Use Lien Waivers Wisely

Waiving lien rights on a property during the course of a project might be common, but suppliers and subcontractors must pay close attention to the language in their lien waivers to remain protected against nonpayment—especially when waiving lien rights in connection with partial payments. Before signing a lien waiver after receiving a partial payment, make sure you are only waiving your rights for the work covered by that payment.

"Some lien waiver forms are one-page documents and relatively easy to interpret," said Chris Ring, of NACM's Secured Transaction Services (STS). "Some lien waiver forms are multi-page documents full of legalese that attempt to change a contractual relationship such as change of venue, indemnification and the addition of liquidated damages. The battle of the forms must be considered when signing any document that is full of legalese, and you may need to consult legal counsel before signing."

Whenever possible, use your own lien waiver document. "Drafting your own partial lien waiver and final lien waiver form is important," said Kevin Laurilliard, shareholder at O'Connell Aronowitz, P.C. (Albany, NY). "This can help subcontractors and suppliers remain protected by controlling the terms and the extent of their waivers and releases."

Connie Baker, CBA, director of operations for NACM Secured Transaction Services, agreed. "Using your own waiver is the best way to protect your rights." However, "Owners or general contractors typically create their own waiver and try to make you sign it because they have the financial advantage in the relationship," Laurilliard said.

"General contractor waivers are normally developed to protect themselves. It is so important to read them and to always strike harmful language," Baker said.

Large contractors may include language that can increase risks to subs and suppliers. For example, watch out for language that waives your right to any and all claims thereafter or that releases the contractor from all liabilities. Make sure you only waive rights for work completed up to the effective date of the waiver and not for future work or any pending claims that need to be preserved, Laurilliard said.

Ten states have statutes that dictate waiver language. For example, Florida provides statutory lien waiver forms, but it allows contractual parties to use a different form, but you cannot release lien rights for unpaid work, said Tim Moorhead, attorney at Wright, Fulford, Moorhead & Brown, P.A. (Altamonte Springs, FL). Additionally, some states, like New York, make contract language that seeks to limit a party's right to file a mechanic's lien legally unenforceable. But after the initial contract, a partial lien waiver can waive your right to file a mechanic's lien for work in the future, so that language should be struck from the waiver, Laurilliard said.

Another best practice is the use of conditional waivers. "Conditional means you have not received payment yet, but will give up your rights when payment is received," Baker said. "You should always make sure it is based on the clearance of funds from the bank. If this language is not in the waiver, add it, then initial and date your additional language."

Conditional waivers can release lien rights upon final payment or provide a partial release of rights that correspond with progress payments. Conditional waivers allow subs and suppliers to release their rights only when certain requirements are met, such as:

• Receiving a check for a specific amount.
• Receiving a check within a specific time period.
• The check clearing the bank.
• The debtor not filing bankruptcy within 90 days of receipt of payment.

Unconditional waivers may be used for either final payments or to correspond with progress payments as well, but they should only be signed once payment is received and has cleared the bank, Baker said.

In a recent Law Office of John Caravella, P.C., blog post, construction attorney, John Caravella, also suggests ensuring the waiver only applies to lien rights and is related to payment, not performance.

-Bryan Mason, editorial associate