NAVIGATING THE PROTECTIONS - Microsoft · Lien waivers are categorized by when they are executed and when they become effective. A party can waive its right to file a lien before

NAVIGATING THE PROTECTIONS OF VARIOUS LIEN WAIVERS

Brent A. Meyer Senior Counsel Husch Blackwell LLP

Contents

The Different Types of Lien Waivers .......................................................................................... 1

Conditional Lien Waivers ........................................................................................................... 1

Unconditional Lien Waivers ........................................................................................................ 2

Enforcing the Waivers ................................................................................................................ 2

States with Required Lien Waiver Language .............................................................................. 3

States without Required Lien Waiver Language ......................................................................... 3

This article originally published on Law360.com

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Developers, real estate financers and contractors understand the importance of mechanic’s lien waivers. Since mechanic’s liens can

cloud title and hinder the sale of a property, they provide contractors and subcontractors with an effective means to collect payment. Owners benefit from lien protection tools such as lien waivers to freely access and market the project after completion.

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NAVIGATING THE PROTECTIONS OF VARIOUS LIEN WAIVERS

Traditionally, a lien waiver functioned as an acknowledgment that some payment was paid and the lienholder released its right to file a lien on a subject property for that payment. Over the years, the content of lien waivers grew to include additional protections.

Most entities prefer the efficiency of a standard form lien waiver, and some jurisdictions mandate specific lien waiver language through statute. However, most states vary on how lien waivers are enforced. Since real estate developers and contractors conduct business in numerous states, the preference for the standard form lien waiver may be to the company’s detriment. This article will discuss the different types of mechanic’s (construction) liens, the different lien laws in the United States, and how the “one-size-fits-all” lien waiver may be missing opportunities to protect an owner, financer or general contractor.

The Different Types of Lien Waivers

Before discussing how different states enforce lien waivers, it is important to understand the different types. Lien waivers are categorized by when they are executed and when they become effective. A party can waive its right to file a lien before furnishing any materials, labor or services on a project. Generally, this waiver is done through a clause in the underlying agreement for construction services or materials. The waiver of lien rights before furnishing any labor, materials or services is typically called a “no lien” clause.

Most lien waivers, however, are executed after the lienholder has furnished materials or services on a project and is now seeking payment. These lien waivers fall into two general categories: conditional and unconditional.

Conditional Lien Waivers

The conditional lien waiver was created because the lienholder does not want to waive the lien rights before being paid. The payor does not want to make payment until it has assurance that the lienholder will waive its lien rights. Since the payor wants the assurance before paying, conditional lien waivers are executed before payment, but do not become effective until the lienholder receives payment. Receipt of payment is the “condition” or event that makes the waiver effective. If the payment is not received by the lienholder, the waiver is not valid. The conditional waiver can be used for partial payments during the construction project, known as conditional waivers for partial payment, and can be used for final payment, known as conditional waivers for final payment.

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Unconditional Lien Waivers

The other type of lien waiver is an unconditional waiver. These waivers are effective upon signature by the lienholder and not conditioned on any payment. Since unconditional waivers are effective (and enforceable) after being executed, any lienholder that signs such a waiver before payment risks not getting paid and losing its lien rights. Because of this risk, contractors, subcontractors and suppliers try to avoid signing unconditional waivers prior to payment during construction projects. Just like a conditional waiver, an unconditional waiver can be used for partial payment where the lien waiver is limited to the amount paid to date. Or, an unconditional waiver can be used for final payment where the lienholder is waiving its right to any amount owed under the project.

Enforcing the Waivers

With that general background in mind, let’s focus on how jurisdictions vary on enforcing the waivers. The “no lien” clause, or the waiver of lien rights in the construction contract, is disfavored by most jurisdictions in the United States. Mechanic’s liens afford contractors, subcontractors and suppliers some recourse if they go unpaid for their work or materials on the project. If courts allow owners, and to a certain extent, general contractors, to use their superior bargaining power to obtain lien waivers in the initial contract, then the “no lien” clause defeats the whole purpose of the mechanic’s lien statutes. More than half of the jurisdictions in the United States have determined that “no lien” clauses are invalid and unenforceable. Only two states, Nebraska and Colorado, explicitly allow “no lien” clauses through statutory law. The remaining states, a little less than half, have not ruled on the enforceability of “no lien” clauses.

Eleven states have opted to regulate lien waivers by enacting statutes, which set forth required language. The statutory waiver form jurisdictions are Arizona, California, Georgia, Massachusetts, Michigan, Mississippi, Missouri, Nevada, Texas, Utah and Wyoming. (A table of statutes with required lien waiver language is below). Any owner or general contractor operating in these states should ensure the mandatory statutory language is contained in their lien waivers. These jurisdictions provide form language for both conditional and unconditional waivers. For lien waivers to be enforceable in these states (except Nevada), the language must be substantially similar to the statute’s language. Nevada requires strict compliance with the statutory language. There is little to no room for creativity or additional releases in lien waivers in these jurisdictions.

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States with Required Lien Waiver Language

States Lien Waiver Statutes

Arizona Ariz. Rev. Stat. Ann. § 33-1008

California Cal. Civ. Code §8132, 8134, 8136 and 8138

Georgia O.C.G.A. § 44-14-366

Massachusetts Mass. Gen. Laws Ch. 254 § 32

Michigan Mich. Comp. Law Ann. § 570.1115

Mississippi Miss. Code Ann. § 85-7-433

Missouri Mo. Rev. Stat. § 429.016 (residential)

Nevada Nev. Rev. Stat. § 108.2457

Texas Tex. Civ. Code Ann § 53.284

Utah Utah Code Ann § 38-1a-802

Wyoming Wyo. Stat. Ann. § 29-10-101

Florida Fl. Stat. § 713.20

States without Required Lien Waiver Language

Lien waivers in the remaining jurisdictions are not so specifically regulated. If you or your client operates in these other jurisdictions, the lien waiver can operate to obtain additional releases or protections. Courts have enforced lien waivers that release claims, defenses and damages beyond a lienholder’s right to file a lien. For example, a subcontractor released its breach of contract and quantum meruit claims for nonpayment against a general contractor when the subcontractor signed a lien waiver stating the payment was “a full and final payment” and would “make no further claim of any nature for compensation.”[1] In these jurisdictions, an owner or general contractor can benefit from broader releases in the lien waiver documents.

Lien waivers can be an effective tool for protecting the project and the parties involved in the project. To be effective, a payor must understand what language will be enforced within the jurisdiction in which it is conducting business.

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Since jurisdictions vary, a company’s standard form lien waiver could miss

opportunities to protect, or under certain circumstances completely fail to protect, against claims from parties involved with a construction project. These missed opportunities should be considered and weighed when deciding whether to use a standard form lien waiver on every project.

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