Whenever a payment dispute arises in a construction project, the party who’s trying to get paid will typically attach a mechanics lien against the property in question. A mechanics lien limits a property’s market value, which forces property owners to either settle outstanding debts or fight it out in court.
Nobody likes dealing with a mechanics lien; it is time-consuming for all the parties involved, owners and claimants alike. It is, therefore, common for property owners to require their construction workers to sign a lien waiver, a document that lets potential lien claimants relinquish their lien rights as long as they get paid for their work.
Lien waivers are essentially “proofs of payment.” A party who has received payment in a construction project is expected to sign a lien waiver as a declaration that they are effectively waiving their lien rights. If used correctly, lien waivers can actually protect both the paying party and the party claiming the payment from having to deal with a mechanics lien.
Sometimes, however, it is not clear whether signing a lien waiver is the right thing to do. Waiving your lien rights is a strong statement to make, so it is not something that should be done in a hurry. Here are six situations in which signing a lien waiver is highly advisable:
- Scenario 1: The property owner requests a signed lien waiver before they make a payment
- Scenario 2: Prime contractor or property owner gives you a lien waiver to sign
- Scenario 3: You’re a prime contractor or property owner working with subcontractors and material suppliers who also hire other subcontractors and material suppliers
- Scenario 4: You’re a subcontractor working on a big project and the prime contractor gave you a check payment
- Scenario 5: You’re a subcontractor with a sub-subcontractor
- Scenario 6: You’re a material supplier or sub-subcontractor hired by a subcontractor
Scenario 1: The property owner requests a signed lien waiver before they make a payment
Let’s say you’re a prime contractor who is working directly with the property owner. After completing your work, the property owner tells you that before they give you the payment, they want you to first provide a signed waiver. In this situation, you can hand them a signed conditional lien waiver together with the invoice.
Handing a signed lien waiver that you yourself prepared is actually beneficial on your end. Ideally, you already know all the details, from the dates that you performed work on the project to the amount that you are expecting to earn for the work you rendered.
If you are simply signing a waiver that has been prepared by another party, you will have to do the extra work of looking for possible loopholes that may cause you to not get the full amount and also lose your lien rights altogether.
A few reminders about handing a self-prepared signed lien waiver to the property owner:
- Make sure that it is a conditional lien waiver. Since you are waiting for payment that is yet to come, the conditional lien waiver allows you to preserve your lien rights until you actually receive the payment.
- Make sure that you waiving your lien rights for the correct amount. You must not waive your rights for an amount that is less or more than what you have worked for.
- Make sure that you use the statutory lien waiver forms if you are working on a project that is located in one of the 12 states that require a specific waiver form. Not using the statutory lien waiver forms in these states makes your waiver invalid.
Scenario 2: Prime contractor or property owner gives you a lien waiver to sign
Let’s say that you’re a prime contractor and the property owner that you are working with gave you a conditional lien waiver to sign. They told you that they want you to sign the waiver before giving the document.
In this case, you can sign the lien waiver but not before considering the following:
- You have already done work on the project.
Lien waivers are used as a security measure for the paying party to prove that they have already paid up and, therefore, let them avoid possible payment disputes in the future. If you have not started working on a project yet, then you must not waive your lien rights.
- The document is a conditional lien waiver.
Since you have not been paid yet, you must sign a conditional lien waiver. Signing an unconditional lien waiver is enforceable even before you get paid. This means that if you sign an unconditional lien waiver before receiving the money and the property owner ends up not paying up, you have already waived your lien rights because you signed the unconditional lien waiver.
- The effective date on the waiver is accurate.
This consideration is very important if you are dealing with progress payment, which means that you are expecting payment for the work that you’ve done only up to a certain date. So if the amount you’re receiving is the payment for all your work until, say, January 30, make sure that the date listed in the waiver is indeed January 30.
- No other rights are being waived.
This is when it gets tricky when you are signing a waiver that was prepared by another party. You have to ensure that you are waiving no other rights (e.g. breach of contract rights) when signing the lien waiver.
Scenario 3: You’re a prime contractor or property owner working with subcontractors and material suppliers who also hire other subcontractors and material suppliers
Let’s say you’re a property owner or a prime contractor in a big construction project. You are aware that there are subcontractors, sub-subcontractors, and material suppliers working on the project. Even if you are not directly responsible for paying them, it is highly advised that you issue a lien waiver for all the participants in your project.
For property owners:
Property owners, especially, are highly encouraged to send out a lien waiver to everyone involved in their project. Even if the prime contractor has signed a conditional or unconditional lien waiver after they have gotten payment, the waiving of the lien rights does not automatically trickle down to all parties down the contracting chain.
Because of this, property owners must be aware of all the project participants that are being introduced into their project. You might end up having to deal with a mechanics lien filed by a sub-subcontractor who has been left unpaid by a subcontractor—even if you have already given the prime contractor the full payment and they signed a lien waiver.
For prime contractors:
Prime contractors are also expected to be mindful of the other parties below the contracting chain, even if they are not directly responsible for paying them. Some property owners might even require them to send a lien waiver to all project participants before they get paid.
