Lien waivers are a constant and oftentimes unappreciated aspect of the construction payment process. Since these documents are generally the last thing standing in the way of finally receiving payment, they are constantly rubber-stamped and signed without examination. Further, “lien waiver” language is often included in contracts, or other agreements between parties on a project, sometimes unbeknownst to the “waiving party”, or that is somehow different that language that may be outlined by statute. In the recent case Lane Myers Construction, LLC v. National City Bank, et al, 2014 UT 58, (Dec. 2014), the Utah Supreme Court considered a question posed by this exact situation.
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Background of the Case and How the Lien Waivers Arose
A family (the “Kykers”) hired Lane Myers Construction, LLC (“Lane Myers”) to construct two separate homes. In order to finance the construction, the Kykers secured a construction loan from National City Bank (“National City”). Lane Myers periodically received payments from National City using draw request forms. These forms contained language stating that Lane Myers had no lien on the property. After non-payment for construction work performed on one of the homes, Lane Myers filed a mechanics lien for over $575,000 of unpaid funds. As could be easily imagined, one side argued for the validity of the mechanics lien, and the other side argued that the language contained on the draw requests constituted a valid lien waiver.
“one side argued for the validity of the mechanics lien, and the other side argued that the language contained on the draw requests constituted a valid lien waiver”
The district court agreed with the property owners and the lending bank, and determined that the language contained on the draw request forms substantially complied with Utah law such that the signing of the forms constituted a valid lien waiver such that filing a later mechanics lien was disallowed. However, when the decision was appealed, the appeals court disagreed with the trial court, and reversed the trial court’s determination. The appeals court determined that lien waivers must be substantially compliant with the form provided in section 38-1-39(4), and while that didn’t necessitate a complete adherence to the statutory form, it did require an effective waiver to include the distinct component parts of the statutory form.
The question presented to the Utah Supreme Court was whether the type of language contained on the draw request form constituted a valid lien waiver that substantially complied with the portion of Utah’s mechanics lien act governing waivers of the right to file a mechanic’s lien.
The Supreme Court’s Decision – What Constitutes a Valid Waiver
The statutory forms provide a “safe harbor” such that their form is acceptable, but their use is not mandated.The Utah Supreme Court eventually reversed the decision of the appeals court, but did not affirm the determination in favor of the homeowner’s either. The court determined that the mechanics lien act only required “a waiver and release that is signed by the lien claimant or the lien claimant’s authorized agent” and not the exact adherence to the statutory forms. The statutory forms provide a “safe harbor” such that their form is acceptable, but their use is not mandated. However, the waiver must “incorporate the established elements of the legal concept of a “waiver.”” Due to other questions of fact in this particular case regarding whether those elements were met, the Supreme court remanded the case to the district court for further proceedings.
Utah statutory law sets forth that a lien waiver is “enforceable only if the lien claimant . . . executes a waiver and release that is signed by the lien claimant or the lien claimant’s authorized agent.” §38-1-39(2)(a)(i), or pursuant to a “restrictive endorsement on a check.” §38-1-39(2)(a)(ii). In order to for a waiver pursuant to a restrictive endorsement on a check to be effective, the endorsement must be: 1) signed by the lien claimant or the lien claimant’s authorized agent; and 2) in substantially the same form set forth in Subsection (4)(d). This means that in order for the Utah statutory forms to even come into pay in the determination of whether a lien waiver is valid and enforceable is when the waiver is accomplished via a restrictive endorsement – use of the statutory forms is not an element of the general waiver rules, only that of those related to the particular waiver type considered by §38-1-39(2)(a)(ii).
Therefore, when the waiver at issue is not a waiver brought about by a restrictive endorsement, the use of the statutory forms is not a requirement of the mechanics lien act. However, this was not determined to mean that the language on the draw form itself necessarily constituted a valid waiver, either. There are two things to consider 1) the statutory waiver forms are (while not mandated) instructive as to what constitutes a valid waiver; and 2) waiver is a “term of art with a widely shared meaning”, and thus, what constitutes a valid waiver is defined in Utah caselaw “[t]o constitute waiver, there must be an existing right, benefit or advantage, a knowledge of its existence, and an intention to relinquish it.”
This case is interesting, and provides some insight into the complicated and often overlooked lien waiver process. Lien waivers are vital documents, and should be thoroughly examined and given their necessary respect.