Levelset‘s CEO, Scott Wolfe, Jr., recently conducted a webinar about lien waivers, sponsored by the American Subcontractor’s Association (ASA). After the webinar, Scott fielded questions from the audience. These are questions about lien waivers that consistently arise in the construction industry.

To help you navigate confusing lien waiver dilemmas, we thought we would post the top questions (and Scott’s answers) here — and add a bit more explanation to make things extra clear.

What is your advice when a GC sends a copy of the signed payment check and asks for the unconditional lien waiver before the check is sent?

Scott says:

Ultimately, this falls within the “Practical Challenges” category.

From a legal standpoint, it’s a bad idea to sign the unconditional lien waiver in exchange for a copy of a check. After all, I could send you a copy of a check, and that copy will be completely useless to you – both practically, and legally. If you sign the unconditional waiver and you don’t have money in the bank, you’re exposed. Being promised payment, having a check copy, having the check in hand, seeing a wire confirmation, etc. — all of these things is less than having the money in the bank. From a legal standpoint, unconditional lien waivers is a statement by your company that you have money in the bank.

Now, practically speaking, what do you do if the general contractor refuses to pay you.

If you have the financial ability, you can sign a conditional waiver, send it to him and the owner, and tell them it’s as far as you’re willing to go. The likely scenarios is that the GC will get over the requirement (because they are waiting on payment, too), and will eventually issue payment. The unlikely scenario is that a dispute will arise, but it’s going to be a dead-loser dispute for the GC. It would be a near legal impossibility for any court to ever require you to sign an unconditional lien waiver before payment.

Do you want to be in that dispute? Likely not, and this is where the dance gets very tricky. You have to tread carefully if you sign the unconditional waiver because you will be exposed, but at least know that you are exposed and that you are signing a lien waiver that is unfair, and that could be used to take advantage of you. That will help frame the decision. Also, think about other options. You have the conditional waiver, but maybe you would also be satisfied with a letter of credit from the GC’s bank, a joint check agreement from the GC and the Owner, etc. There may be other ways to make you feel secure enough to give away your lien rights…

We add:

Great question! In a more general sense, it’s generally never a good idea sign an unconditional lien waiver until you are paid – oftentimes, what the waiver says is more important that what actually happens. One way to get around this is to use a conditional waiver when the payment has not yet been received. Sending a conditional waiver along with an invoice or pay app is a great way to start the waiver-for-payment-exchange of an the right (fair) foot, and show the paying party that you are ready and willing to waive lien rights fairly for payment received – which can speed up the payment process. Conditional waivers are only effective once the condition has been fulfilled, so you still reserve your right to file a valid mechanics lien if the payment ends up not coming. Displaying a willingness to waive lien rights when it’s fair to do so can help develop a good business relationship with the party you are contracted with. For further assistance, here is an article about whether or not you should sign that waiver.

You said that the person who signs a lien waiver could be personally liable. Can you explain that a little bit more?

Scott says:

I’ve seen lien waivers that end with some type of “attestation” at the end of the document. This is put in there so that the other parties can be more confident that the party signing the document has authority to sign the document. Sometimes these provisions can be broadened (again, maliciously, or accidentally):

They could say something like this:

“By signing below, I attest and swear that I have the authority to sign this waiver.”

This isn’t too bad because it’s an authority confirmation statement. However, the signer could be personally liable if they did not have the authority to sign the waiver. If they did have the authority, and something was wrong, this would not cause personal liability. In this example, therefore, the personal liability would only relate to the statement about whether the authority to sign exists… or not.

However, they also could say something like this:

“By signing below, I attest that the above is true and correct.” Or maybe a combo: “By signing below, I attest and swear that I have the authority to sign this waiver and the above is true and correct [to the best of my knowledge, etc].