Some important notes to consider if you’re a prime contractor signing a lien waiver from the property owner:
- Some lien waivers may include a statement saying that you will be responsible for possible payment disputes with other parties down the contracting chain (e.g. between a subcontractor and a sub-subcontractor). You may not want to sign up for responsibility like this.
- Some lien waivers may also waive your rights in case of a breach of contract. Be careful not to sign this waiver as this may put you in a tough spot if contractual obligations are not fulfilled.
- Some lien waivers may make you responsible and legally liable for all the contents of the waiver. Statements like this may not be explicitly stated so you must read closely the legal language used in the document you are signing.
Scenario 4: You’re a subcontractor working on a big project and the prime contractor gave you a check payment
Let’s say you’re a subcontractor who was hired by a prime contractor to work on a project. The contractor has given you the payment check and in exchange they want you to sign an unconditional lien waiver. As long as you have ensured that the cheque has been cleared in the bank, then you can go ahead and sign the unconditional lien waiver.
Signing unconditional waivers is generally not advised since this type of waiver — whether it’s for final or progress payment — is enforceable regardless of whether the payment has been made or not. In this situation, however, you have already received the payment and you have ensured that the cheque did not bounce.
As long as you are certain that you have the payment on hand, you may sign an unconditional lien waiver.
Still, you have to consider the following:
- If you are receiving partial payment, make sure that the unconditional lien waiver you are signing has the correct effective date. If the amount you received is only for the work you performed until March 10, make sure that the date in the waiver is not, for example, April 10. Otherwise, you will also be waiving your rights for the work you’ve done between March 10 and April 10.
- If you are signing an unconditional lien waiver that is not a statutory form, make sure that you have read and understood everything that is written on it. Some waivers may include items that have nothing to do with proving that you have received the payment, so be wary of the small details.
IMPORTANT: if you already received payment for the work you have rendered, it is highly advised that you sign a waiver. Lien waivers protect the paying party from double payment, and it is only ethical for you to sign the unconditional waiver as long as (1) you have confirmed that payment has been received, and (2) you fully understand the entire waiver document you are signing.
Scenario 5: You’re a subcontractor with a sub-subcontractor
Let’s say you’re a subcontractor who hired a sub-subcontractor or a material supplier to do work for you. You want to avoid the possibility of double payment so you want reassurance from your sub-subcontractor or material supplier that they will waive their lien rights once you have given them their payment.
In this case, you can draft a conditional lien waiver and have them sign it before you issue the payment cheque.
Lien waivers are not exclusive to property owners or prime contractors; subcontractors may also use them to protect themselves from possible payment disputes with the parties that they have hired. When drafting a lien waiver, the subcontractor must consider the following:
- Make sure that you are using the statutory waiver form if you are in a state that requires lien waivers to be in a specific format with specific information.
- Make sure that you are being truthful with the effective date and payment amount you are declaring.
- Make sure that if you are putting additional statements in the lien waiver, the sub-subcontractor and/or material supplier understands what they are about.
Lien waivers can be a way to build good relationships with other parties in the contracting chain, whether they are below or above your tier. If issued properly and with mutual agreement among all parties, waivers can protect both the paying party and the party receiving the payment.
Scenario 6: You’re a material supplier or sub-subcontractor hired by a subcontractor
Let’s say that you are a sub-subcontractor or material supplier hired by a subcontractor to provide labor or materials for a construction project. This subcontractor has been hired by the prime contractor who reports directly to the property owner. After the project has been completed, the subcontractor withholds your payment and refuses to pay you.
In this scenario, you can use a conditional lien waiver as leverage to claim your payment. It is understandable for project participants to be wary of handing over payment, especially if the relationships were tense during the project. Signing a conditional lien waiver informs your subcontractor that you are willing to waive your lien rights as long as they give you the payment you duly earned.
Keep in mind that even sub-subcontractors may sign lien waivers. In this specific scenario, you have to make sure that the lien waiver you are signing is a conditional lien waiver. Since you are a sub-subcontractor waiting for payment, you do not want to sign an unconditional lien waiver, which can effectively waive your lien rights even if you do not get paid.
But what if the subcontractor completely leaves the project and cuts communication with you?
In certain cases, subcontractors can get their payment from the prime contractor—and even sign an unconditional lien waiver as proof of receipt—but they end up running away from their payment responsibilities to sub-subcontractors or material suppliers.
If you’re a sub-subcontractor or a materials supplier in this specific case, then your best recourse is to file a mechanics lien either against the parties on top of the contracting chain, which is typically the property owner. This is because even if your subcontractor has signed an unconditional lien waiver, it does not mean that they are also waiving your rights to file a mechanics lien.
Lien waivers waive the rights of the signing party, and as long as you did not sign the document, you can still pursue a mechanics lien against the property owners. However, all other lien laws and requirements still apply. If you are working in a state that requires filing pre-lien notices, then you must have filed those obligatory pre-lien notices before filing a mechanics lien.
It is very important that you protect your right to file a lien in every stage of a construction project, not only when payment issues arise. Even though waivers may help you secure payment, you must not rely on them to protect yourself from non-paying clients.