Lien waivers used in the construction industry can either be unconditional or conditional, and the difference between the two is huge. You definitely don’t want to use the wrong waiver at the wrong time — your ability to get paid the money you earned is at stake.
This article will help you better understand the important difference between an unconditional and conditional lien waiver, when you should use each one, and how to handle the catch-22 of needing to get a waiver and cash exchanged at the same time.
Essential Reading: The Ultimate Guide to Lien Waivers
An intro to lien waivers
Lien waivers are kind of like the construction industry’s receipt for project payments.
However, unlike a receipt from the grocery store or the pharmacy, a lien waiver is actually a legal document that has some very serious consequences. As the name implies, when someone executes a lien waiver (“executes” means that they sign the waiver document), they are giving up their right to file a mechanics lien. Or in other words, they are literally giving up their right to get paid.
And that’s a big deal!
Lien rights are powerful, legal rights that guarantee construction payment to job participants. Everyone on the job is interested in lien rights. Some stakeholders — like contractors and suppliers — want to make sure they keep their rights and not waive them too early or unfairly.
Other stakeholders — like lenders, owners, and general contractors — want to make sure they prevent mechanics liens on the project. As a result, they look to exchange all payments for waivers down the chain.
Lots of court cases around the country have involved lien rights including cases:
- A contractor in Nevada nearly lost $1 million after signing an unconditional waiver
- A subcontractor in Georgia gave up all legal right to payment by signing a waiver
- In Utah, a court reinstated a contractor’s mechanics lien after they signed the wrong waiver
- In Minnesota, a court dismissed a supplier’s bond claim because of a waiver they signed
This process can become very complex, and trying to keep track of all the payment documents can feel like a circus.
The most challenging part of the lien waiver exchange is juggling the relationship between “conditional” and “unconditional” lien waivers. The way to use these very different documents can be quite detailed, and the closeness of two words (i.e. conditional, unconditional) can create a sort of brain twister.
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What is an Unconditional Lien Waiver?
The most important thing to know about unconditional lien waivers is this:
An unconditional lien waiver goes into effect as soon as it is signed. It doesn’t matter if you haven’t yet received payment or if something happens and you end up never receiving payment.
If you send in a signed unconditional lien waiver, you are giving up your lien rights no matter if you get paid or not.
For this reason, an unconditional lien waiver can be VERY DANGEROUS for the signing party. (Just see this court case in Arizona where a contractor signed an unconditional waiver before they were paid and lost their lien rights.)
Signing an unconditional lien waiver means giving up your lien rights no matter if you get paid or not. If there is any reason the payment might fail (e.g. a check that hasn’t cleared), it’s a bad idea to sign an unconditional lien waiver.
In other words, you should only sign an unconditional waiver after receiving payment in hand.
When NOT to use an unconditional waiver
Since the consequences of signing away lien rights before payment has been received can be very serious, I am also going to describe situations where using an unconditional lien waiver is not a good idea. Keep in mind that these are general suggestions; if you have questions about a specific scenario, you should consult an attorney.
When the Money Isn’t in the Bank
Even if you’ve received a check for payment, it’s best to wait until the payment actually clears the bank before signing an unconditional lien waiver. If a contractor signs the unconditional waiver and the check bounces, the contractor will end up with no payment and no lien rights. Wait until you have the money in hand before signing an unconditional lien waiver.
When the Amount Stated in the Waiver is Not What Has Been Received
In the case of unconditional lien waivers, it is especially important to exercise caution and review the contents of the waiver. The amounts stated in the document are more important than the amounts actually received. What is said to be paid matters more than what has actually been paid, so signing an unconditional lien waiver that states “$1000 has been paid” when a contractor has only received $500 leaves him with no recourse for getting the rest of the money owed.
When Dates Don’t Match
A typical lien waiver waives lien rights for work performed to date. Signing parties should be careful that the dates described in the waiver match the dates for which payment has been received. For example, a payment request might seek payment for work performed through March 30th, but if the unconditional lien waiver states April 30th, the signor cannot file a lien for any work performed in the month of April.
