Getting paid on a construction project frequently requires you to execute a lien waiver, and for this reason, thousands and thousands of lien waivers are executed by companies across the country every day. Unfortunately, however, the routine nature of these documents make them susceptible to mistake. This article (and video) explores the 3 lien waiver mistakes that can negatively impact, and in fact, burn your company.
1. Executing An Unfair Lien Waiver Form
The financial risk for a subcontractor or supplier is not getting paid on a project. General contractors and property owners, however, confront a slightly different risk: risk of subcontractor default. They are constantly reviewing their contract terms, policies, and other touch points to “stay ahead” of this problem, and the lien waiver procedure is always a top priority. Savvy general contractors will pass strongly worded lien waivers down the chain when it comes time to pay. Too many subcontractors and suppliers will sign just about anything for the promise of payment.
Generally speaking, there are 2 types of “unfair” lien waivers that get signed.
Asking Contractors To Waive Other Rights In Addition to the Right to File a Lien
Lower-tiered companies are generally under at least some pressure to sign lien waivers in order to secure payment. The paying parties at the top of the chain (i.e. property owners and general contractors) have the ability to exert pressure on the lower-tiered parties (i.e. subcontractors and suppliers) by virtue of the fact they the higher-tiered parties are holding the money.
Because of this pressure, the need for lower-tiered companies to get paid, and the “routine” nature of the lien waiver/payment process, companies often sign waivers without a thorough examination of the document itself. This can lead to companies signing away more than just the lien rights associated with a particular payment.
The text within a lien waiver is regulated by only 12 states. This means that 38 other states will allow contractors to put just about anything in their lien waiver documents, and in fact, they do. Since these 38 states do not regulate lien waivers, there is absolutely no rhyme or reason as to what legal terms are buried into these forms.
One of the biggest mistakes companies make with lien waivers is in signing forms that contain garbage legal terms, or unfair terms. Some contractors and developers see the lien waiver document as an opportunity to better position themselves against parties down the chain. The lien waiver is not intended to do this. It is an acknowledgment of payment, and barely anything more.
Failing to read the lien waiver language and agreeing to language that is unfair can cost your company a lot. The situation with Zachry Construction in Texas is a great example of this (see: Lien Waivers Cost Zachry Construction Millions). In that case, the subcontractor lost about $30 million because of terminology within a lien waiver that waived all claims of any nature between the parties. The waiver was exchanged at a time when some items were in dispute and some items were not, and the waiver related to payment for the undisputed items. Because of the over-reaching release provisions within the waiver, however, Zachry inadvertently waived all of its claims through the time of the waiver, which resulted in a $30m+ swing in their lawsuit.
This is a mistake for all stakeholders, even the ones that it appears to benefit. It’s a mistake for those signing the waiver documents because it can negatively impact important legal rights. It’s also a mistake for the parties asking for the waiver, because many states will invalidate the entire waiver when reaching language is included; or, maybe worse, you’ll wind up with a massively expensive legal fight, like what happened to Zachry Construction.
Asking Contractors to Sign an Unconditional Waiver Prior to Receipt of Payment
Related to the above, companies may be pressured to sign a waiver on the “promise” of payment, rather than in exchange for the payment itself. This exchange of a waiver prior to actual payment may be fine if the waiver is a conditional waiver, but if the waiver is unconditional, the pressure to sign may result in a loss of all rights. This is a common mistake, and again, it’s one that hurts all parties involved.
2. Executing An Inaccurate Lien Waiver Form
Unfair lien waiver language is a serious and common mistake, but perhaps more common are inaccurate lien waivers.
This particular mistake is much more frustrating and much more preventable.
While accounting for an unfair lien waiver document requires some legal know-how, the opposite is true for an inaccurate lien waiver form. Accounting for inaccuracies in a lien waiver document simply requires attention to detail.
Here are some common examples of inaccuracies within a lien waiver:
- Waiver purports to waive a dollar amount that is more than the amount actually being exchanged
- Lien Waiver represents that money has been received when it has not been
- The “effective date” or “through date” of the lien waiver does not reflect the period being paid
A lien waiver can look and seem complicated, but really, it is simply a receipt for payment. The contractor or owner is paying you, and they want you to execute a receipt for that payment. Look at lien waivers in these terms and review your waiver document as you would review a receipt after dinner. Make sure it properly reflects the dollar amount you are being paid, whether or not you have been paid, and the work or work period for which you are being paid.
It’s that simple. And yes, this mistake is very, very common. Check out this situation in Minnesota, for example, where a subcontractor was stuck with its lien waiver even though the waiver did not reflect the amount actually exchanged: Careful What You Waive – You May Regret It – Minnesota Appeals Court Sticks Supplier Because of LienWaiver.
3. Not Having Any Lien Waiver Procedures
Readers of this publication know that we promote policies and procedures. See, for examples, sections of articles on lien policies, credit policies, and collection policies. It is important that companies also employ procedures for handling lien waiver requests (and to utilize lien waiver software!), and the importance of this policy grows substantially with the size of an organization.
To explain why a lien waiver policy is important, let’s frame the problem.
Subcontractors and supplier organizations receive lien waiver requests almost every day — at least as frequently as they send out invoices or payment applications. The requests ask them (the subcontractor or supplier) to sign a legal document, the terms of which are probably unregulated by statute. The terms may be unfair (see the first section above), or inaccurate (see the second section above).
See the problem?
Who is responsible for approving which forms are signed, and which are not? Who is responsible for reviewing the payment history and the representations within the lien waivers to make sure that the “receipt” accurately reflects the current account status? Procedures are critical for organizations.
It is a common mistake for organizations to leave these lien waiver choices to anyone in the organization who receives the request, or worse, to salespeople or account managers. Lien waiver requests must be taken seriously, they must have their own chain of command, and the production or signing of lien waivers must be regulated to ensure your company doesn’t get burned.
Want To Avoid These Common Lien Waiver Mistakes?
Want to avoid these mistake?
Read our Lien Waiver Signing Checklist in this article: Should You Sign That Lien Waiver?