Lien Waiver Best Practices All Construction Pros Should Know
It's vitally important for all construction professionals to understand these basic tenets regarding lien waivers.
Lien waivers are an integral part of the construction industry, but they’re also highly misunderstood documents. Even pros don’t always know how to manage them properly, so it’s vital to have a solid understanding of how waivers operate before signing one.
What Are Lien Waivers?
At their simplest, lien waivers are the industry’s version of a receipt for payment received. For example, if a general contractor pays a subcontractor $50,000 for a job, the subcontractor will sign a waiver worth $50,000 in lien rights. “In other instances, a waiver will be signed releasing lien rights for all work performed through a specific date, regardless of the amount identified in the waiver,” explains Brian K. Oblow, Partner, Cotney Construction Law, Tampa, Florida.
These documents are proof of payment. If someone signs one, they’re confirming they received the stated amount of money for their job and can’t file a lien, or legal claim, against the project for the amount waived, or for work performed through the specified date.
Why Should Construction Pros Understand Lien Waivers?
According to Oblow,
“Lien waivers serve as a form of protection for property owners, contractors, subcontractors, sub-subcontractors, professionals, suppliers, laborers and others that provide materials or services to a project. When everything is completed properly, the upstream contractors and owner are protected against double payments and the owner is protected against having liens placed on the project for amounts that were paid.”
Types of Lien Waivers
With the conditional lien waiver, the potential lienor signs the document in exchange for an expected or promised payment. This type of lien waiver is useful when the potential lienor is unpaid but expects payment from a progress payment or other payment that is exchanged in return for the waiver. Since this waiver is conditional, it’s ineffective if the payment is not actually received. These types of waivers are typically associated to progress payments.
An unconditional lien waiver should only be executed when payment for progress or completion of the project is actually received. These waivers can be riskier because once they’re signed, they immediately go into effect, even if you haven’t been paid. You should only sign this type of waiver if you’ve actually received payment and deposited it in the bank. These types of waiver are typically associated to final payment.
Lien Waiver Considerations
Beyond the type of lien waiver, be sure to read the specific language in the document. According to Oblow: “Make sure you understand what rights you’re waiving, and keep an eye out for lien waivers that overstate the actual amount received or the date through which the waiver is effective, as you could inadvertently waive more rights than you intended. For example, if a supplier executes a lien waiver through a certain date, but there are still some unpaid invoices prior to that date, the supplier could waive the right to lien for the unpaid invoices. Additionally, lien waivers may also double as a waiver of other rights or claims. Examples of this include a waiver of contract rights, or a waiver of pending change order if not specifically reserved.”
Also, be sure to look at the effective date. Some people trap unsuspecting contractors by having them sign an unconditional waiver that’s effective before the payment date. (This is probably fraud, and that would make the waiver ineffective if the signer of the document was actually tricked.) If you’re asked to sign a waiver before you deposit the check in the bank, be sure it’s conditional.
No matter where you are in the payment stream of a construction project, it’s crucial to understand the ins and outs of lien waivers. Make sure you’re clear on and comfortable with all terms before you sign one. If you’re not, review it with someone knowledgeable on the topic, such as a lawyer, trusted colleague or trade union or association representative.