Lien Waivers: Caveat Contractor!

Ok, my Latin may be lacking, but one thing I do know is that contractors should beware when lien waivers enter into construction contract negotiations.

Frequently, lien waivers are thought of in the mid-project, payment context. Basically, where a contractor or sub-contractor gets paid and signs a release of their lien rights. In this context, lien releases are harmless because the party has been paid. There is no reason, and in fact, no legal basis to file a lien. In this setting, lien releases actually serve an important role in getting a project to completion. At the end of the day, owners and developers need a building/structure/etc. that is relatively free and clear of encumbrances when they have paid those to whom they owe payments.

Where lien waivers get a little riskier is when they become an up front contractual requirement instead of post-payment documentation. In short, in these pre-construction lien waivers, upstream parties require downstream parties to prospectively waive their lien rights in advance. By entering into this type of arrangement, the downstream party essentially forfeits one of their most powerful tools to ensure payment for labor and materials–the mechanics lien/materialman lien.

Why have prospective lien waivers become an issue? From an owner’s or lender’s perspective, they are a great deal. Owners and lenders are able to limit the pool of potential parties who could place an encumbrance on a property should payment issues arise. This becomes even more attractive on larger projects where there are more subcontractors (i.e. the potential for more mechanics lien claims) and the property at issue is high value.

Lien waivers are not such a good deal for the downstream contractors and subcontractors, however. One of the best tools contractors have to make sure they get paid is the mechanics lien/materialmans lien. Companies become insolvent, financing falls through, but real property does not go away. And without payment, neither does a lien.

Contractors who enter into construction contracts that include prospective lien waivers should realize what they are agreeing to in advance. If the contract is lucrative enough, this risk may be worth taking on, given the potential profits. However, at a minimum, contractors should hedge their risk by insisting on a payment bond. This is common on larger projects, but payment bonds are not always incorporated into smaller ones. If a party is asking you to waive lien rights, they should at least provide some assurance that you will have a remedy if payments are not made.

Of course, lien waivers are deal points, like so many other things (including price). They can be negotiated. At the end of the day, if you are going to accept the risk that you will forfeit your lien rights, insist on some sort of consideration in return.

Top 10 New Year’s Legal Resolutions for Everyone in Construction

10. Know who you’re contracting with, and make sure they are financially viable (or have a bonding or insurance company that is).

9. Treat your employees and staff fairly and they will (usually) treat you fairly in return.

8. The best defense to an OSHA investigation is to prevent an OSHA investigation.

7. Prevent costly personnel ambiguities by having well defined, fair, written policies in place in advance–and communicate those policies to all employees.

6. Don’t agree to any indemnity provision unless you’re willing to financially be on the hook for another party’s own negligence.
OR
6a. If you negotiate indemnity from another party, make sure the indemnity provision in the contract is actually enforceable.

5. Do not include heavy-handed, punitive liquidated damage provisions in your contracts–courts will not enforce them.

4. Old emails never die–if you wouldn’t put it on paper, don’t type it and hit "Send."

3. Limitations of liability are serious stuff–if you use them, use them correctly.

2. Have good billing practices, know your lien deadlines, and stick to them!

And the #1 New Year’s Legal Resolution...drumroll please....

1. Read your contracts. Understand your contracts. Enforce your contracts!