Lien Waivers are a commonly used document in the construction industry. Though waivers are not required by law anywhere, exchanging or providing signed waivers in exchange for payment is often a stipulation of many construction project contracts. And so in reality, lien waivers are everywhere in construction.
We often write about lien waivers from the perspective of the general contractor (who often requests lien waivers from their subs and suppliers), and also from the subcontractor and supplier point of view (both of whom will sign and return lien waivers in order to actually get paid).
But this article is going to be for the benefit of construction property owners. Please read on to find out why lien waivers are an essential tool for property owners that want to avoid mechanics liens on their projects.
Lien Waivers Are for the Benefit of Property Owners
A lien waiver is a document that a potential lien claimant (aka someone that works your property or project) signs stating that they waive future lien rights against your property for the extent set forth (or the “amount”) in the lien waiver.
Essentially, a lien waiver is like a receipt for payment. So when you pay a contractor $100K, that contractor waives the right to file a mechanics lien worth $100K against your property.
Lien waivers were actually created for the benefit of property owners since it can be nearly impossible to know for certain that all of the subs, sub-subs, and suppliers working on your project got paid. So lien waivers help you confirm this information.
Lien waivers benefit you because you want to finish the project without any lien or bond claims, and collecting signed lien waivers helps you to do just that. It is important to have anyone furnishing material, labor or services to your project to sign a lien waiver because claims affecting the property title or bonding capacity could even prohibit you from doing anything with your property until the claim is resolved.
However, waivers can create a catch-22 scenario because you want the signor to waive their lien rights before you pay them, but the signor wants to get paid before signing over their lien rights. (We’ll show you how to alleviate this concern by using conditional lien waivers later on in the article.)
Waiver Forms and Language Vary from State-to-State
Managing lien waivers can be confusing. Even though states don’t mandate the exchange of lien waivers, there are about 12 states that regulate the lien waiver forms themselves. These 12 states (listed below) have mandatory lien waiver forms that must be used on construction projects.
Having mandatory forms is actually a good thing for several reasons. First of all, having a mandatory form removes any confusion regarding whether you’re using the correct form of if your form contains the correct language. It also removes any need to negotiate the waiver language since that language is already set.
The 12 States with Mandatory Lien Waiver Forms
Click on each state’s link to see that state’s Lien Waiver FAQs and to download all of the waiver forms for each state, all for free.
*Florida does not require that parties use the statutory lien waiver, but it offers the waiver as a safe option, and seems to prohibit parties from requiring a non-statutory form.
The Four Basic Types of Lien Waivers
Generally speaking, there are 4 basic types of lien waivers — 2 main categories that each have 2 sub-types. [Note: Not every state uses this same 4-category classification system! For example, both Georgia and Florida have only 2 types of waiver forms available for use.]
The 2 main types of lien waivers are:
And the 2 sub-types for each category are determined by the nature of the payment (or when) being made: The 2 sub-types are waivers used for:
a Progress Payment
the Final Payment
In the next section, we’ll break it all down for you.
The Main Types
1) Conditional Waivers
Conditional waivers work by waiving the signor’s lien rights, but the waiver is conditioned on something else that must happen for in order for the waiver to take affect. This “something else” is almost always the signor’s receipt of payment.
Conditional waivers solve the catch-22 problem that we mentioned above. Since a conditional waiver allows the signor to promise to waive lien rights upon receipt of payment, the lien waiver only goes into effect – and the threat of a mechanics lien disappears – when payment is received.
But, if the signor of a conditional waiver ends up not getting paid, then the waiver will be invalid and enforceable. And that means that you as the property owner would be in danger of having a potential mechanics lien filed against your property.
2) Unconditional Waivers
Unconditional waivers are different from conditional waivers because there is no requisite condition that has to happen in order for the waiver to take effect (or in other words, no waiting for payment). Unconditional waivers take effect upon execution (“execution” means as soon as they’re signed). Once an unconditional lien waiver is signed, it is fully effective and enforceable.
While using an unconditional lien waiver will certainly protect your property, it won’t guarantee that the signor actually receives payment, since unconditional waivers are typically enforceable even if signor never gets paid. That may be okay for you (in that, you’ll be protected from a potential mechanics lien), but it’s not necessarily good for everyone else on the project that are all counting on getting paid.
Best Practices for Property Owners
In our experience, there aren’t too many property owners in the construction industry that get involved with the lien waiver process on their projects. But, since the property owner is the one party that is most at risk from a mechanics lien on their project, perhaps it might be a good idea for property owners to take a closer look at how lien waivers are used and exchanged on their projects.
For many owners, it may make more sense to require their general contractor to manage their lien waiver process for them, since the GCs are closer to the project itself. In that case, here are a few suggestions that will help the lien waiver process to be smoother for everyone.
2 things that owners should make sure their GC does on every project:
1. Collect Preliminary Notices from ALL Parties on the Project
Here’s the thing about preliminary notices — just like lien waivers, preliminary notices actually exist for the benefit of property owners. As an owner, you should want to receive a preliminary notice. Why? Because it alerts you to the presence of a participant on your project.
Think about it: you as the property owner will hire the general contractor, and in turn, that general contractor will hire any number of subcontractors and suppliers to work on your project. Then those subcontractors might hire subs of their own (“sub-subs”) or may hire their own suppliers. Since you will probably only have a direct, contractural relationship with your general contractor, there’s a good chance you may not know any of the other players on the project.
When you receive preliminary notices from all of these project participants, you will know who’s working on your project. And once you know that a certain party or company is working on your project, then you’ll also know that you’ll need to collect a lien waiver from that party.
Which brings us to #2…
2. Collect Lien Waivers from ALL Parties on the Project
If the preliminary notice informs you who you need to get waivers from, the next logical step is to actually get those waivers! So, be sure to have your GC collect lien waivers from every single participant on the project, even the ones that they did not hire directly.
We’ve already talked the 2 main types of waivers — Conditional and Unconditional — here are a couple of suggestions when dealing with either:
- If you’re GC is collecting conditional waivers, it might be a good idea for them to attach a proof of payment. That way, you can be sure that you will be protected from a potential mechanics lien.
- And if your GC collects unconditional waivers, then you should be automatically protected (though it may not be a bad practice to collect a proof of payment anyway).