When you are having a new building or project constructed, there’s a good chance that you’re working with a slew of contractors and subcontractors who are getting the physically demanding build and design work done. During the construction process, it’s important that everyone involved get paid for their contributions. Property owners pay their general contractors, and usually, general contractors are in charge of disbursing payments to sub-contractors.
Sometimes, however, a contractor or sub-contractor will not get paid for the work they do or designs or materials they supply. If they don’t get paid, there’s a chance they can take a mechanic’s lien out against the property—that is, make an ownership claim because of the money that they are owned.
Mechanic’s liens can be scary for property owners, especially if they have already paid a general contractor what is owed, and it’s in the general contractor’s hands to pay the subcontractor. However, there are some ways a property owner, or the person at the top of the construction food change, can ensure that everyone is paid and protect himself from any liens or legal action by requesting construction lien waivers.
Here’s everything you need to know about construction lien waivers, so you can determine what they mean, what type of lien waivers to use, how to best use them in your project, understand statutory requirements regarding lien waivers, and more.
What is a Construction Lien Waiver?
During a construction project, you may have lien waivers signed by a wide variety of people who are working on the project. Essentially, a lien waiver is a form that accompanies the payment process. Essentially, a lien waiver is signed and returned by anyone who has received payment for work that they’ve done or materials that they’ve supplied. In this way, a lien waiver is almost like a receipt. It shows, legally, that work has been paid for, and it waives their right to file a mechanic’s lien for that amount in the future.
Types of Lien Waivers
While lien waivers are very common during construction work and seem pretty simple, there are actual multiple types of lien waivers that can be used during a construction project. Here are the 2 most common categories, and the two types within each category.
Conditional Lien Waivers
Conditional lien waivers are signed by contractors or subcontractors based on a certain condition. Usually, that condition is that payment has been made. The waiver becomes effective the moment the payment is made and the waiver is signed. There are two types of conditional lien waivers:
- Progress payments: Lien waivers for progress payments are given and signed as the work is completed. Contractors will sign many of these during the process. These are safe to sign and hand back no matter whether payment has been given or not, since it only takes effect under the condition that payment has been remitted and received.
- Final payment: Sometimes, subcontractors are only paid at the end of a project, once work has been completed. Final payment lien waivers are signed in this case. They only need to be signed once pay all parties, and they’re safe to sign at any time during the process, since they only take effect when payment has been made.
Unconditional Lien Waivers
With unconditional lien waivers, the waiver becomes effective as soon as someone signs it. This means that its terms are enforceable whether a person receives their payment or not. Unconditional lien waivers tend to be unfair to the subcontractors who sign them, and they tend to benefit property owners who are protected by having the waivers signed. There are two types of unconditional lien waivers.
- Progress payments: These are used when workers are paid as they go. This means that they can sign several lien waivers throughout the process, every time they get paid or compensated.
- Final payment: Final payment unconditional lien waivers are signed at the very end of the project, when payment is made at full after the work is completely done. Unconditional lien waivers with final payment are only safe for contractors to sign when their payment is in hand, and not before. Otherwise, they are not legally protected if they never received compensation for their work. To protect themselves, workers can hold off on signing the waivers until work is completed and their payment has been received.
Lien Waiver FAQs
Lien waivers are an important part of the construction project process for both property owners and the people who are doing the construction. They are very commonly exchanged during the process. However, lien waivers can be in-depth and confusing, and it’s common for people to have questions about what they mean and how they can be enforced.
If you’re a property owner wondering about lien waivers and how they can best protect you, check out some questions that are frequently asked about lien waivers below.
Are their statutory requirements for lien waivers?
The legal requirements for lien waivers vary from state to state. Some states have statutory requirements for the documents; in fact, 12 states explicitly lay out rules and regulations for how lien waivers work. These states are: Arizona, California, Florida, Georgia, Massachusetts, Michigan, Mississippi, Missouri, Nevada, Texas, Utah, and Wyoming.
The other 38 states that do not have statutory requirements allow for a lot of loose flexibility when it comes to lien waivers. This means that the parties can basically draw up waivers with whatever they want in them, which can be confusing for everyone involved. If you’re part of a construction project using an original lien waiver, it can help to consult an attorney who is a specialist in construction law. An expert construction attorney can read through the contract, understand any specifics, and make sure that you follow the contract adequately to best protect your own interests.
Can Lien Waivers Waive More than Just the Right to Liens?
Lien waivers are intended to stop subcontractors from filing lien against property. However, there may be clauses added to lien waivers that waive other rights of subcontractors. Some things that signing a lien waiver may prohibit a person from doing include: claiming retainage, claiming other contractual rights, and more.
How Do You Draft a Lien Waiver in an Unregulated State?
In one of the states that does not have regulated lien waivers, you may not know where to begin drafting a lien waiver. A good place to start is by consulting a construction attorney who’s well versed in what a lien waiver should and shouldn’t say. If you want to craft your own lien waiver, it can help to draft a default lien waiver, then use it again and again, for each new project. By using a default waiver of your own, you won’t have to investigate and re-learn all of the terms it every time, and you can ensure that it legally protects you in a way that you know is adequate.
Is a Lien Waiver the Same a No Lien Clause?
No. Sometimes, in a contractual agreement, there will be a “no lien clause.” This means that in the language of the contract, it is spelled out that all rights to liens are waived, before any payment is due or given. This is different from a lien waiver, which is its own individual document given after payment is due. The waiver waives the right to a lien. However, it is different because it is not incorporated into the original contract, and it is much less controversial than having a no lien clause in a contract. No lien clauses are so controversial, in fact, that they are illegal in more than 20 states, which protects contractors and takes some of the power out of the hands of wealthy developers or real estate moguls.
Conclusion: Using Lien Waivers to Protect Property Owners and Ensure Proper Payment
If you are heading up a construction project, there’s a good chance there are about to be a lot of people working under you—and many of those people will be subcontractors who were not hired by you, so it may be hard for you to know whether everyone’s been properly paid or not. This can be risky because if someone does not get paid money they’re owed for something they supplied to your project, it’s possible they could take a mechanic’s lien out against your property.
By requiring construction lien waivers, you can ensure that everyone who has done work for you has been adequately paid. You can also project yourself from legal action against you and minimize the stress and hassle associated with your construction project process.
If you’re not sure how to go about getting lien waivers, or you need help with a financial dispute regarding your project, get in touch with an attorney at the Smiley Firm. The Smiley Firm has construction law experts who can advise you how to best resolve the situation you’re in, and how to protect yourself legally should any challenges arise.