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Construction projects are filled with lumber, nails, paint, roofing, steel and\u2026paperwork. Yes, paperwork is an integral part of performing construction, because much of what is done must be recorded so that everyone on the project knows what to do. The paperwork often includes architectural or engineering plans, which guide the way a project is built; it also often includes contracts and purchase orders or invoices so that all the parties know the basic rights of the parties and how the work is to proceed. Payment requisitions are also part of the construction paperwork process, and for many projects, lien waivers are submitted at the same time. But what is a lien waiver and why are important?<\/p>\n
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As is normal in the construction industry, subcontractors are often called upon to provide lien waivers throughout their performance on a project.\u00a0 Typically, the lien waivers are requested in exchange for partial or final payment and are required in order for the subcontractor to get paid.\u00a0 The purpose of the lien waiver is to obtain the subcontractor\u2019s agreement, or waiver, that it will not file a lien in exchange for the payment it is about to receive on its monthly or periodic pay requisition.\u00a0 The goal for the general contractor is to extinguish the subcontractor\u2019s lien rights and that is achieved by having the subcontractor sign the document entitled \u201clien waiver.\u201d\u00a0 Once the lien waiver is signed, the subcontractor no longer has lien rights for its work performed for that period of time that is stated in the lien waiver itself.<\/p>\n
For example, if the subcontractor\u2019s first pay requisition\/invoice is for $100,000, the general contractor will typically require a partial lien waiver for that same period of time in exchange for the payment of $100,000.\u00a0 Therefore, the general contractor can satisfy itself that the subcontractor has no lien rights for that first month on the job.\u00a0 Similarly, lien waivers would continue for every month throughout the duration of the project, and, finally, upon final completion, a final lien waiver would be requested of the subcontractor. Many subcontracts make lien waivers a condition precedent or prerequisite to getting paid.\u00a0 Contractually, a subcontractor may need to sign a lien waiver as part of its pay application process in order for the general contractor to facilitate payment.<\/p>\n
From a general contractor\u2019s perspective, it is absolutely imperative that they obtain lien waivers from their subcontractors.\u00a0 As stated above, it is the ultimate protection to guard against liens or claims for non-payment by subcontractors.\u00a0 A lien filing can have a detrimental impact on anyone within the construction process.\u00a0 Once a lien is filed, the owner will likely hold back monies from the GC who, in turn, will likely hold back the amount of the lien from the subcontractor until the lien has been resolved.\u00a0 For that reason, it is now common for general contractors to also consider obtaining lien waivers from lower tier subcontractors, including sub-subcontractors and suppliers who may have lien rights, depending on the jurisdiction.\u00a0 If a general contractor knows, for example, that there is an equipment supplier for a major component of a project (e.g. rooftop air conditioning units totaling $5 million), then it is wise to ask the subcontractor responsible for that supplier to procure a lien waiver from the supplier as well.<\/p>\n
Anyone who has lien rights. This includes the general contractor on most private projects, and some public projects. As a general rule, lien rights exist for the first 3 tiers in the construction chain.\u00a0 Using a typical project setup, the first tier is \u201cowner\/general contractor.\u201d\u00a0 The second tier would be \u201cgeneral contractor\/subcontractor.\u201d\u00a0 And, finally, the third tier is typically \u201csubcontractor\/sub-subcontractor and\/or supplier.\u201d\u00a0 Thereafter, lien rights generally do not exist for lower tier persons performing work on a construction project (e.g. the trucking company delivering the rooftop air conditioning units to the project).<\/p>\n
The power of a lien filing cannot be overstated.\u00a0 It has significant consequences.\u00a0 By definition, the lien, on a private project, serves as an encumbrance against the real estate, very much like a mortgage filed against someone\u2019s home.\u00a0 Therefore, a subcontractor\u2019s lien has an impact against the owner of the real estate, even though there is no contractual privity between the owner and the subcontractor and\/or sub-subcontractor.\u00a0 Liens can be filed nearly instantly, and the ability to lien it now can prohibit the sale of a property, prevent the transfer of clean title, and be a basis for default under a bank\u2019s construction loan.<\/p>\n