Now this is more hairy. In this situation, you are actually making a personal statement that other people and companies can rely upon. If the statement (i.e. the waiver) is not true and correct (i.e. you have not been paid when you say you have), you could be personally on the hook to the owner, the lender, the GC, or other parties if they relied on the statement, and it was not true.

We add:

Going even further into this issue, it’s always very important to read whatever you sign before you sign it. If you don’t understand something or think something doesn’t look right, ask or look for help. Lawyers would be the best to ask, but if that is too expensive or otherwise not possible, you could compare the document with others that have been approved in the past. There’s no guarantee that the previous documents are perfect, but it gives a guide as to what was determined acceptable previously. Finally, it pays to know the situation – not just what you are signing. If the situation is not what is set forth on the document, don’t misrepresent it by saying it is. Being honest in the document you put your name on is always the best first step to avoiding issues.

What happens when a general contractor has nexus in more than one state, but they are transacting in a regulated state? Can they use an unregulated waiver?

Scott says:

The answer is no. The only thing that matters is where the job site is actually located. The state where the job is located will have the controlling law. If there is a regulated waiver pursuant to that state law, it must be used by everyone on the project, and all rules and regulations (waivers, lien laws, notice requirements, prompt payment rules, retainage restrictions, etc.) are the rules of that project’s state.

We add:

Nothing. The location of the job site is what determines controlling law. If you have a contractor that is transacting out of New York that sends a lien waiver to a subcontractor on a job site they are working on in Massachusetts, the lien waiver better follow the Massachusetts statutory form. Note, also, that this is true not just of lien waivers but also of other state-specific construction documents and timelines. The specific notice and lien forms required are all controlled by the stat in which the project is located, so don’t fall back on documents or requirements from the state in which you are located if it’s different than the project state.

How do we protect ourselves regarding our subcontractor’s suppliers? We normally get lien waivers from their suppliers but what if we don’t know about them?

Scott says:

This is one of the most difficult parts of the lien waiver / lien rights scheme. Many projects include a number of participants, and not everyone knows who the others are. They can’t figure out who to collect waivers from because they simply don’t know who else is on the project. Everything seems to go fine, and then the project is side-swiped with a lien from a party that no one knew ever existed.

What do to?

This is tough.

In some places (~38 states), a supplier must deliver a preliminary notice at the start of the project to protect their lien rights. Embrace these preliminary notices. They are explicitly lobbied for and sought after by GCs, owners, lenders, and title insurers to get more visibility on the project. Encourage your subs and suppliers to send preliminary notices. They are motivated to do so (because it protects their lien rights), but are frequently scared to upset their customer. This leads them to hold back and not send it…but, as you know, that presents bigger problems.

In other places, there’s just no way to know for sure. You can (and should) make formal requests to the participants you do know. You can leverage tools to get additional project information (such as Levelset).

This is a major problem, but the best practice is to embrace the rights of those below you and encourage them to give you the information you need. If you create a protectionist culture, those below you will be tight lipped and conservative about the information they share, which will put you in the dangerous dark.

We add:

Scott’s exactly right. The problem of visibility is an extremely difficult issue that many contractors, owners, and lenders face in construction projects. And, this issue with lien waivers is compounded by the fact that the unknown parties are the parties that may be able to file valid mechanics liens and gum up the works. These “hidden” liens arise because the lack of visibility precluded obtaining lien waivers from them, and the fact that no lien waivers were obtained may make the lien valid. Note, however, that preliminary notices are one of the best ways to find out who is on your project. In a perfect construction world, every party buys into the fairness promoted by visibility (as well as wanting to secure the ability to lien the project) and sends preliminary notice. These preliminary notices can then be used to create a universal project tree to track, monitor, and manage every party on the project without fear of missing out on collecting lien waivers from some hidden party.

Conclusion

Lien waivers can be complicated, but that doesn’t mean they can’t be properly and fairly used and managed by everybody on the project. Use the resources around you and educate yourself on the best practices and ways to be fair and remain protected.