Lien waivers do not get the respect they deserve in the realm of protecting the rights to payment in construction. In a prior post in this series we shifted the focus to the owner’s perspective on the problems of liens and payment including the need for collecting lien waivers. Lien waivers are important to both owners and claimants because they are a customary tool for managing risks of liens on one hand and payment on the other.

Lien waivers serve as a paid receipt. Provided they are used and understood properly, lien waivers should help to track the money on the project and continuously clear the lien rights of contractors and suppliers. In most cases, lien waivers require consideration to be enforceable.  That should mean that the party giving a waiver has actually been paid.  In many cases, however, contractors or owners demand lien waivers as a condition for payment, or a potential claimant fails to use the correct form.  Contractors and suppliers may fail to read the small print on what they sign and risk unintended loss of lien rights. Owners often fail to appreciate that they need the waivers of subcontractors and suppliers and not just their general contractor.   Any of these scenarios represents an avoidable breakdown of sound practices with consequences.

It is also important to know that there are some states where lien waivers do not require consideration. In those states, the waiver is considered to be “live” when it leaves the signer’s hand.  So, an extra degree of caution is required in those states.

There are two main types of lien waivers: full final payment and partial payment.  Each of those has two sub types: unconditional and conditional.  About 12 states now prescribe lien waiver forms.  In California, for instance, the correct form in each category is prescribed and required.   In most states the lien waiver form is a choice even where the form of a conditional waiver is not formally recognized in the statutes.

A full final unconditional lien waiver is appropriate where the contractor or supplier is actually paid in full. A conditional final lien waiver addresses the situation where the owner, lender or contractor is insisting that it collect all the final lien waivers before it will release the final funds.  A conditional waiver normally reflects that the signer is not paid yet.  Often the signer holds a check in exchange for the conditional waiver, but the waiver itself states it is only effective when that check clears the bank on which it has been written.  If that should fail to occur, the lien waiver is not effective. The language of the waiver is a clear indication to the receiving party, in order to avoid any misunderstanding, that final payment has not been made and  that some follow up will be required.

Final waiver forms need to be read with care. Some final waiver forms contain other language such as an affidavit affirming that all labor and materials have been paid, additional warranties or waivers of any lingering claims.

Partial lien waivers, both unconditional and conditional, work the same way, but in the world of partial lien waivers there are additional cautions. First, an unconditional lien waiver is not appropriate where the signer does not have at least a check in hand.  Unconditional waivers should not be released for any amount that is not presently paid.   If the money is not presently paid, the appropriate form is a conditional waiver.  Further, however, lien waivers requested from the lower tiers of subcontractors and suppliers are often non-standard forms and may contain additional language or waivers of rights which may or may not be correct or intended.  There is also an important distinction between waiving lien rights through a date versus waiving only through an amount.  It is all too easy to waive rights through a date only to discover that there was more work or material which had not been billed and is now without lien protection.   Lien waivers only for payment actually received is the safest route to take.

Sound lien waiver practice is good for both the owner and the lien claimant. To avoid unnecessary surprises all industry participants should use the right type of lien waiver form and read it before signing it.