If you are a contractor, subcontractor or other entity offering construction goods and services, you probably know that the ability to place a lien on property for the unpaid value of labor and materials provided is a great piece of leverage. Conversely, if you are a property owner, you have likely had to take steps to avoid the title of your property becoming clouded by liens. This is typically required by most loan agreements.
One of the ways both parties ensure payment and avoid risk on a project is by using lien waivers. A lien waiver is a written instrument by which a contractor, subcontractor, material supplier or other potential lien claimant fully or partially relinquishes its right to assert a lien against another’s property.
While lien waivers are a routine aspect of most construction projects, they should not be taken lightly. It is important for construction entities and property owners to thoroughly review and understand the lien waiver process on each project and even more important to give them proper attention during their execution.
Many owners mistakenly believe that a subcontractor or supplier’s lien can be defeated by showing evidence of payment to the prime contractor. This is simply not the case. In fact, Missouri courts have repeatedly held that an owner’s payment to a general contractor will not serve as a defense to a lien enforcement action brought by a subcontractor or supplier.
A lien waiver is only valid if it a) is supported by consideration; or b) has induced the receiving party to detrimentally change its position in reliance upon the waiver. The enforceability of a lien waiver can be summarized as follows:
(1) The waiver will be enforced as written if the language is plain and unambiguous;
(2) Lawful consideration must be given for the waiver; and
(3) The courts will not determine whether the consideration is fair or adequate.
Types of lien waivers
There are four typical types of lien waivers: pre-contract, conditional, partial and final. Each is addressed below.
Pre-Contract Lien Waivers: A party may waive its future lien rights if its intention to do so is clearly manifested. However, the Missouri Mechanic’s Lien Act does not allow agreements to waive lien rights, when such agreements are made in anticipation and consideration of the award of a contract. This restriction, however, does not apply to contractual provisions that require lien waivers as a condition for payment.
Conditional Lien Waivers: A conditional lien waiver is not effective and cannot be relied upon by anyone until the condition stated in the lien waiver has been satisfied. A situation might arise where a subcontractor or material supplier provides a lien waiver with its pay application to the contractor, but then does not receive payment from the contractor after the owner makes payment to the contractor. In this instance, the owner might argue that it relied upon the lien waiver to its detriment by making payment to the contractor; and, therefore, the waiver should be given full effect despite the fact that the subcontractor or supplier did not receive full consideration for its lien waiver. To prevent this scenario, subcontractors or material suppliers should consider adding language to lien waivers expressly conditioning the waiver upon actual receipt of funds from the contractor’s payment. Conditional language prevents the owner from reasonably relying upon a lien waiver without further investigation as to whether actual payment has occurred.
Partial Lien Waivers: Partial lien waivers are usually submitted with payment applications during the course of a project. Typically, a partial, or qualified, lien waiver will waive lien rights for 1) work performed to date; 2) work performed to a stated dollar amount; or 3) a combination of the two.
- To Date Lien Waivers: A partial lien waiver that waives a claimant’s lien rights for all work performed “to date” may waive that claimant’s lien rights for pending, unapproved claims for extra work and the amount of retention withheld through the particular date. Potential lien claimants should exercise extreme caution when reviewing “to date” lien waivers, as the waiver might be construed against you in a manner you hadn’t envisioned. In many cases, a contracting entity may have been paid for progress payments through a certain date, but it still could be owed money for held retention, disputed extra work or other potential claims. By agreeing to a lien waiver through a date certain, the lien claimant is essentially acknowledging payment for all of the work it performed through the effective date. As a result, it could potentially be waiving its right to a lien for these types of issues.
- Stated Dollar Amount: Preferably, a partial lien waiver will recite a specific dollar amount being waived by the claimant. A lien waiver that states a specific dollar amount does not contain the same pitfalls as a “to date” lien waiver, as the exact amount being waived is clear. Again, counsel representing construction entities should add conditional language to the face of the lien waiver requiring actual receipt of funds.
Final Lien Waivers: Final lien waivers are typically required by owners before final payment will be issued. A final lien waiver constitutes a waiver of all lien rights that may have accrued during the course of a project up to the date of the waiver. Owners will typically demand much stricter language in a final lien waiver. As such, usually an owner will not accept “conditional” language in a final lien waiver. However, a prudent lien claimant will refrain from executing an unconditional final lien waiver where it has claims for additional compensation. In such a situation, the prudent lien claimant will either refuse to execute a final lien waiver, carve out the disputed claims or condition it upon a reservation of rights to assert a future claim for the additional money.
Fraudulent Lien Waivers
Individuals with construction entities that submit fraudulent lien waivers can be subject to criminal and/or personal liability. Under the Missouri Mechanic’s Lien Act, any contractor who knowingly issues a fraudulent lien waiver or a false affidavit shall be guilty of a class D felony. Mo. Rev. Stat. § 429.100 (3) (2017).
Lien waivers are an important tool for the payment process on construction projects. Unfortunately, they are often executed without much thought regarding their implications. It is important to make sure you are aware of these nuances and the corresponding risks.