Lien waivers have an important, and even integral, place in the construction payment process. The property owner and other top-tier parties in close proximity to the control of funds (the lender, construction manager, or general contractor) are highly motivated to make sure the project proceeds free of any lien claims. In fact, since mechanics liens cloud the property title and negatively impact bonding capacity, they may actually prohibit the job from getting completed successfully.
Despite the importance of avoiding lien claims, actually keeping a project free and clear of mechanics liens can be complicated and challenging. Payment problems are common in the construction industry, and since many construction projects involve a high number of parties, some of whom can be unknown to the parties at the top of the project, it’s nearly impossible for those at the top of the contracting chain to know for certain that everyone down the chain is getting paid. Additionally, since it takes a while for the money to flow all the way through the contracting chain to its ultimate destination, some parties who will be paid are “forced” to file a lien in order to not miss a filing deadline.
One way that this potential lien exposure can be managed is by procuring lien waivers from parties below them on the contracting chain. When used appropriately and as designed, this is a fair process that works to the benefit of all parties on the project. The lower-tier parties get paid and the top-tier parties get a waiver of the lower-tiered parties’ right to file a lien in return – everybody’s happy.
Because of the protection afforded by lien waivers, and due in part to the ongoing risk-shifting battle that occurs over construction payment and the risk of non-payment, it is an occasional but unfortunate occurrence that “no-lien” clauses, or other methods by which a right to file a lien is extinguished preemptively, are contained within contracts, or presented at another time prior to work being performed.
In general, no-lien clauses are looked upon with disfavor – and many states have 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 waives its right to later file a mechanics lien on the project. In other words, the waiving party agrees to perform the work without the security of a potential mechanics lien claim against the improved property if unpaid.
As noted above, these types of agreements are generally viewed and interpreted with disfavor. 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. 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. This is not always the case by any means, however. Some states allow for a waiver of a mechanics lien right prior to work in some or even all circumstances, if particular requirements are met.
Subordination of Mechanics Liens
The determination of whether an advance waiver of lien rights is acceptable is not the end of the matter, however. Even in some states that disallow the advance waiver of the right to file a mechanics lien, the subordination of the mechanics lien (by contract) to some other security interest is perfectly fine.
Subordination of a mechanics lien relates to lien priority. Lien priority is what may ultimately determine who gets paid first (or at all) in the event of a foreclosure on the property. While lien enforcement or foreclosure proceedings are not frequent, they do occur, and being at the end of the line can mean that a party doesn’t get paid – even if they have a valid filed lien.
Subordination of a mechanics lien, then, moves 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 behooves 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 it can have the same ultimate result in the event that there is not enough money in the property to satisfy all claimants.