This document is usually prepared, signed, and passed along without much fanfare or analysis. But the laws and cases that affect lien waivers depend on a variety of factors that can be as broad as the project’s state and as nuanced as its specific characteristics.

Since lien waivers are exchanged so routinely, their details are often overlooked in favor of practical needs. This has created confusion as to how these waivers should actually work.

In fact, there are two critical reasons CFMs need to understand lien waivers. First, they are intrinsically tied to getting paid, and getting accounts receivables paid quickly is an important part of the CFM’s job. In fact, it’s been suggested that accounts receivable is the single most impactful component to a contractor’s cash management.¹ And second, as guardians of a company’s financial risk and exposure, CFMs must exercise careful concern to avoid over-reaching or inaccurate lien waivers.

This article will discuss what can be known about lien waivers, common industry misconceptions, and what CFMs can do to better manage these documents for their companies.

What Can Be Known About Lien Waivers

Lien waivers are nuanced documents that are dependent upon many variables built into both the law and the jobsite, making it difficult to know anything definitive about lien waivers. However, here are a couple of universal truths about these documents.

Universal Truth #1: It’s Difficult to Waive Lien Rights Before Payment Is Exchanged

Numerous laws exist to protect against the possibility that a contractor or supplier might waive their lien or bond claim rights before actually receiving payment. These laws fall into three categories and are subject to only a few exceptions.

First, “no lien clause” laws completely prohibit a party from waiving its rights within a contract or before doing the work of a contract. In other words, it’s legally impossible to agree to forfeit lien rights.² Contract provisions that give up lien rights are voided by these statutes, which underscore strong U.S. public policy to protect contractors and suppliers against nonpayment.

In some cases, the laws prohibiting these types of waivers are very strict. Consider Tennessee Code Annotated (TCA) § 66-11-124(b)(1), which states that “[a]ny contract provision that purports to waive any right of lien under this chapter is void and unenforceable as against the public policy of this state” and goes on in § 66-11-124(b)(2) to hold that “if a contractor solicits any person to sign a contract requiring the person to waive a right of lien...[after a hearing] the contractor’s license shall be immediately revoked.” Similarly in Illinois, 770 ILCS 60/21.01 provides limits with respect to a party’s ability to induce delivery of a waiver.

There are few statutory exceptions to the “no lien clause” rule. While states like Colorado and Nebraska (and Pennsylvania with respect to residential property) expressly allow for pre-work waiver of lien rights, even in these states – and other states where the rules are more ambiguous – no lien clauses are generally upheld only when specifically and perfectly drafted. (See Exhibit 1.)

Second, every state allows parties to sign and exchange conditional lien waivers. Simply defined, the waiver is ineffective until payment exchanges hands, which then renders the waiver effective and unassailable. Property owners, lenders, and GCs typically want lien waivers in-hand from lower-tier parties before issuing a payment. This tool allows contractors and suppliers a clear way to give waivers without fear of nonpayment.

Third, whenever a lien waiver is signed, regardless of what the document may say, many state laws consider it a “conditional waiver” by rule until payment is actually made. For example, in California, lien waiver behavior is strictly contained based on the actual payments exchanged between the parties (as opposed to the lien waiver’s specific language).³ Similar laws exist in Mississippi,⁴ Texas,⁵ and several other states. Most states with regulated lien waiver forms will also regulate the ability to exchange unconditional waiver forms when payment has not yet been exchanged.