To avoid the risk of mechanic’s liens, a project owner naturally wants to ensure that everyone involved in the project is paid out of each progress payment check he writes to the GC. A contract requiring the GC to pay subs and suppliers out of that check is nice, but as we all know, contracts aren’t always honored. For that reason, it is common for an owner to condition both interim and final payment to the GC on submission of lien waivers, not only from the GC itself but from virtually everyone down the line who furnished any labor or materials being paid for by the owner’s check. Construction lenders want this as well, and typically require such waivers as a condition of any loan disbursement.
Lien waivers, whether interim or final, limit the signer’s right to assert a mechanic’s lien. Over the years I’ve seen many different forms used to accomplish this (and sometimes to accomplish more than this – read on!), but they all fall into one of two formats: those conditioned on receipt of payment (“soft” lien waivers) and those acknowledging receipt of payment (“hard” lien waivers). From the owner’s and lender’s perspective, “soft” lien waivers give no certainty that payment will flow downstream and liens will be avoided – the very thing that motivated the request for lien waivers in the first place! For this reason many owners and lenders view “soft” lien waivers as close to useless, and insist on the unconditional “hard” lien waivers. But subs and suppliers don’t like them. Because the owner doesn’t write his own check until all the lien waivers are in hand, “hard” lien waivers are typically outright lies; unless the GC is fronting its own money (which rarely happens) there is no swapping of a signature for an immediate check. The sub swears otherwise because that’s the only way he will get paid, and he is obliged to take the risk that the promised payment will not follow and yet his lien rights will be lost.
How much of a risk is it? If the signer of a “hard” lien waiver doesn’t get paid, he may well be held to the literal terms of the waiver despite nonpayment, and be unable to lien the project. But if owner or lender is not disbursing in reliance on the truth of the waiver, and indeed knows it to be false, enforcement of the waiver may be difficult. (Chicago Bridge & Iron Co. v. Reliance Ins. Co., 46 Ill.2d 522, 264 N.E.2d 134 (1970), is worth a read on this subject.)
There are ways to strike a fair balance between both sides’ interests. Some contracts require the GC to furnish its own “hard” lien waiver through the date of a current payment, but to furnish subcontractor and supplier “hard” lien waivers only through the date of the immediately prior progress payment. This eliminates the need for the lie inherent in many “hard” lien waivers from subs and suppliers, without putting them at risk.
What the signer should never presume, however, is that a document titled “lien waiver” does no more than give up lien rights. For example, interim lien waivers may specify either the date through which the furnishing of labor and materials will not give rise to a lien (generally the end date for the current requisition for payment), or the dollar amount of the labor and materials furnished that will not give rise to a lien, or both. If retainage is being withheld, specifying the dollar amount is particularly important, since simply waiving lien rights through a given date could end up waiving the right to lien for the retainage that will eventually fall due on that work.
Lien waivers bear careful reading, since so many forms now in vogue go well beyond the mere waiver of lien rights – such as giving up any claim for payment, swearing that downstream sub-subs and suppliers have been paid, promising indemnity, and the like. Spending five minutes thinking about what the language really means before picking up a pen will repay the time invested.
Lien waivers, whether interim or final, limit the signer’s right to assert a mechanic’s lien. Over the years I’ve seen many different forms used to accomplish this (and sometimes to accomplish more than this – read on!), but they all fall into one of two formats: those conditioned on receipt of payment (“soft” lien waivers) and those acknowledging receipt of payment (“hard” lien waivers). From the owner’s and lender’s perspective, “soft” lien waivers give no certainty that payment will flow downstream and liens will be avoided – the very thing that motivated the request for lien waivers in the first place! For this reason many owners and lenders view “soft” lien waivers as close to useless, and insist on the unconditional “hard” lien waivers. But subs and suppliers don’t like them. Because the owner doesn’t write his own check until all the lien waivers are in hand, “hard” lien waivers are typically outright lies; unless the GC is fronting its own money (which rarely happens) there is no swapping of a signature for an immediate check. The sub swears otherwise because that’s the only way he will get paid, and he is obliged to take the risk that the promised payment will not follow and yet his lien rights will be lost.
How much of a risk is it? If the signer of a “hard” lien waiver doesn’t get paid, he may well be held to the literal terms of the waiver despite nonpayment, and be unable to lien the project. But if owner or lender is not disbursing in reliance on the truth of the waiver, and indeed knows it to be false, enforcement of the waiver may be difficult. (Chicago Bridge & Iron Co. v. Reliance Ins. Co., 46 Ill.2d 522, 264 N.E.2d 134 (1970), is worth a read on this subject.)
There are ways to strike a fair balance between both sides’ interests. Some contracts require the GC to furnish its own “hard” lien waiver through the date of a current payment, but to furnish subcontractor and supplier “hard” lien waivers only through the date of the immediately prior progress payment. This eliminates the need for the lie inherent in many “hard” lien waivers from subs and suppliers, without putting them at risk.
What the signer should never presume, however, is that a document titled “lien waiver” does no more than give up lien rights. For example, interim lien waivers may specify either the date through which the furnishing of labor and materials will not give rise to a lien (generally the end date for the current requisition for payment), or the dollar amount of the labor and materials furnished that will not give rise to a lien, or both. If retainage is being withheld, specifying the dollar amount is particularly important, since simply waiving lien rights through a given date could end up waiving the right to lien for the retainage that will eventually fall due on that work.
Lien waivers bear careful reading, since so many forms now in vogue go well beyond the mere waiver of lien rights – such as giving up any claim for payment, swearing that downstream sub-subs and suppliers have been paid, promising indemnity, and the like. Spending five minutes thinking about what the language really means before picking up a pen will repay the time invested.
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