Signing a lien waiver also secures the property owners from fraudulent lien claims. Sometimes a delinquent prime contractor may keep the money for themselves and fail to distribute the payment to their subcontractors and other lower-tier parties. These lower-tier parties may file a lien against the property, which may cause the property owners to pay double the amount.

Avoiding double payment

To avoid double-payment issues, property owners usually prefer that all construction participants sign a lien waiver before payment is exchanged. In this regard, signing a lien waiver may help speed up the payment process which allows you to get paid sooner than later.

A lien waiver, therefore, helps foster a healthier relationship between property owners and other construction participants. Both the payer and the payee are protected, so long as the waivers that are signed are accurate and are true to the requirements of the state (we’ll get to the rules in a bit).

Who can submit a lien waiver?

A lien waiver document may come from either the payer or the payee, depending on the established practices of the parties involved. In some cases, it is the general contractor who hands a lien waiver for the subcontractor to sign, but it is also possible for a subcontractor to send a signed conditional lien waiver together with the invoice.

When can you submit a lien waiver?

Generally speaking, construction participants are encouraged to exchange conditional lien waivers on or before payment is released. If you are a general contractor, you may ask the people working for you to submit a signed conditional lien waiver when they send their invoices.

Accordingly, if you are a subcontractor or a material supplier, you are encouraged to attach a conditional lien waiver to the invoice even if the contractor has not requested you to do so. You speed up the payment process by being proactive in sending the lien waiver instead of waiting for a specific instruction from your client.

Once a lien waiver has been sent, you must track its status and verify if the payment has been satisfied. Tracking lien waivers involves taking note of the date of sending, the name of the person who received it, when was it received, and when the payment has been made.

Following the paper trail of your lien waivers is very important as you may need these documented proofs in case payment disputes arise down the line.

Statutory requirements

Sending and tracking a lien waiver are not the only important steps to consider – you must also ensure that the lien waiver you are signing follows the rules and regulations of the state in which you work.

Luckily, 38 states do not have specific laws when it comes to lien waivers. The remaining 12 states, however, specify the rules that you must follow for your lien waiver to be considered legally binding.

Which states require a lien waiver?

The following states have specific rules for lien waivers: Arizona, California, Florida, Georgia, Massachusetts, Michigan, Mississippi, Missouri, Nevada, Texas, Utah, and Wyoming.

If you are working on a construction project in any of these 12 states, your lien waiver must adhere to the format and language requirements that are specified in the statutes.

Is it okay to send a waiver where it’s not required?

Yes, it is perfectly fine to send a lien waiver even if you are not obligated to do so. Since you do not have to follow a standardized format, you are free to draft a lien waiver form on your own.

However, it is in your best interest to consult a lien expert – a construction lawyer, a lien service specialist – to guide you on how to draft your lien waiver form. You may also begin the process by consulting the standard forms used in regulated states, just so you have an idea on the type of information that are included in these forms.

You do not have to draft a new lien waiver form every time you start working on a new project. A standard lien waiver that you have created should be good enough to be reused in multiple projects.

Dangers of using non-standard forms in unregulated states

Non-standard forms in unregulated states may contain intentionally vague legal language that could cause you to lose more than just your lien rights. If you are signing a non-standard lien waiver from your client, make sure that you understand everything that is written on it.

Things to watch out for include clauses that imply that you are signing off your lien rights “unconditionally” (i.e. before a payment is made and cleared) and that you are waiving your rights to other unrelated items such as pending change orders.

Lien waiver forms

Which states require notarization of a lien waiver?

Only three states require your lien waivers to be notarized: Mississippi, Texas, and Wyoming. All other states do not require notarization for your lien waivers.

Lien waiver vs. “no lien” clause, lien release

Lien waivers are sometimes mistaken for documents that are seemingly similar in purpose but really are fundamentally different from them, particularly “no lien” clauses and lien releases.

How is a lien waiver different from a “no lien” clause?

A “no lien” clause is included in the original contract that you sign with the party that hires you, while a lien waiver is a separate document that you sign when you have already performed work a project. When signed, both a “no lien” clause and a lien waiver revoke your right to file a mechanics lien against a project.

How is a lien waiver different from a lien release?

A lien waiver is sometimes called lien release but they are different documents. To know which document you have to sign, simply ask yourself: have I filed a mechanics lien yet? A waiver is signed before a mechanics lien is filed, while a lien release is signed after a mechanics lien is filed.

When you get paid for your work on a project and the property owner requests you to waive your right to file a mechanics lien against said project, you must sign a lien waiver.

If, on the other hand, you have already recorded a mechanics lien and it successfully prompted the property owner to pay up, then you must sign a lien release to clear the mechanics lien claim that you filed.  

Types of lien waivers

There are two main types of lien waivers: conditional and unconditional. Under these two main umbrellas are two further types: waivers for progress payment and waivers for final payment.

Conditional lien waivers

As the name implies, conditional lien waivers are enforceable on the condition the payment is duly received by the payee. You must use this waiver when you have NOT received payment from your client yet.

Conditional lien waivers

There are two types of conditional lien waivers: conditional waiver and release upon progress payment and conditional waiver and release upon final payment.

