Lien waivers are a tool that can protect creditors and their customers, when they are used correctly. However, it is important to choose the right type of waiver based on the situation because the wrong choice can leave a collections team empty-handed.
NACM's Construction Credit Think Tank, comprised of construction credit thought leaders, recently discussed the best ways to use the two types of waivers credit professionals generally use. Conditional lien waivers can be used by subcontractors and suppliers if they are still owed payments to maintain their right to file a lien upon receipt of payment. Unconditional lien waivers are often used when payment has been received to waive lien rights to the specified project.
Knowing the difference between the two is critical in situations where a customer offers payment in exchange for a lien waiver.
"Unconditional waivers are a legal document stating one party has paid another party in full through a specific date," said Ty Knox, ICCE, director of credit & risk for EFCO Corp. (Des Moines, IA). "These documents are relied upon by many parties on a construction project and can unlock millions in payments that flow through to all subcontractors and material suppliers. Make sure you are reading these documents very closely before signing."
The language presented within the agreement can determine if the waiver is conditional or unconditional. To read more about specific language, click here.
According to Knox, the best practice to follow is to "never sign an unconditional lien waiver until the check clears the bank. You should always utilize a conditional waiver when trading waivers for checks, and follow up with an unconditional waiver once the payment clears your bank," he said.
Credit professionals may get caught in a situation where they exchanged an unconditional lien waiver for payment and then the check does not clear the bank. Although the exchange was agreed upon and the deal was made, Knox noted companies can still maintain their rights because a "bounced check is a material breach." A material breach is when one party receives significantly less or a different amount of compensation than what was specified within the contract.
"As long as you are timely in response, you may rescind or recall the waiver based on a breach," Knox said. The easiest way to ensure a waiver is conditional upon the receipt of payment is to review and remove any language or phrases that make it unconditional. This can save your company countless dollars on an endless number of projects.
"Each state has statutory language associated with lien waivers," Knox said. "Make sure to strike any additional terms and conditions that your customers may try to incorporate into the waivers."
Samuel Smith, regional finance manager of Crescent Electrical Supply Company (East Dubuque, IL), agreed with Knox. Removing unconditional language should be done "just for mental peace," Smith said.
"A good example that I always give is if you have a 'pay when' or 'pay if' clause in a purchase order that comes in and you're in a state where that is unenforceable and you sign off on it, what does your customer think?" Smith continued. "Your customer thinks that you're good with the 'pay when paid' [clause]. So, when do you think you're going to get paid? Whenever they do."
Also, the addition of a bankruptcy clause within the waiver protects your company if your customer were to file bankruptcy, said Chris Ring, of NACM Secured Transaction Services. "If you sign a conditional or unconditional waiver and your customer files for bankruptcy within 90 days, the payment exchanged for the unconditional waiver could be deemed a preference. Another caveat to add to a waiver is that the customer not file for bankruptcy within 90 days."
-Bryan Mason, NACM editorial associate