Don’t Sign Your Lien Rights Away

Reading the fine print is one of the better-known clichés, but there's a reason for it. Many sayings start from a small truth and grow to become world renown. Another famous saying, at least in the business-to-business credit world, is that construction creditors have a toolbox full of items they can use to better situate themselves to get paid. Combining the small print proverb and the creditor toolbox phrase lands those in the business at a crossroads known as lien waivers.

Lien waivers do just that to those who sign them—waive the right/ability of the potential lien claimant. While waivers are not exactly a tool for creditors, the fine print, or actual form, must be read and understood. Credit departments can't only look at the title of the form and say, "OK," because the language of the form might not be as clear. There are many risks for an unsecured creditor including default and complete losses. And like tennis, unforced errors can absolutely devastate a business even further.

Waivers can appear in contracts or purchase orders sent to credit departments, and in some states, this is an effective tool for owners and general contractors to make lower-tier parties become unsecured creditors through the entirety of the project. As material suppliers and those lower in the supply chain, "you have to know how to review contracts to eliminate that waiver," said James Fullerton, Esq., of Fullerton & Knowles, P.C. in a recent NACM webinar on the topic. "More and more states have added wavier protections, making waivers in contracts signed before work begins ineffective because it is against public policy."

This is why credit departments and material suppliers need to review contracts or purchase orders and cross out the waiver; however, separate waiver documents are effective in all 50 states. There's no such thing as a standard waiver; they vary tremendously in how they are worded and how lien rights are affected. Some progress payment waivers go further than they should, noted Fullerton, waiving rights to retention and future shipments, etc. While there are no standard waivers, most written by title companies will have a blank for the dollar amount paid and for the date. "A lot of people will sign these," said Fullerton, but potential lien claimants have to look deeper to find the red flags.

For progress payment waivers with blanks for the dollar amount and date, credit departments need to fill in the correct dollar amount and date as well as review for trigger words and phrases, such as "hereafter" or "today" rather than specifics such as a certain date to be paid through. Fill in the date correctly and add "except for funds held for retention and change orders." However, this can still be disputed by general contractors and owners, but it's a good start for material suppliers. Fullerton mentioned making all waivers conditional. This can be done by adding, "This release will be effective only to the total amount of payments actually received without any bankruptcy filing for 90 days thereafter." This language fixes all the problems—only waiving rights to payments actually received and getting around bankruptcy preferences.

Objections from debtors is a huge battleground. Debtors are certainly entitled to progress payment waivers. Before payment, the payor needs a waiver from the payee (subcontractor) and all their sub-subcontractors and suppliers. It is reasonable for creditors to cross out "hereafter have" and add "except for retention" as well as crossing out "through today." Another acceptable change is adding "except for change orders," which is where the pushing and shoving will come from, said Fullerton.

-Michael Miller, managing editor 

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Tuesday, 05 March 2024

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