The importance of lien waivers can’t be overstressed. They are a critical step in the construction payment process. However, there is an unusual practice that has been around for some time now; requesting zero dollar lien waivers. This is an attempt to work around the established rules and procedures of the lien waiver exchange process. Although these types of waivers can work in some circumstances, they are unpredictable; and could lead to more problems than they purportedly solve.
The point of lien waivers
At its core, a lien waiver is basically the construction industry’s version of a receipt for payment. When a party executes a lien wavier, they are waiving future lien rights against the property to the extent outlined in the waiver. Besides protecting the property from a mechanics lien claim, they are also meant to act as a record-keeping measure, to track any and all payments made on the project. That way, in case a dispute arises overpayment, there is tangible evidence to prove that a certain amount of money has been paid to that contractor.
This is a pretty straightforward concept. Subs waive x amount of mechanics lien rights, for x amount of dollars that the labor or materials provided were worth. However, there is a relatively common practice used by many in the construction industry to request a zero dollar lien waivers or even $10 waivers. But why? What’s the point? And do they actually work?
This has been a point of discussion for some time now. In fact, we’ve addressed this exact issue more than once in our Ask an Expert Center:
- Are zero dollar final waiver/releases legal?
- Are there any legal ramifications in issuing a “partial waiver and release of lien” for zero dollars?
- Unconditional waiver with zero amount?
Why this became a common practice?
There are two theories that can be given credit for this practice. However, the main theory behind this is the ability to hide actual charges from the property owner.
Let’s say a property owner hires a contractor under a lump-sum contract. The contractor was able to negotiate a sweetheart deal with a high-profit margin since they know they can secure some low-cost subs and material suppliers. But they may not want the property owner to know that they might be being overcharged. By submitting zero dollar lien waivers, they can conceal these costs from the owner. That’s because, if they were so inclined, an owner can easily add up the amounts on each lien waiver and determine the overall costs to see if they are being overcharged.
Another theory is just mere complacency. Many contractors feel that the lien waiver exchange process is overly burdensome and look for ways to streamline the process. This is one of the reasons “no-lien clauses” began popping up in many construction contracts. It was a way to waive all lien rights at the starting line, instead of dealing with it piecemeal throughout the project.
A majority of state legislatures have responded to this by outlawing the use of such clauses. As for these $10 lien waivers, the theory is the same. Instead of tracking each and every waiver, along with their payment amounts, the contractors decide to request these “catch-all” waivers to avoid what they considered an unnecessary hassle.
For a deep dive on lien waivers:
Dangers of signing a zero dollar lien waiver
Waiving lien rights while working on a construction project is a serious decision, and shouldn’t be taken lightly. The typical exchange process is meant to ensure that lower-tier parties get paid, and the appropriate amount of lien rights have been waived. Messing with the system can lead to any number of outcomes.
Courts can declare the waiver as ambiguous and refuse to enforce it right off the bat. There are some circumstances where this practice could work effectively, but there are several outcomes that could prove detrimental to either end of the exchange.
Could be waiving nothing
First, and foremost, you may not be waiving anything at all! Executing a zero dollar waiver kind of misses the whole point of the lien waiver exchange process. As we discussed at the beginning of this article, lien waivers are meant to waive a certain amount of lien rights based on the value of the services or materials provided. Generally speaking, if the lien waiver states that the value of the work performed is $0, then the claimant is waiving that corresponding amount of lien rights… zero.
The “through-date” issue
One common characteristic of progress (or partial) payment lien waivers is the inclusion of a “through-date.” On these types of waivers, the through date is actually much more important than the amount of money listed on the waiver. Why?
Let’s backtrack for just a minute. Lien waivers are essentially mini contracts. One of the fundamental legal requirements for a valid contract is consideration. Consideration is a benefit that is transferred in exchange for the performance (or non-performance) of the other party. That consideration typically being payment.
When executing a lien waiver that includes a through date, for $10 (or for $0 and other valuable consideration) that doesn’t necessarily mean that person is waiving $10 worth of lien rights. Rather, it is simply acknowledging that consideration (payment) has been received. The purpose of the through date is to establish that the party signing the waiver is agreeing to waive claims for all work completed on or before that date.
The through date is the determining factor when calculating the amount of mechanics lien rights being waived. This is true regardless of the amount of money listed as consideration; even if there are any attached supporting invoices or payment schedules. The work completed on or before that date is the “value” of the lien rights waived. Period. When signing a waiver with a through date, proceed with caution; especially if the waiver is unconditional!
In this scenario, there may not be any real immediate harm in executing a zero dollar waiver. However, in the construction industry, in particular, documentation is crucial to protecting your rights; if a dispute arises later on, the more evidence of payment and accounting, the better.
Recovering unpaid amounts can be difficult
Imagine this scenario. A subcontractor is hired to do $15,000 worth of roofing on a project. The contractor requests that the sub execute a $10 lien waiver and release for the work performed. A check is sent out, but it is only for $10,000. If the executed wavier says $10, then the waiver is enforceable (even if conditional) because the sub has received some money. This could make it quite difficult to make an argument that you were stiffed $5,000. This is particularly true if the waiver was an unconditional one. Most of the states that provide statutory lien waiver forms include explicit warnings stating that the claimant should use a conditional if they haven’t actually received payment in full.
Even worse, take the same scenario but let’s say the sub never gets paid. So the subcontractor files a lien against the property. Clearly, the owner would challenge this because a waiver was signed. The counter-argument? Well, the sub would claim that the waiver was invalid because they never received the payment (consideration) for the waiver. What’s to stop the contractor from digging a 10-spot out of their pocket, handing it over, and saying, “Ok. now it’s enforceable.” -I know this is an extreme scenario, but it’s not out of the realm of possibility.
When faced with a request for a zero dollar lien waiver, take a moment to consider the consequences. Sure, in some circumstances, they may work. But “may” is never a good word when used in the context of money, or law for that matter. The whole point of lien waivers is to provide concrete, tangible proof of payment and mechanics lien rights.
If at any point a dispute comes up regarding lien rights or payment disputes, providing properly executed waivers as evidence can make all the difference. These zero dollar lien waivers may prove effective in some instances and may work against the parties in other circumstances. So why tempt fate? The waiver exchange process has been long established for a reason.