The exchange of lien waivers is an integral part of sending and receiving payments in the construction business. Since a mechanics lien encumbers the property and can hold up cash flow, the parties at the top of the payment chain (those closer to the money) are highly motivated to make sure the project proceeds free of any lien claims. Gathering lien waivers from all participants and related to every payment is one step to avoid liens – but it can be a challenge to gather all of the required documents each month prior to making progress payments.
Due to this difficulty, or just due to the ongoing risk-shifting battle that occurs in construction over the risk on non-payment, some parties look to out-leverage others through contract, by preemptively extinguishing or crippling the ability to file a lien before work even starts. Since the ability to file a mechanics lien to secure the right to get paid for work done in construction is well-established public policy (in fact, mechanics liens date back to Founding Father Thomas Jefferson) it’s generally hard for any party to limit that right. Any attempt to preemptively limit the right to file mechanics liens becomes a battle between the right of freedom of contract on one side, and centuries old public policy on the other. How that battle shakes out can depend on many different factors.
In general, no-lien clauses are looked upon with disfavor, and many states have specifically and forcefully disallowed their inclusion in contracts, and their enforcement, by statute or through court decisions.
A “no lien clause” is simply a clause within a construction contract, or a lien waiver document signed before the furnishing of work, whereby a party preemptively waives its right to later file a mechanics lien on the project. In other words, the waiving party agrees (whether they know it or not) to perform the work without the security of a potential mechanics lien claim against the improved property if they end up not getting paid for their work.
As noted above, as a general rule, these types of agreements are unenforceable. While United States law generally allows parties to contract between themselves as they wish, contracts must not run afoul of the state’s public policy (for example, you can’t contract to do something illegal, or against what the legislature and courts have determined to be the public good). Accordingly, in many states, you can’t contract around the state’s interests in protecting construction participants against non-payment through the mechanics lien right.
Note, however, that while this is generally the case it is not universally always true in practice. Additionally, while there may be technical difference between a no lien clause in the original contract and a preemptive waiver of lien rights prior to furnishing labor or materials to a project, there is no practical difference, as both result in no lien rights for the potential claimant. Some states let parties waive lien rights prior to performance, subject to certain rules, and some don’t so be careful.
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Subordination of Mechanics Liens
Even in situations where a pre-work waiver of lien rights is not allowed, it may not be the end of the story. In some cases, the subordination by contract of the mechanics lien to some other security interest is perfectly fine, sometimes even in states that disallow the advance waiver of the right to file a mechanics lien.
Subordination of a mechanics lien relates to the mechanics lien’s priority, and lien priority is what may ultimately determine who gets paid first (or at all) in the event of an enforcement action and foreclosure on the property. While lien enforcement or foreclosure proceedings are not frequent, they do occur, and being at the end of the priority line can mean that a party doesn’t get paid – even if they have a valid filed lien.
Subordination of a mechanics lien, then, takes a lien from its place of higher priority, and moves it behind another interest in the property that originally would have been lower on the priority ladder. Often times, these subordination clauses are contained within lending agreements, so that the lenders can claim priority for their deed of trust over mechanics lien claims that may have otherwise had priority.
It is important for construction parties to examine contracts for lien subordination clauses, because even if a “no-lien” clause may not be enforceable, a lien subordination clause may be – and unfortunately for would-be lien claimants, it can have the same ultimate result.