Furthermore, if the subcontractor\u2019s lien has not been resolved, the subcontractor can move to foreclose upon the lien, again, no different than a bank foreclosing upon mortgaged property when a homeowner fails to make their mortgage payments.\u00a0 Ultimately, if the foreclosure lawsuit proceeds to successful conclusion for the lienor, it will result in the sale of the property to satisfy the lien.\u00a0 Of course, the lienor needs to take into account whether prior liens and\/or encumbrances exist against the property.\u00a0 In many jurisdictions, priority of lien filings would take precedence and the lienors with previously filed liens may have a greater priority to the proceeds of the sale of the property.\u00a0 Also, if there are bank mortgages filed against the property, the bank will generally address a lienor\u2019s lien prior to allowing a lien foreclosure to go to conclusion in order to protect its collateral; the property itself.<\/p>\n
A subcontractor\u2019s lien waiver can take the form of a partial or interim lien waiver, or a final lien waiver.\u00a0 A final lien waiver would appropriately be requested at the end of the project when all of the subcontractor\u2019s work is completed.\u00a0 An interim or partial lien waiver is typically given in exchange for partial payments while the subcontractor is performing its work. Be careful not to submit a final lien waiver when the project is still ongoing and there is still work to be done. Additionally, when submitting either a final lien waiver or a partial lien waiver, make sure you know what you are signing, and that you are not signing away your rights to additional claims you may have that are separate and apart from the payments being made to you during that pay period.<\/p>\n
Owners and contractors have an interest in making lien waivers as definitive as possible, often attempting to waive claims in exchange for payment. As a practice pointer, all entities requested to sign a lien waiver must be careful about several things:<\/p>\n
First: lien waivers should be in exchange for payment.<\/strong>\u00a0 While self-evident, you do not want to give up your lien rights and not receive payment.\u00a0 Therefore, some partial lien waivers are also called \u201cconditional\u201d lien waivers which clearly state that the lien waiver is conditioned on the subcontractor receiving payment.<\/p>\n Second: the lien document itself should not<\/u> contain \u201crelease\u201d language whereby the subcontractor is giving up any and all of its claims other than its lien rights.<\/strong>\u00a0 For example, while the subcontractor may be willing to give up its lien rights for a specific period of time, there may also exist various other claims, such as claims for additional work, change orders, delay, etc., that need to be preserved.\u00a0 Some general contractors\u2019 lien waivers contain \u201crelease\u201d language whereby they seek to eliminate or have the subcontractor release any and all claims that they may have in exchange for partial payment.\u00a0 Subcontractors should be wary of signing any document that has release language.<\/p>\n Third: subcontractors should make it clear on the lien waiver document that it is preserving its other claims.<\/strong>\u00a0 For example, the subcontractor might state: \u201cThis lien waiver shall not serve to release or eliminate in any manner whatsoever, subcontractor\u2019s claims for change orders 1-10; delay claim for the period of January 1 \u2013 September 1, 2018, etc.<\/em>\u201d<\/p>\n In conclusion, lien waivers are commonplace and serve a useful function.\u00a0 They help owners and others in the chain of construction guard against the filing of liens.\u00a0 Of course, the consideration for giving up one\u2019s lien rights is proper payment.\u00a0 Whether its partial or final payment, a subcontractor should expect that upper tier parties will request a lien waiver in exchange for payment.<\/p>\n","protected":false},"excerpt":{"rendered":" Construction projects are filled with lumber, nails, paint, roofing, steel and\u2026paperwork. Yes, paperwork is an integral part of performing construction, because much of what is done must be recorded so that everyone on the project knows what to do. The paperwork often includes architectural or engineering plans, which guide the way a project is built; […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1124],"tags":[],"yoast_head":"\n