Lien waivers and releases, which were once just a way for owners and general contractors to make sure they wouldn’t have to pay for the same work or material twice, are now became something much more broader affecting much more than just a mere mechanic’s lien rights.
Mechanic’s liens (a.k.a. construction liens) are designed to provide additional protection and way to ensure payment for contractors, subcontractors or suppliers for the work provided or material supplied. A mechanic’s lien essentially gives the person or company an interest in the property equal to the unpaid amount, affecting the owner’s ability to convey or transfer the property free and clear without paying the amount owed. While such laws aim to protect contractors and subcontractors, it also creates a risk for property owners and real estate developers of paying for the same work or material twice. In an attempt to protect themselves, developers, property owners and contractors are now increasingly insistent on the practice of obtaining a signed waiver or release of lien rights to the extent actually paid, as condition to furnish any payments to contractors and subcontractors working on the project. However, signing such waivers may directly or indirectly cause for contractors and subcontractors to “sign away” many of their rights to dispute contractual and related project issues.
Modern-day construction lien waivers and releases became much broader than simply addressing mechanic’s liens. In some instances, signing a release not only waives the right to file a mechanic’s lien, but also waives the ability to file claims for any other related issues, such as breach of obligations by a party to a contract, delays caused by mismanagement of the project, or additional expenses incurred. Contractors, subcontractors and suppliers should remember to preserve their own rights when executing any construction waivers or releases. For example, if a subcontractor is concerned about underpayment, it could refuse to accept payment until the general contractor has been paid in full, or the subcontractor could accept payment, but note on the release that it was reserving the right to make certain additional claims.
Many projects usually only have one general contractor, and each general contractor knows all of its subcontractors or suppliers, each of whom may be eligible to file a mechanic’s lien. However, many state construction lien laws are now allowing tier 2 and tier 3 subcontractors, including suppliers and others with whom the general contractor has no direct relationship, to file mechanic’s liens, thus creating a much larger and potentially unknown number of parties that are able to create liability on the project. That is why many general contractors require their subcontractors to acquire signed lien releases from all other subcontractors and suppliers on a periodic basis before issuing any payments. One of most common issues challenging the ability to secure signed lien releases on a monthly basis is the struggle of many companies to maintain enough cash flow to make all of their payment obligations in time. It can be easy for companies to find themselves in a difficult situation in which they can’t afford to pay their subcontractors or suppliers right away, and, in the same time, they can’t obtain payment from the general contractor or the owner without first providing a signed release stating in turn that they have already paid everyone.
It is vital that general contractors and subcontractors review the proposed contractual language carefully in order to ensure the appropriate cash flow and lines of credit, so they are able to fulfill their payment obligation when required. Carefully review the exact terms of any release or waiver you are expected to sign. Exercise care before accepting any payment, particularly if the payment is not for the full amount owed. Most importantly, always remember that lien waivers are separate obligations, and no matter how unfair the underlying result may be, courts are very likely to uphold provisions of signed waiver or release.
Source: Joshua R. Lorenz: “Mechanic’s Lien Waivers Place Burden on Contractors and Subcontractors; Construction Law”, the Legal Intelligencer (Online), September 6, 2016; Copyright 2016 ALM Media Properties, LLC.
Sergey Garanyants runs CMA’s Construction Forms Filing Services, helping CMA members in the construction industry protect their lien rights in all 50 U.S. states. For information about CMA’s construction forms filing services, visit http://creditmanagementassociation.org/services/construction-forms-filing/