What is a Conditional Lien Waiver?
The most important thing to know about conditional lien waivers is this:
A conditional lien waiver that is signed is only effective upon the occurrence of something else. The “something else” is almost always the actual receipt of payment. In other words, getting paid is the condition — the signor’s lien rights are waived if and only if they actually get paid.
This is the beauty of conditional waivers.
However, while conditional lien waivers are safer to use than unconditional lien waivers, that doesn’t mean that conditional waivers are harmless. That’s because the amount of money (the payment) the lien waiver says that you received matters more than the amount of money you actually received.
Here’s a scenario to help explain:
Let’s say you were paid $50,000, but your lien waiver says you were paid $100,000. There are two possible explanations for this.
Perhaps you made a mistake and the waiver amount is simply an accident. Or perhaps the lien waiver amount was requested by the owner and general with the promise to pay you the full amount later. The trouble with lien waivers is that the law doesn’t necessarily care about these explanations, at all.
In most states, the courts will look to the waiver document itself, and if it says $100,000, that’s the final authority on the matter. You were legally just paid the $100,000 even though you only received $50,000. And the matter is done, settled, end of story.
Bottom line: When you sign a lien waiver, what the waiver says you received is always more important than what you actually received. Don’t make mistakes like the infamous Zachry Construction lien waiver mistake.
The Waiver Catch-22
The lien waiver “catch-22” is quite infamous in the construction industry. Regardless of whether it’s your job to sign lien waivers in exchange for payment, or to collect signed waivers from contractors and suppliers in order to send them a payment, it’s likely you’ve had to negotiate a frustrating disconnect:
- One side wants to sign a waiver only after they’ve received payment.
- The other side wants to get the signed waiver before they make the payment.
From an objective point of view, when executed properly, lien waivers are fair. A subcontractor receives a payment of $5,000 for work performed and that subcontractor gives up the ability to file a lien for that same $5,000. Everybody wins, right?
But when it comes to real life, things can get a little sticky when it comes time to decide who should go first. Does the payee give up their lien rights (by signing the waiver) before receiving payment, taking it on faith they will receive that payment?
Or does the payor make payment first, taking it on faith that the signed lien waiver will indeed come in?
In any case, the first question you should always ask yourself when dealing with lien waivers is: “Is this a conditional or an unconditional waiver?”
Always Use Conditional Lien Waivers
The solution to this catch-22 is to use the “conditional” set of waivers. These lien waivers are only effective when the “condition” — receiving payment — is satisfied. Thus, everyone goes away happy (and paid!) and the catch-22 situation is avoided.
Think of all the ways that receiving a supposed “sure-thing” payment can go wrong:
- the check could bounce
- a credit card charge could be disputed
- an ACH payment could be reversed
Anyone of those things happens and your lien rights will be irreversibly lost if you signed an unconditional lien waiver. For these reasons, contractors should always use conditional lien waivers.
Best Practices for Exchanging Lien Waivers
The lien waiver document was supposed to be simple. It was supposed to be a receipt…a waiver of lien rights exchanged for a payment. Now, however, it’s a hot mess of legal traps and nuances.
If you learn anything from reading about lien waivers, you must learn this: It is impossible to manage lien waivers without some tool. Just like you need a tool to manage mechanics liens, preliminary notices, and bond claim compliance, so too do you need a tool to manage lien waivers. Don’t underestimate this need!
Downloading a lien waiver form is a good quick fix, but it is not a solution to organizing and managing all your waivers. You need, instead, some type of lien waiver software application or tool. Levelset makes it easy for companies that exchange lien waivers regularly to track all their lien waivers in one place. You can explore other tools in our review of the 5 Best Lien Waiver Tools.
With a free Levelset account, you can exchange unlimited lien waivers. Send signed waivers to your customers, or request waivers from your customers and vendors. Collect all the waivers you receive in one place whether they come by mail or email, so you can track waiver status and take next steps. Levelset makes lien waivers easy, fast, and collaborative for everyone ranging from suppliers and contractors to lenders and property owners.