Owners frequently require contractors, subcontractors, and suppliers to submit lien waivers to ensure that all labor, materials, subcontractors, and equipment are paid for on their projects and unexpected mechanic’s liens do not pop up after payments are made.[i]
There are two general types of lien / bond waivers: a waiver to a date certain (waiver-to-date or “interim”) and a final waiver. The interim waiver is frequently submitted with a progress payment and waives a lien or bond claim right up to the date of the waiver or payment. The final waiver is submitted upon receipt of final payment and waives all lien rights on the property.
The lien / bond waiver is an affirmation by the contractor, subcontractor, or supplier to the owner that it has received payment and will not record a lien / bond claim against the project / bond for that work. When a contractor or subcontractor signs a standard lien / bond waiver and submits it to the owner, the contractor has waived any lien / bond rights it may have had to any work it performed on the project irrespective of whether the contractor, subcontractor, or supplier has actually received payment. The purpose of the lien / bond waiver is for the owner or general contractor to ensure that all contractors, subcontractors, and suppliers are paid and accounted for so as to reduce the risk of mechanic’s liens or bond claims on the project.
There are four commonly-used bond / lien waivers forms in the construction industry depending on the type of project and the ultimate end that form is being used for:
- Lien Waiver (Interim and Final)
- Bond Waiver (Interim and Final)
- Combination of Lien / Bond Waiver and Claim Waiver (Interim and Final), which in addition to waiving lien rights or bond claim rights through a date certain, also has the contractor, subcontractor, or supplier waive any claims it has on the project through a date certain
- Conditional Waiver (variants of the three forms)
1. Submission of Bond / Lien Waivers Before Payment is Received
Owners, escrow agents, and general contractors often require that the lien / bond claim waivers be submitted prior to payment being made. The question arises as to whether this is a safe practice or not.
The safest way to protect lien / bond claim rights is to make a simultaneous exchange of the lien / bond claim waiver for payment. That may work for lawyers, but it does not work for the construction industry. Owners, escrow agents, and general contractors often require waivers from subcontractors and suppliers prior to payment being made. Thus, downstream subcontractors and suppliers need to submit lien / bond claim waivers and trust that the upstream contractors will pass the payment along when the payment is made. Trust, in today’s economy, seems to be in short order.
2. Conditional Waivers – Protection Without Delaying Payment
The easiest way to protect payment rights and any lien / bond concerns is via “conditional waiver” forms:
Conditional Waivers. Though owners, escrow agents, and general contractors may not prefer conditional waivers, the only way a downstream contractor can protect itself is to issue a conditional waiver that specifically indicates it will not become effective until payment is actually received. The waiver in the document is conditioned upon receipt of payment.
The conditional lien waiver puts the owner and general contractor on notice that the contractor, subcontractor, or supplier has not actually been paid. Therefore, the owner cannot rely on the lien waiver to the same extent it does on an unconditional lien waiver.
Date Matches. A typical lien / bond waiver requires that the contractor waive any and all lien / bond claim rights it may have to any work it has performed on the project through the date of waiver document. Therefore, it is essential that the contractor ensure that the date on the lien / bond waiver matches the date of the work to be paid. If not, the contractor is risking waiving lien / bond claim rights to work for which it is yet seeking payment.
For an example of how this works, consider a payment request seek payment for work performed through October 15, 2013. If however the date on the lien waiver form is November 1, 2013, the contractor will actually waive its bond / lien rights for the work performed through November 1, 2013, and have no recourse for the two weeks for which the waiver is applicable, but for which the contractor did not receive payment.
3. Practice Pointer: Limiting Waivers to Progress Payments, Lien Rights, and Bond Claim Rights Through the Date of Payment Only
Requiring that the contractor waive all project claims of any nature, including lien / bond claims through a date certain is tricky because if retainage is being held and lien / bond rights through a date certain are waived without an exclusion for the retainage, contractors risk waiving their lien / bond rights if they submit unconditional forms that do not specifically exclude retainage from the lien / bond waiver, including a notation to that effect. A provision in contract or subcontract along the following lines will avoid inadvertent waivers of bond, lien, or claims:
“Any form or contract language wherein Subcontractor [Contractor] purports to release Contractor [Owner] is hereby qualified by the following language, whether or not Subcontractor [Contractor] specifically adds the language: ‘This release shall apply only to Work for which payment has been received in full by Subcontractor [Contractor], shall not apply to retainage, shall not apply to unbilled changes or extra work, shall not apply to changes that have been asserted in writing or which have not yet become known to Subcontractor [Contractor], and shall be conditional upon receipt of funds to Subcontractor’s [Contractor’s] account.'”
[i] This blog is based in part on the Advise and Consult, Inc. Blog. David A. Eisenberg, Trust Versus Best Practices: The Dangers Posed By Lien Waivers, (October 24, 2013).