More than 200 years ago, Virginia’s most famous son invented the mechanics lien concept to protect contractors and suppliers against non-payment on construction projects. In the 2015 legislation, Virginia’s lawmakers finally embraced the public policy reasons behind this legal principle, passing a law prohibiting subcontractors and suppliers against waiving their lien rights, thus protecting these parties against strong-arm tactics by general contractors, lenders, and sureties.
Prior to this law change, Virginia was one of only 3 states that allowed parties to waive their right to file a lien before they began furnishing labor or materials to a project. In other words, these so-called “no lien clauses” were rendered null and void by nearly every state as against public policy and fundamentally unfair to the subcontractors and suppliers who are performing and supplying to the work. Virginia finally agrees.
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Subcontractors & Suppliers Can No Longer Be Forced To Waive Lien Rights
The Virginia Senate introduced a bill into the General Assembly earlier this year adding language to the state’s mechanics lien statutes. That passed through the senate and house with flying colors and now sits on the governor’s desk waiting for his expected signature. The bill adds the following language to Virginia Code Section 43-3 (additions in italics):
C. Any right to file or enforce any mechanics’ lien granted hereunder may be waived in whole or in part at any time by any person entitled to such lien, except that a subcontractor, lower-tier subcontractor, or material supplier may not waive or diminish his lien rights, the right to assert payment bond claims, or the right to assert claims for demonstrated additional costs in a contract in advance of furnishing any labor, services, or materials. A provision that waives or diminishes a subcontractor’s, lower-tier subcontractor’s, or material supplier’s lien rights, right to assert payment bond claims, or right to assert claims for demonstrated additional costs in a contract executed prior to providing any labor, services, or materials is null and void.
If interested, read the full text of Virginia Senate Bill 891. The effect of this language is quite clear.
The provision previously allowed anyone to waive their lien rights “at any time.” This made Virginia one of just three states that expressly allowed contractors and suppliers to waive their lien rights and assume the risk of non-payment on a construction project. Now, however, the provision expressly prohibits this type of waiver. The bill is a huge 180 degree shift for the state’s policy on mechanics lien rights.
Subcontractors, lower-tier subcontractors, and material suppliers are prohibited from waiving or diminishing their lien or payment bond rights within the construction contracts.
Will Courts Let Unfair Waivers Still Pass Through?
Though this bill passed through the Virginia chambers with flying colors, the small changes to the bill’s text during that process is interesting and may leave construction attorneys arguing about its purpose and reach over time. The bill’s original text was a bit different from the final text above quoted. It instead provided as follows:
C. Any right to file or enforce any mechanics’ lien granted hereunder may be waived in whole or in part at any time by any person entitled to such lien, except that a subcontractor may not waive or diminish his lien rights, the right to assert payment bond claims, the right to assert claims for demonstrated additional costs, or such other rights a subcontractor has under laws prevailing at the location of the project, [highlight]unless such waiver is obtained by actual consideration specific to the waiver requested.[/highlight]
This could be a pretty substantial difference.
The original text sought to tie the contractor or supplier’s waiver ability to the actual money they were paid. This is common, and a lot of states have recently taken this approach because general contractors, lenders, sureties, and others are abusing the lien waiver process. The effect of this approach is to nullify lien waiver exchanges when they do not fairly represent the transaction that has actually taken place.
In committees, however, this language was alerted to the more generic above version, simply prohibiting the waiver of lien rights “in a contract executed prior to providing any labor, services, or materials is null and void.”
It will be interesting to seeIt will be interesting to seeIt will be interesting to see how this subtle difference is interpreted by the courts.
On the one hand, the purpose behind the statutory change in Virginia is as clear as day. The law previously allowed subcontractors and suppliers to waive their lien rights at anytime, and now, the state wants to change this completely to protect these parties against strong-arm waiver tactics. The purpose behind such a change is a fundamental belief that those furnishing labor or materials to a project should not carry the heavy financial risk burden of such projects. Consider, for example, the summary of the bill, which explains the bill’s purpose as follows:
Protects a subcontractor from waiving his lien rights, bond claims, claims for additional costs, or any other rights unless the subcontractor has been compensated for the work or materials related to the waiver.
On the other hand, however, the legislature had contemplated the more restrictive language and rejected it, favoring to put in more ambiguous and less restrictive language. How will it be interpreted? Is an unfair and unrepresentative lien waiver a “contract” executed after labor, services, or materials are rendered? Will contractors, title companies, bankers, and others at the top of the chain just transfer their strong-arm provisions from the original contract into the lien waivers?
Time will tell.
Title Insurers and Bankers Exert Influence To Rob General Contractors Of Fair Protections
The final bill prohibits a few different parties from waiving their lien rights – subcontractors, lower-tier subcontractors, and suppliers. Noticeably missing from this list are general contractors, who are still allowed to waive their lien rights within the contract. This was not lost on the general contractors. Through the Associated General Contractors (AGC), recommendations were made to the legislative committees to add general contractors to the protected list. In a February 2015 AGC eBulletin to members, here is what the AGC says happened:
When the bill came before the House Courts of Justice Civil Subcommittee, AGC asked that general contractors be included in this provision. No one objected, and the subcommittee approved it unanimously…When the proposal was considered by the Courts of Justice Committee, no one objected to the bill and it was again approved unanimously.
Afterwards, the bankers and title companies complained…A few days before the end of the session, they convinced some of the Republican caucus leaders in the House to ignore the subcommittee and committee process and oppose the bill.
The result – we were faced with a choice between no bill or reverting back to the original bill in order to save this protection for our subcontractor and supplier members, with gc’s excluded from the bill. We chose the latter course of action with assurance by the patron, Senator Chap Petersen, that he would work with us next session to correct this unfair action.
Title insurers and bankers were probably not pleased with this bill at all because Virginia was one of the few states that enabled them to handcuff and push contractors and suppliers around completely on lien rights. However, their overall aggressive “slam the financial risk down the throats of the bottom of the chain” approach is disconcerting, and has little future.
In a country that values the contribution of the “doers,” it’s going to be hard to fight against the now 48 states who believe in protecting the payment rights for contractors, suppliers, and project participants who are furnishing the labor or materials to a project. It will be a welcome day when the bankers and insurers choose a fair and welcoming approach to their financial risk mitigation. They’ll find it more successful when compared with their dead-end current approach.