A lien waiver is a document used during construction, home repair, automotive repair, and other similar services and contracts to release a lien that was placed on the property. Liens are often placed on property when the person who contracted for service doesn't pay for it after they receive it. By placing a lien on property, the contractor can assure that they will be paid if the person decides to sell that piece of property. Liens must be satisfied before the sale can take place. Once the contractor is paid, they complete a lien waiver form to take the lien off of the property.
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What is a Lien Waiver? Why Do You Need a Lien Waiver? How to Create a Lien Waiver Legal ConsiderationsUnfortunately, it is not uncommon for a party such as a general contractor, subcontractor, supplier, construction company, etc., to go unpaid for the work, raw materials, and equipment they have supplied to do work on another party's property. When this happens, those parties have a legal right to place a lien against that property.
A lien waiver is a legal document where one party waives their right to place a lien against another party's property for money owed for work performed, raw materials used, and equipment supplied to improve that property. By signing a lien waiver, the contractor, subcontractor, supplier, etc., affirms that they have been paid for the work they have done on the property and the raw materials they used.
Much like a receipt, once a party has received payment or has been assured that money is on the way, they will issue a lien waiver to the other party. In this way, a lien waiver helps to protect the interests of both parties. It is essentially a release upon final payment.
The terms lien waiver and lien release are frequently used interchangeably. However, there is an important difference between the two instruments. A lien waiver is executed to mitigate the need to file a lien. On the other hand, a lien release is executed to cancel a lien that has already been filed. In other words, a lien waiver is executed before a lien has been filed, and a lien waiver is executed after.
It's also not uncommon for the term lien waiver to be confused with the term No Lien Clause. The difference between the two instruments, however, is significant.
"No Lien clause" is used to refer a clause that is inserted into a contract for work before any actual work has been performed and before any progress payments for that work is due. These clauses expressly waive a party's future lien rights for any future work that they perform. This is different from a lien waiver that is executed for work that has already been performed and for payment that is already due.
No Lien Clauses, are generally frowned upon. As a matter of fact, no lien clauses have been legalized in only three states, and are explicitly prohibited by the laws in more than 20 other states.
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Lien waivers are powerful legal instruments and are very important in the construction industry. When used properly, a lien waiver benefits both the payor and the payee.
Payors benefit by receiving a lien waiver that ensures that they won't end up paying twice for the same services. In this way, a lien waiver acts like a receipt for payment.
The payee benefits by sending a signed lien waiver along with their invoices because this will expedite the payment process. Paying parties are often reluctant to send payment without first receiving a guarantee that the payee will waive its right to file a mechanics lien for more money. When receiving a signed lien waiver with an invoice, the payor will be encouraged to make the payment sooner.
There are two basic types of lien waivers:
A conditional lien waiver, as the title implies, waives the signor’s lien rights, so long as something else happens, which in most cases is payment actually being received. In other words, with a conditional waiver, the signor promises to waive his or her lien rights if a certain condition is met. If this condition is not ultimately satisfied, the waiver becomes invalid.
Conditional lien waivers come in two varieties:
Whereas with a conditional lien waiver the signor promises to waive their lien rights when payment is received, an unconditional waiver becomes effective and enforceable as soon as it is signed.
An unconditional waiver can be executed after actual receipt of either a partial payment or a final payment. However, they should never be executed until payment has actually been received. If you have not actually received payment and but are anticipating payment being made, executing a conditional lien waiver would be in your best interests.
Every lien waiver will be unique. The party providing the waivers will have to prepare the required information before creating the document. Parties receiving the waiver will probably want this information as well to verify its accuracy. Understanding what information is required is the first step in creating a valid and effective lien waiver. Here is what’s important to know for each lien waiver:
Understanding which information is needed to create an effective lien waiver document is half of the job done. The other half is selecting a template from our library, Then fill out a step-by-step questionnaire that will place that information where it needs to be placed in the document. Afterward, you can export your completed lien waiver as a Word or PDF document.
A lien waiver exchange will happen several times during a construction project. If you are involved in many different construction projects this could mean a great number of lien waivers to review. You could hire an attorney to review each lien waiver for you, but the time and cost required to have this done by an attorney make this highly impractical. So what can you do?
Always use the same set of lien waiver forms that have been pre-approved with regard to your state’s regulations.
Designate someone at your company who will be responsible for reviewing lien waivers that are supplied to you by contractors or owners who won't accept your own lien waiver forms.
Consult with an attorney whenever necessary.
In most cases, it is best for both parties involved to exchange conditional waivers exclusively. This is because a conditional waiver only goes into effect once payment has actually been received, thereby protecting both the payer and payee. The payee retains the right to file a lien until the money is actually received; the payer avoids facing double payment (having already paid the payee, but still having a lien placed against them).
Considering that an unconditional lien waiver becomes enforceable the moment it is signed, it can be extremely risky to sign an unconditional final waiver before you actually have the cash in hand. It is not uncommon for a contractor to be given a check and then sign an unconditional lien waiver, only to find out later that the check bounced. When this happens, the contractor has a big problem because it has relinquished its lien rights and has still not been paid. Using conditional waivers will avoid this situation because the contractor will retain its lien right until the funds are actually received.
The terms of the waiver will govern the relationship between you and the other party involved. It is, therefore, extremely important that you view lien waivers from a legal standpoint. That being said, here are few legal considerations to keep in mind, whether you are giving or receiving a lien waiver.
If the contract you sign dictates the form you must use for lien waivers, you will be required to send and receive lien waivers in this form for the duration of the contract. Make sure that you negotiate the type of lien waiver form that will be used when negotiating the contract. If you have a particular preference, this is the time to express that to the other party. Otherwise, you may be obliged to use a form that you are not comfortable with or that contains language that is not in your best interest.
Understand the legal significance of signing a lien waiver
It is absolutely critical that you understand that when you sign a lien waiver in order to receive payment, It is not merely a formality, but has significant legal consequences. If you sign a release that says you are waiving your right to certain claims, you cannot come back later to assert those rights after you have already waived them.
Make Sure That the Lien Waiver Does Not Waive More Than Just the Right to File a Lien
When you sign a document that is titled “lien waiver” at the top, this does not mean that you are only waiving your right to file a lien. There are many rights you can have under a construction contract and the language within the lien waiver will govern which of these rights you will be waiving.
Even if the document is titled “lien waiver”, the body of the document can say that you are waiving your right to claims, such as change orders, extra work, delays, retainage, etc. So, don't be fooled by the title of the document. Read the body of every lien waiver before you sign it so that you ensure that you are not waiving any right that you don't intend to waive.
Make Sure That Your Lien Waiver Has the Right Through Date
If you are not careful you can lose a lot of rights (and money) by signing a lien waiver with the wrong "through date" or no through date at all. The through date is the effective date of the lien waiver, or in other words, the specific date upon which the lien waiver becomes effective. If there is no through date, the effective date of the release is the day you sign it.
The reason why having the correct through date is important is because you will be waiving your lien rights, (and any other rights mentioned in your lien waiver) related to any work supplied before this date. If you plan on being paid later for anything you did prior to the through date, you need to include an exception in the waiver that excludes those items, or you need to adjust the through date appropriately.
Keep in mind that 12 states require a statutory lien waiver form to be used. Use anything other than this statutory form and your lien waiver will be invalid. It is therefore crucial, in these 12 states for those exchanging lien waivers to use the right form.
Conversely, it is essential in the other 38 states to review lien waivers carefully to make sure the waiver meets all of the statutory requirements and doesn’t include any language that compromises your position. If you are signing a lien waiver, make sure that you are not signing away anything more rights than you intend to sign away.
