Even though lien waivers are quite common, contractors, suppliers, and developers alike may not fully understand how they work and why they are necessary.
Lien waivers benefit all parties involved in a construction project but can be complicated, and if not done correctly, can result in a massive loss of funds.
In this article, we’ll look at the following topics that will give you a working knowledge of lien waivers:
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A lien waiver is a document that acts as a sort of receipt for payment in the construction industry.
It is a written agreement where the signer waives the right to file a lien for the specified amount in the waiver.
Lien waivers can be initiated by a:
When signed by the other party, the lien waiver essentially states that the initiator of the waiver has been fully paid. This, in turn, waives their rights to file a lien.
If you’re involved in construction and will be requesting payment for materials supplied or services rendered, you need a lien waiver.
Usually, the General Contractor will request lien waivers from anyone involved in the project as they are paid. This includes:
Avoiding liens benefits everyone involved, and since most GCs prefer to get the job done without the filing of any liens, lien waivers can save them a lot of headaches, time, and money.
In every construction job, there are two parties involved:
The payor (the property owner or GC) is the one who sends a lien waiver to the payee (the subcontractor or materials supplier), who signs the waiver, agreeing not to file a lien on the specified amount.
Lien waivers benefit both the one who is paying and the one receiving the payment.
Lien waivers benefit the party making payment by:
Lien waivers benefit the party receiving payment by:
To fully understand the lien waiver process and the benefits to both parties, an example may be helpful.
Let’s say a GC pays a mechanical subcontractor $50,000 for installing all the plumbing and HVAC on a project and sends a lien waiver for the subcontractor to sign. When the subcontractor signs the waiver, he waives a lien worth $50,000.
By requesting and signing this lien waiver, the GC is protected from a lien being filed against him.
Furthermore, the subcontractor benefits by having added assurance that he will be paid for the completed job.
Though lien waivers are generally not required, they are most certainly a necessity for those who are making payments — and this is especially true for progress payments.
Any time a progress payment is made, a lien waiver should go along with it.
Of course, you can write your own lien waiver by hand, but if you make mistakes in the wording or forget to include something, it can cause all kinds of problems.
People in the construction industry are human, and many are looking for any reason to not pay what they owe — especially on sizable projects. So, if there is even one tiny error in the lien waiver, that will give them the excuse they are looking for to avoid payment.
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Lien waivers are not required anywhere but are common everywhere.
In general, lien waivers should be used by any construction company or contractor that makes payment requests.
And even though lien waivers are not required by law in any of the United States, 12 states have mandatory forms that need to be used.
Lien waivers can be quite confusing, so requiring mandatory forms in these states makes it easy for contractors and owners to know they are using the correct forms and that they are worded properly.
If you work on a construction project in one of the following states, you will need to make sure you use the mandatory lien waiver forms:
In most cases, lien waivers do not need to be notarized — unless it is being used as an affidavit or needs to be filed with a county recorder.
A notarized document simply verifies a signature. It doesn’t prove the truth or clarify anything (other than the identity of the person signing), so notarizing lien waivers is fairly uncommon.
But there are a few states where notarized lien waivers are required.
Lien waivers must be notarized to be considered valid and enforceable in:
It may go without saying, but a lien waiver is signed before a lien is filed.
The party requesting the lien waiver should send it to the other party unsigned. Usually, the party receiving the lien waiver will sign it when payment is made.
However, in some cases, the payor (owner or GC) may ask for the payee (a subcontractor) to sign a lien waiver before payment is paid out.
Of course, this protects the GC from a lien being filed on the project, but it may not benefit the subcontractor in the same way since he would be releasing his rights before the payment is processed and cleared.
There are two basic types of lien waivers:
Each of these types has 2 subsets:
So, essentially, there are 4 types of waivers:
Most states in the U.S. do not regulate lien waivers at all, but there are a few states that do.
Many of these states only acknowledge conditional waivers on progress payments and unconditional waivers on final payments.
As the name implies, conditional lien waivers are dependent on a condition specified in the document.
In most cases, the condition necessary for the lien waiver to come into effect is the condition of the payee’s receipt of payment.
A conditional waiver might be needed anytime a payout is made. This guarantees the owner or GC that a lien won’t be filed as long as the subcontractor or supplier is paid.
But if the party who signs the waiver does not get paid, then the waiver would become invalid, giving the signor the right to file a lien.
Conditional lien waivers can be specified for both:
A conditional waiver for progress payments waives lien rights up to a specific date as long as payments have been received. This type of waiver should be used when you are expecting to receive a specific progress payment on the project.
A conditional waiver for final payments removes lien rights when receipt of the final payment is received. Some provisions may apply. This type of waiver should be used when you are not expecting more payments in the future.
Again, as the name signifies, unconditional waivers come without any particular conditions.
Without any specified conditions in the lien waiver agreement, these types of waivers are in effect and able to be enforced as soon as they are signed — whether payment is received or not.
Unconditional waivers are risky for subcontractors and suppliers, so careful consideration should be taken before signing on the dotted line.
Unconditional waivers should be reserved for those situations when payment has been received and processed — the check has cleared the bank and the money is in hand.
Sending these types of waivers before payment is received is dangerous and could leave the signor without any type of recourse.
As with conditional waivers, unconditional waivers can be used for:
Unconditional waivers for progress payments release the lien rights through a specific date with no conditions.
This type of waiver should be used when you have received partial payment on the project, even though future payment may be expected.
This waiver should not be used if there is a chance that the payment will fail or be delayed for some reason. A conditional waiver would be the better option in this case.
Unconditional waivers for final payments remove lien rights once payment is received. This waiver should be used when all payments have been made and you are not expecting any future payments.
As with the other type of unconditional waiver, this one should only be used when the payment has been processed and is in hand.
Creating your own lien waiver is possible, but not recommended.
Mistakes in lien waivers can be costly, and while forms can be downloaded online, some states may have specific requirements like:
If any of these are wrong or missing, the waiver will be rendered invalid.
In addition, lien waivers should include precise language regarding specific:
Otherwise, the signer of the waiver might try to get payments for any service or project they specify, rather than the one that should have been named in the waiver.
Paying careful attention to detail benefits both the payor and the payee.
Getting all the details right with lien waivers is a big deal. Even the smallest mistake or omission can cost more than you’re willing to pay.
With so much at stake, it makes sense to get help from professionals.
Flexbase has the experience and know-how necessary to get it right the first time — saving you money and stress.
When you let Flexbase complete lien waivers for you, they:
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Using Flexbase will ensure reliable and effective lien waivers — and so much more.