Lien waivers are an excellent tool for construction industry participants to minimize risk when making and receiving payment. For those making payment, a properly executed lien waiver is designed to mitigate the exposure to future lien filings. For those receiving payment, executing and delivering a lien waiver can be dangerous because you don’t want to sign away the right to file a lien until payment has been received. But when they are prepared correctly and carefully, a lien waiver is an excellent method of leveraging lien rights in order to get paid.
STEP 1: UNDERSTAND THE TYPES OF LIEN WAIVERS
Generally speaking, there are two broad categories of lien waiver, each with two subsets: conditional lien waivers (for final payment or for partial payment) and unconditional lien waivers (for final payment or for partial payment). It is important to understand the distinctions between them before laying down a signature.
CONDITIONAL LIEN WAIVERS
This waiver depends on something, and they don’t go into effect until that condition is met. Typically they are conditioned upon the receipt of payment, either partial or final. For this reason, conditional waivers are usually the safest option for parties awaiting payment.
UNCONDITIONAL LIEN WAIVERS
These waivers are slightly riskier because they go into effect as soon as they are signed. Because lien rights are waived immediately upon signing, it is best practice not to sign an unconditional lien waiver until payment has been received. Like conditional waivers, unconditional lien waivers can be apply either to partial payment or final payment.
STEP 2: UNDERSTAND YOUR STATE’S LAW
There are 12 states that have statutory requirements for lien waiver forms. This makes dealing with waivers in these states a little easier – you simply have to use the statutory form. To download the required forms for these states, click here.
- Arizona
- California
- Florida*
- Georgia
- Massachusetts
- Michigan
- Mississippi
- Missouri
- Nevada
- Texas
- Utah
- Wyoming
*Florida does not require that parties use the statutory lien waiver, but it offers the waiver as a safe option, and seems to prohibit parties from requiring a non-statutory form.
In states without statutorily required forms, it is important to be extra careful. Unregulated forms sometimes include clauses that can negatively impact the party waiving lien rights. Make sure to keep your eyes peeled for mentions of retainage, change orders and extra work when reviewing a lien waiver in one of the other 38 states.
STEP 3: CAREFULLY REVIEW THE LIEN WAIVER
It should come as no surprise that carefully examining a legal document before signing is a good practice. But it can be difficult to recognize red flags when dealing with unfamiliar documents. Here are a few good ideas for how to minimize risk and sign lien waivers with confidence.
- Keep and stick to an approved set of forms. In the 12 states with regulated forms (see above), use them. And make sure any waivers you receive conform with the regulations. In states without regulated forms, work with your attorney to create a default lien waiver form.
- Sometimes a contractor or owner might refuse to accept your waiver form in favor of their own. Be very careful when this happens! It is a good idea to have someone at your company who specializes in reviewing these types of documents and can make an educated decision about whether to accept or reject the form.
- Don’t be afraid of consulting an attorney. Even with an excellent lien waiver policy in place, exceptional circumstances will arise and it is better to be safe than sorry.
Following these steps will set you on a good path for reviewing and benefitting from lien waivers.