1. Conditional waiver and release upon progress payment

This waiver applies when you i) are yet to receive payment, and ii) are only receiving payment for part of the work that you have performed on a project.

Say, you are working on a contract to work on a project for 12 months and you are set to receive payment for the work that you’ve done only for the first 2 months. In this scenario, you must sign a conditional waiver and release upon progress payment.

2. Conditional waiver and release upon final payment

This waiver applies when you i) are yet to receive payment, and ii) will be receiving the full payment that you are expecting from the project.

Say, your work for a project is done and you are expecting to receive your last and final paycheck from this gig. You must then sign a conditional waiver and release upon final payment.

Unconditional lien waivers

Unconditional lien waivers are enforceable immediately after they are executed or signed. This means that whether you have received payment or not, signing an unconditional waiver automatically revokes your lien rights.

You must only sign an unconditional lien waiver once you have received the payment. If you have received a cheque, make sure that the cheque is cleared in the bank before you sign a waiver. The same goes with money orders and credit card transactions.

Signing an unconditional lien waiver has more risks, so you must be 100% sure that you have received your money before you give up your lien rights.

1. Unconditional waiver and release upon progress payment

This waiver applies when you i) have received and verified your payment and, ii) have received payment only for part of the work that you have provided to a project.

Say, you received a cheque for the concrete that you have supplied in the last month and the bank has cleared the cheque. The project is also ongoing and you will still be the property’s concrete supplier. In this scenario, you may sign an unconditional waiver and release upon progress payment.

2. Unconditional waiver and release upon final payment

This waiver applies when you i) have received and verified your payment and, ii) have received your final expected payment from this project.

Say, you verified that a credit card payment has been cleared in your account and you are completely done with a project. You are not expecting future payments and you are ready to move forward to a new project. In this scenario, you may consider signing an unconditional waiver and release upon final payment.

4 common mistakes when sending a lien waiver

For it to be valid, you must perfect your waiver. Here are some mistakes you can make when preparing and sending your lien waiver.

1. Signing an unconditional lien waiver before verifying that payment has been received

Bouncing cheques and declined credit card transactions can happen anytime, so you must always ensure that you have the payment on hand before you sign an unconditional lien waiver.

If possible, try to sign a conditional lien waiver instead so you can still protect your lien rights if unfortunate circumstances occur. Otherwise, you will end up waiving your lien rights without receiving the payment that you rightfully earned.

2. Failing to follow the statutory requirements in your lien waiver form

If you are working in one of the 12 states that require a specific lien waiver form, make sure that you follow all the formatting and language requirements to a tee.

The statutes sometimes state that a lien waiver document must be in “substantially” a specific form, but it is in your best interest to just copy the exact form in the statutes and fill in the blanks. You do not want to sign an invalid waiver just because you used the wrong typeface or added an unnecessary sentence.

3. Failing to have your lien waiver notarized when required

Having your lien waiver notarized is required in only three states, so you must not miss this step when you are working in Mississippi, Texas, or Wyoming.

Consequently, when you are working in all other states, you do not have to go the extra mile and have your document notarized. Having your lien waiver notarized when not required to do so may even do more harm, so sticking to the rules should work best.

4. Signing a lien waiver without understanding all its clauses

Lien waivers may include clauses that may cause you to lose more than just your lien rights. When signing any kind of lien waiver, make sure that you understand everything written on it.

Keep an eye out for statements that could revoke your right to claim retainage or payment for pending change orders. Also watch out for lines that could add obligations that you must fulfill, specifically items that were not agreed upon in your original contract.

3 things to keep in mind when submitting a lien waiver

While lien waivers are very helpful in facilitating a good business relationship among construction stakeholders, they also come with risks, especially for subcontractors, material suppliers, and lower-tier parties. Here are three things that you must always keep in mind when signing waivers.

1. Ensure that the details are accurate

The important details to watch out for are the amount and the time period being covered. The amount you are waiving should be the same amount that you received or are expecting to receive as payment. This amount should also agree with the time period stated, i.e. the first and last dates of work for which you are waiving your lien rights.

Keeping track of your work on a project and having an efficient bookkeeping system is a good way to mitigate the risks of writing inaccurate details. Ideally you should always know when exactly you do the work, how much the work is worth, and when the payment has been received or is due to be received.

2. Ensure that you agree with all the clauses on the lien waiver form

This is very, very important, especially if you are working in a state in which no standard lien waiver is required. Your client may ask you to sign a waiver that would make you responsible for the contents and possible inaccurate statements. You may also encounter a waiver that would raise the standards in your work, even if such standards were not agreed upon in the initial contract.

In any case, it is best practice for you to be wary when signing waivers that include clauses beyond what is normally stated in standard forms. You may consult legal experts to mitigate this risk, or you may exercise due diligence on your own to make sure that you are not being ripped off.

3. Ensure that the waiver is effective only when you have received payment

If possible, always sign a conditional lien waiver. However, if the waiver you are being asked to sign does not specifically state whether it is conditional or unconditional, take note of its “effective date.” Make sure that you have either already received payment by the effective date before you sign the waiver.

When ensuring that payment has been received, do not just rely on getting a cheque in the mail or a proof of credit card transaction. Always verify with the bank that the cheque has been cleared or the credit card transaction has been approved before signing away your lien rights.

Further reading