Lien waivers: lean or mean?

August 11, 2010

Owners loathe and contractors love mechanic's liens. Regardless of point of view, mechanic's liens are an American institution as old as the Bill of Rights.

In 1790, President George Washington chose the exact site on the Potomac to construct the District of Columbia. The states of Maryland and Virginia ceded land and local landowners were indemnified so that the capital city of Washington could be built. The federal commissioners charged with overseeing construction of the district determined that it would be necessary to provide incentives to master builders to undertake the building of houses within what was to become Washington, D.C. Thomas Jefferson and James Madison, who were members of the federal commission, in a sense are the fathers of the American mechanic's lien because they persuaded the Maryland General Assembly to enact the first lien law for the benefit of artisans and suppliers of goods and services on construction projects. Thus, on Dec. 19, 1791, four days after the Bill of Rights was adopted, the Maryland General Assembly passed the first lien law for the benefit of master builders, journeymen and materialmen who erected buildings or made improvements in Washington. Limited purpose of waivers

Despite the rich history of the first lien law, owners have every right to protect themselves from the risks of double payment associated with Jefferson and Madison's creative and ubiquitous invention. Their best safety net to guard against this nightmare is to conscientiously secure lien waivers. Lien waivers are tricky because they can be abused when they are used as instruments to do more than waive lien rights to the extent of the payment received in exchange for the waiver. In their haste to receive payments before the close of the banking day, contractors often overlook the full scope of the language in the waiver.

It is not uncommon for contractors to sign waivers that extinguish all of their lien rights through the date the waiver is signed, even though they are not being paid for all of the labor and material furnished through that date. For example, suppose work is started on Jan. 2, 2002. Typically, the first pay application would be submitted in late January to cover the first month. After going through the contract chain, with good fortune a check may be delivered in mid- to late March to cover the January pay application.

A lien waiver signed on March 20, 2002, purporting to waive the contractor's lien rights for labor and material furnished through the date of the waiver will in all probability extinguish the contractor's lien rights for not only January's labor and material but also will extinguish the amount withheld for January's retainage, plus lien rights for everything furnished and provided in February and March up to the date the lien waiver is signed.

A lien waiver tied to time, instead of dollars, is totally inappropriate unless it is intended as a final lien waiver. A proper partial lien waiver should release the contractor's lien rights "to the extent of the payment received" as opposed to "through the date of this lien waiver."

Contractors and subcontractors should also be mindful that a lien waiver has a very limited purpose, which is to extinguish lien rights to the extent of the payment received. Lien waivers should not be used — as they sometimes are — to provide a release for all claims or to increase indemnification and warranty obligations beyond those provided in the contractor's contract documents.

A violation of public policy occurs when an instrument such as a lien waiver is used as a vehicle to require a contractor to release a claim over a disputed amount in order to receive an amount not in dispute. Conditional lien waivers

Tension always exists concerning whether a subcontractor should be required to provide its lien waiver to the general contractor for submission to the owner before the subcontractor actually receives its payment. If the subcontractor offers a waiver conditioned upon receipt of a future payment, it probably will be rejected by the owner.

The AIA family of contract documents provides a reasonable compromise to the age-old question, "What comes first, the waiver or the check?" These forms do not require lien waivers from subcontractors for the first month's pay application. Thus, the general contractor can be paid for the first month without the necessity of obtaining the waivers from its subcontractors. However, by the time the second month's application is submitted, the general contractor should have paid for and received lien waivers from the subcontractors for the first month. Waivers run one month behind until final payment, when the parties must find a reasonable mechanism for exchanging the final lien waiver for the final payment. Lessons learned

Owners must protect themselves from the risk of double payment, while contractors must not give up lien rights for more than the amount of payment actually received. Lien waivers should be drafted, carefully read and executed with the idea that the waiver of the rights should be limited to the amount of the payment received. Anything else almost certainly will offend the sensibilities of Jefferson and Madison.

         
 

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