Fixing the systemic payment issues within the construction industry and creating a quick, easy, streamlined, and fair payment structure for everyone is a long-term project. However, there are process changes and considerations that can provide outsized benefits for the parties making payments and those looking to get paid.
What Is a Lien Waiver?
Lien waiver documents are routinely exchanged and can help minimize risk related to construction project payments but are often overlooked. Like many things in construction payment, the terminology surrounding lien waivers can be confusing. For the purposes of this article, a lien waiver is a document prospectively waiving the ability to claim a lien at all, not the release or “waiver” of a previously filed lien.
Lien waivers function as the construction industry’s proprietary receipt of payment (or of promised payment). When a certain amount of payment is made or promised, the party receiving the payment gives up its right to file a lien against the property in an amount equal to the payment amount. But these seemingly simple documents come with nuances that must be understood in order to effectively manage financial risk on a construction project.
Types of Lien Waivers
When implementing a waiver strategy and process to eliminate financial risk, consider the four types of waivers – partial, final, conditional, and unconditional – and how each are applicable to different situations. The appropriate waiver depends on the nature and timing of payment, and whether that payment is promised or actually received.
Partial vs. Final
The first distinction is whether the expected or received payment is only for a portion of the work done or to be completed (a partial or progress payment), or whether the payment expected or received is full and final.
Partial waivers are used when the contractor expects more payments to be made under the contract, while final waivers are reserved for receipt of the last or full payment under the contract. This is an important distinction – partial waivers will typically include a “through-date,” which identifies the cut-off date for the value of labor or materials provided. Furthermore, partial waivers reserve any other claims to payment or retainage, while final lien waivers will waive any and all remaining lien rights for labor or materials furnished to the project.
Conditional vs. Unconditional
The second important distinction is whether the waiver is conditional or unconditional. A conditional waiver is only effective upon a specific condition being met, namely the actual receipt of the specified payment. An unconditional lien waiver, however, is effective upon execution, which means that once an unconditional lien waiver is signed, lien rights have been waived whether the payment has been received or not. This is a significant and important distinction of which to be aware, and a construction participant must pay careful attention to lien waiver language to make sure appropriate waiver templates are being used.
Legally, parties must be able to rely on lien waiver text in order to assess financial risk and the payment status of a project. Accordingly, if an unconditional lien waiver is signed and delivered, what is written on the waiver can matter more than what has actually happened.
Understanding the differences among these four types of waivers is critical when signing or requesting a lien waiver.
Mandatory Forms & Restrictions on Use Regulations
Another key aspect of lien waivers to consider when implementing a waiver process is whether the state in which work is being performed regulates lien waivers by statute. Currently in the U.S., there are 12 states that regulate the form and content of lien waivers – Arizona, California, Florida, Georgia, Massachusetts, Michigan, Mississippi, Missouri, Nevada, Texas, Utah, and Wyoming.1 Even though Florida is included, it comes with a caveat; although there are statutory forms provided, as long as both parties agree, non-statutory forms may be used.2 However, no construction participant on a Florida project can be required to use a non-statutory form.3 In these states with statutory waiver forms, a waiver can be deemed invalid and unenforceable if the waiver obtained or provided does not “substantially” comply with the state’s specific requirements.4
Just because a project is occurring in a state without statutorily-mandated waiver templates or language doesn’t mean that the entire process is necessarily a free for all, though. Even states that don’t regulate lien waiver forms can provide certain restrictions with regard to waiving lien rights. Such restrictions can include a prohibition on what amounts to a preemptive lien waiver by waiving all lien rights in the contract for work (also known as “no lien” clauses), waiving lien rights before payment has been received or work has been performed, or waiving downstream participants’ lien rights through an upper-tiered party’s waiver that states all parties were paid.
Accordingly, it’s important to review your state’s rules and restrictions regarding mechanics lien waivers so an effective and compliant waiver strategy can be implemented to speed up payment and/or reduce financial or lien risk.
Regardless of whether the state in which you are performing work regulates lien waivers, it’s incredibly important to review waiver document language. It is not uncommon for parties to include additional and potentially overreaching language that can result in waiving more than just the right to file a lien. A notorious example of this came out of Texas in the case of Zachry Construction Corporation v. Port of Houston Authority of Harris County.5
In this case, Zachry Construction had executed multiple lien waivers in exchange for payment as is standard operating procedure on most construction projects. What Zachry didn’t realize is that the waivers also included some additional language that stated Zachry “had no further claims…for the portion of the work completed.” This was deemed to include any defenses for the liquidated damages being withheld by the Port Authority, and overlooking this simple statement cost Zachry over $2 million.6
While not all lien waiver mishaps are multimillion-dollar losses, the stakes surrounding the receipt of payment should be high enough to matter to the parties involved in every case. Because the lien waiver exists at the crossroads of a project’s financial risks, it is important to thoroughly review and understand all of the implications associated with executing or requesting a waiver document.