One of the most important steps in the construction payment process is the exchange of lien waivers. These often overlooked documents can have a serious impact on payment rights if not handled properly. The reason they are so important is that they affect all participants on a construction project:
- Project lenders frequently require lien waivers to approve loan disbursements.
- Developers or homeowners require lien waivers to limit the possibility that they pay for the same work twice.
- General contractors must collect lien waivers on behalf of the owners and lenders, and also protect themselves.
- Subcontractors and suppliers must send out lien waivers to get their payments processed.
If you’re reading this, you’re likely in charge of getting lien waivers right, on an Arizona construction project. Exchanging lien waivers is a crucial part of the construction payment process. And in many cases, making one mistake could invalidate the entire waiver and potentially delay payments.
Overview of Arizona’s lien waiver rules
Lien laws vary from state to state, but generally speaking, lien waivers operate in the same manner all over the country. In its simplest form, it is a document signed by a potential lien claimant that waives their rights to file a lien in exchange for payment.
As a supplement to this guide, you can find downloadable forms, Arizona statutes, and other frequently asked questions about Arizona lien waivers here: Arizona Lien Waivers Overview.
Enforceability of waiving lien rights by contract
One slight ambiguity in the statute should be noted. The law is vague concerning the enforceability of contractual lien waivers. Ariz Rev. Stat. §33-1008 starts with, “an owner or contract by any term of their contract, may not waive or impair the claims or liens of other persons whether with or without notice except by their written consent or as prescribed by §33-1003.” The statute then continues to state that a written statement claiming to waive a claim is not enforceable, “unless it is pursuant to a waiver and release… or if the claimant actually received payment in full.”
Although this seems like a hard no, close reading of the statute suggests that there are very specific circumstances where waiver of lien rights by contract may be allowed. If the contractor either provides written consent or has posted a payment bond. Once the payment bond is recorded, “no lien shall thereafter be allowed.”
Furthermore, the second provision allows waiver of rights if payment is made up front, or is pursuant to a waiver and release. Since Arizona allows for the waiver of lien rights before payment (see below), if a separate statutory waiver is executed alongside the contract, the claimant will still be effectively waiving their lien rights. Although not technically part of the contract, constractors should be aware of thie practice nonetheless.
How to choose the right Arizona lien waiver form
Since Arizona is one of the 12 states that provide statutory lien waiver forms, choosing the rights form is relatively straightforward. The statute provides four specific types to choose from. Determining the correct form requires answering these two questions.
Step 1. Determine the type of payment
Payments on a construction contract can either be a progress payment (aka partial payment) or final payment. This is the first step in determining what form to choose. If the claimant is getting paid and is not expecting any additional payments, then it will be classified as a final payment. If the payment is one portion of an overall payment scheme, and future payments are anticipated, then the payment is a progress payment.
Step 2. Have you actually received payment?
The next question one should ask is whether actual payment has exchanged hands or not. If payment has yet to be received, then the waiver should be conditional. This means that the waiver will be valid when the condition (i.e. payment) has happened. If payment has actually been received, then the waiver should be unconditional. This means actual transfer. A check in hand doesn’t necessarily mean it won’t bounce. Also, credit card charges and ACH payments are still subject to disputes or reversals.
Step 3. Choosing the right lien waiver
|Final Or Progress Payment?||Payment Made Already or Not?||Lien Waiver Form Download|
|Final||Payment Already Made||Unconditional Final Lien Waiver|
|Final||Payment Not Made||Conditional Final Lien Waiver|
|Progress||Payment Already Made||Unconditional Progress Lien Waiver|
|Progress||Payment Not Made||Conditional Progress Lien Waiver|
Frequently asked questions about Arizona lien waivers
Now that you have a basic understanding of how Arizona lien waivers work, let’s get into the details. There are always nuances and situations that aren’t always clear-cut. Here are some frequently encountered questions when dealing with Arizona lien waivers.
Does an Arizona lien waiver need to be notarized?
No, Arizona lien waivers do not need to be notarized. Only three states in the US require notarization of lien waivers; Texas, Mississippi, and Wyoming. Some people may suggest that notarizing a lien waiver is “industry best practice.” In reality, unless working in one of the three states mentioned above, don’t waste your time.
In fact, adding a notary block and stamp could be considered a substantial deviation from the statutory forms. Ariz. Rev. Stat §33-1008 states that the waivers should “follow substantially the same form.” Meaning that in Arizona notarizing a lien waiver could invalidate it.
Can unconditional waivers be exchanged even if payment is not made?
Yes. Some states restrict the exchange of unconditional lien waivers before payment is made, or before labor or materials are furnished to the project, Arizona is not one of them. Keep in mind, Arizona unconditional waivers include a specific notice at the bottom, which states in part:
This document is enforceable against you if you sign it, even if you have not been paid. If you have not been paid, use a conditional release form.
There’s some free advice stated right there at the bottom, listen to it. Using conditional waivers is always the safer option.
Do you need to exchange conditional AND unconditional waiver forms?
The short answer is no. As hinted to above, a conditional waiver is conditioned on the occurrence of a certain event. That event is the actual transfer of payment. So executing a subsequent unconditional is unnecessary. According to §33-1008(A), a conditional waiver is fully effective, and lien rights are released, “if there is evidence of payment to the claimant,” which can be either:
- The claimant’s endorsement on a single check or joint payee check that has been paid by the bank on which it was drawn; or
- Written acknowledgment of payment given by the claimant.
These statutes are unfortunately a bit outdated since they haven’t taken into account credit card payments, ACH payments and other forms of electronic payments. In practice, claimant’s waiver will likely remain intact. All you need is a conditional release and some form of evidence of payment.
For a deep dive on lien waivers in general: