RE: Subcontractor's Waiver of Liens

2 weeks ago

My question is, if we are requiring our subcontractors to sign conditional partial lien waivers with each progress payment, but we aren’t requiring them to provide lien waivers with all of their suppliers, are we still legally protected from a lien? It’s happened in the past that we have gotten signed conditional waivers from a subcontractor, but they didn’t pay their own suppliers and we are faced with a lien. How do we protect ourselves if the subcontractor states that he has paid off of his vendors/suppliers/2nd tier subcontractors? Seems like a lot of paper work to make sure that they give us a list of all of their suppliers on our projects, to ensure they are paying their vendors with the money we paid them. Just not sure of the legal ramifications of doing all of the paperwork to have a sub sign a lien waiver IF they indeed, didn’t pay their own suppliers/vendors for that project. Any suggestions?

Senior Legal Associate Levelset

Sub-tier visibility and making sure everyone down the chain is getting paid can be major concerns, as you mention above.

It’s hard to know everyone who’s on the job, and it’s even harder to make sure everyone has been paid what they’re owed. However, creating a more visible and transparent project helps to eliminate the potential for a mechanics lien coming out of nowhere. So, while it may take a little more effort to collect everyone’s info who’s working on the job, those efforts will go a long way toward making sure payment problems don’t pop up. When a contractor knows who all of the project’s sub-subcontractors and suppliers are, it’s much easier touch base, if necessary, to make sure everyone’s been paid.

Collecting lien waivers
More importantly, though, knowing everyone who’s on the job helps contractors know who they should be collecting lien waivers from. As you mentioned above, it’s not uncommon for a mechanics lien to get filed on a job where the contractor isn’t even aware of payment problems occurring at the second or third tier of the project. Obtaining a waiver which also states your direct subcontractor has made all necessary payments is nice, but that assurance, in and of itself, won’t provide much protection if there really is a payment problem at hand.

That’s why it’s a good idea to collect lien waivers from everyone on the payment chain when releasing payment – whether you’re collecting those yourself, or having your sub do that legwork. If participants aren’t getting paid and if they’re being asked to submit a lien waiver, chances are they’ll make the payment dispute known. Plus, if the information of every project participant was obtained at the start of the job, it will be easier to collect lien waivers further down the line or to check in on sub-subs and suppliers to ensure they’ve been paid.

Protecting against sub-tier mechanics liens
Mechanics liens can only be filed when payment is owed but unpaid, so the best way to avoid the issue of potential liens to is to make sure everyone’s been getting paid on time. As mentioned above, having the information of everyone on the project will provide the ability to make sure payments are properly made, and it will make it a lot easier to obtain lien waivers. So, the mere act of collecting all these participant’s information and empowering them to speak up if there’s an issue will often stop payment problems before they start.

As you mentioned above, requesting written assurance from a subcontractor confirming they’ve paid all their subs and suppliers will add another layer of protection. It might not stop a lien from being filed, itself – but it will come in handy when hashing out the dispute that comes afterward.

Unpaid balance state
Finally, note that New York is what’s called an “unpaid balance” state. Meaning, the amount of a lien claim by any sub-tier lien claimant will be limited to the amount that’s owed but unpaid between the owner and the contractor. So, a sub-subcontractor or second tier supplier’s lien is generally limited to the amount the owner failed to pay their contractor – and the owner won’t be responsible for more than the contract price.

Of course, the goal probably shouldn’t be to discredit a lien claim that’s already been filed – by the time a lien filing has taken place, feathers are ruffled on the job and the owner will likely be pretty upset about the lien filing (even if the lien isn’t enforceable). Rather, a better goal is likely to track payments being made on the job and to prevent issues from occurring or at least prevent them from snowballing out of control.

I hope this was helpful! If you’ve got other questions about using notices and liens in New York, here are some great resources:
(1) About New York Preliminary Notice
(2) New York Mechanics Lien Guide and FAQs

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