What is a Lien Waiver?
A lien waiver is a document from any potential lien claimant, whether a contractor, subcontractor, material supplier, equipment rental company, or other party, stating that they waive future lien rights against the improved property to an extent set out by the waiver document.
To make it simple, you can think of a lien waiver as the construction payment version of a receipt. Once payment is made (or, occasionally, promised) a lien waiver is provided. The lien wavier provides protection to the party making payment, by ensuring they won’t need to pay twice for that work or have the property encumbered by a lien. And, the waiver process provides protection to the party supplying the waiver by allowing them to retain their lien rights until satisfied that payment is made or forthcoming.
The term “lien waiver” is generally used to refer to a waiver of security rights on construction projects even on projects on which mechanics liens don’t apply. So, for public projects or private projects on which a payment bond has shielded a property from mechanics liens, the term lien waiver is usually still used instead of bond claim waiver.
Lien waivers are contracts between the party making payment and the party getting paid. In most states, waivers are not controlled by statute, and there are few to no requirements with respect to lien waiver forms, or what may be included.
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Who needs to use Lien Waivers?
Lien waivers are ubiquitous in construction projects and are used throughout the construction payment process. Waivers are requested and provided alongside nearly every pay-app or invoice, and are a constant source of administrative burden for most construction participants.
Anyone furnishing materials, labor, or services to a construction project may be entitled to file a mechanics lien or bond claim in the event that they are not paid. And, accordingly, may be requested or required to waive those rights pursuant to payment. This is where waivers come in, they serve as proof of payment, and promise that the potential lien claimant will not file a lien with respect to the same amount.
In many circumstances, a potential lien claimant will be requested or required to provide a lien waiver in exchange for payment. This is not only common practice, but is specifically set out as an acceptable procedure by statute statutes.
In what circumstances are Lien Waivers typically used?
Lien waivers are generally used as part of the construction payment process, and provided in exchange for payment. Accordingly, lien waivers can be exchanged multiple times on each project, along with every progress payment.
In many circumstances, contractors will require lien waivers to be provided from sub-tier parties before making payment.
There are also different types of lien waivers, discussed more in-depth below. The specific type of lien waiver to be used can depend on the circumstances surrounding the payment/waiver exchange. Unconditional waivers are more dangerous to use than conditional waivers because unconditional waivers are effective immediately when signed, regardless of whether payment is actually received. The best, and safest, course of action is to use conditional waivers until payment has actually cleared.
Do Lien Waivers change according to the project location?
They may. In 12 states, lien waiver forms are specifically set forth by statute. In those states, in order for a lien waiver to be valid it must (substantially) follow the form provided by the state.
In every other state, however, the rules surrounding lien waivers are much less restrictive (if there are really any rules at all). In these states, there are few, if any, restrictions on what can be included on waivers, and the waiver can be in generally any form agreed between the parties. In many circumstances, the party requesting the waiver can practically mandate the form of the waiver to be executed and provided by the party receiving payment, since payment may be relatively contingent upon the receipt of a signed waiver.
Do Lien Waivers change according to the project type?
They may. As noted above, the term “lien waiver” is generally used to apply to waivers of any statutory security interest protecting construction payment. There is no general distinction between waiving mechanics lien rights and waiving bond claim rights. While there is not really any specific mandate requiring different language on a waiver of the right to make a bond claim as opposed
Are there different types of Lien Waivers?
Yes. In most states, lien waivers can be distinguished into 4 distinct types: Conditional Partial/Progress Waivers; Unconditional Partial/Progress Waivers; Conditional Final Waivers; and Unconditional Final Waivers. It’s important to note that, since the majority of states do not regulate lien waivers at all, the actual language used on lien waiver forms may be standardized, and the lien waiver’s category may be unclear.
There are two types of conditional waivers: partial conditional and final conditional. As the name suggests, conditional lien waivers waive lien rights on the condition of actual receipt of payment.
Getting paid on a construction project creates a frustrating Catch-22 scenario. The paying party wants a lien waiver before making the payment, and the receiving party wants to receive the payment before handing over the lien waiver. The solution to this standoff is to use the “conditional” set of waivers. The waiver can be provided prior to payment being received but is only effective when the condition of payment being received is satisfied. As the name suggests, progress/partial waivers are used when further payments are expected on the project, and final waivers are used when no further payments will be made.
Unconditional waivers operate the same with respect to partial/progress and final types, but are effective immediately upon execution and delivery with no further conditions required. Unconditional lien waivers are completely effective and enforceable the instant they are signed, no matter if payment was actually received or not. This makes them dangerous for parties receiving payment to use prior to the payment actually being in hand.
What happens if I make a mistake with Lien Waivers?
Making a mistake with a lien waiver can have enormous consequences. The most common mistake with respect to lien waivers is not paying close enough attention to the language on the lien waiver. This can result in completely waiving lien rights prior to receiving payment, waiving other rights in addition to lien rights, waiving lien rights to a greater amount of money than intended, or accidentally creating additional liability.
There’s an infamous case out of Texas involving a company called Zachry Construction that illustrates some of these dangers. In that case, Zachry ended up losing millions of dollars because they signed an overreaching lien waiver.
Zachry Construction did work and was owed money for it. To receive a payment, they were required to sign lien waivers, as is normal. However, a disagreement about something other than the exchanged payment drug on for a long time, and racked up a bunch of attorneys’ fees. The lien waiver document that Zachry signed in order to receive payment, and which really had nothing to do with the dispute, ended up being a disaster for Zachry because it had provisions within it waiving the rights to assert any defenses. A simple mistake ended up costing millions of dollars.
Lien waiver mistakes can have significant consequences on the other side of the spectrum, as well. Parties requesting lien waivers and then making payment must also be vigilant with respect to the waivers provided. If the work is being done in a state with a statutory lien waiver form, for instance, using a different form (even if appropriate and routinely used in another state) can result in an invalid lien waiver. This means that a lien waiver can be obtained, and there can still be a lien filed on the project. Additionally, to fully protect against lien exposure, a party should collect lien waivers from everysub-tier party, i.e. the entire payment chain.