When it comes to construction projects, it's essential to understand the legal terms and concepts that can impact the success of your project. Two such terms are liens and waivers. A lien is a legal claim that a contractor, subcontractor, or supplier can place on a property to ensure payment for work or materials provided. On the other hand, a waiver is a document that releases someone from their legal right to file a lien. In this guide, we will look closer at liens and waivers in construction, including how they work and when necessary.
What is a lien?
A lien is a legal claim on a property that secures payment for work or materials provided. For example, if a contractor or supplier has not been paid for their work, they can file a lien against the property where the work occurred. In this example, the lien gives the contractor or supplier the right to force the sale of the property to collect payment for the work or materials provided. Liens can be filed by contractors, subcontractors, suppliers, and laborers.
Why is it called a Mechanics Lien?
The term "mechanic's lien" originated in the 18th century to refer to workers who provided physical labor or materials to a construction project. In the 18th century, mechanics and tradespeople who worked on a project could be left without payment if the owner or contractor failed to pay them. To address this issue, states in the United States began to pass laws that allowed these workers to place a lien on the property they had worked on, which could be used to force payment if necessary.
Over time, the term "mechanic's lien" has become a catch-all term for any type of lien filed by a contractor, subcontractor, or supplier in the construction industry.
How does a lien get filed against a project property?
To file a lien, the claimant must follow a specific process, which may vary depending on the state where the property is located. Generally, the process involves the following steps:
Pre-lien Notice - The first step is to send a pre-lien notice to the property owner, notifying them of the outstanding debt.
File a lien - If the debt is not paid after the pre-lien notice, the claimant can file a lien with the county recorder's office where the property is located.
Serve notice - Once the lien is filed, the claimant must serve notice to the property owner, the general contractor, and any other parties with an interest in the property.
Release the lien - If the debt is paid, the claimant must release the lien. If the debt is not paid, the claimant may need to take legal action to enforce the lien.
A supplier for a subcontractor has filed a lien. What can I do?
When a supplier files a lien on a construction project, it means they are seeking payment for materials or services they have provided to the project. If the sub-contractor you are working with has not paid the supplier, the supplier is within their rights to file a lien against the project.
Here are some steps you can take to address the situation:
Verify the validity of the lien: Make sure that the lien is valid and that the supplier has followed all necessary legal requirements for filing a lien. Consider consulting with a lawyer to review the lien documents and ensure they are valid.
Communicate with the sub-contractor: Speak with the sub-contractor to understand why the supplier has yet to be paid and determine whether any issues need to be resolved. Ask the sub-contractor to provide any documentation related to the supplier's work and invoices.
Negotiate with the supplier: Once you better understand the situation, you can try to negotiate with the supplier to resolve the issue. You may be able to come to an agreement to pay the supplier directly or work out a payment plan.
Consider filing a bond claim: If you cannot resolve the issue directly with the supplier, you may be able to file a bond claim. A bond claim is a legal action that allows you to make a claim against the project's bond to pay the supplier's lien.
Seek legal advice: If the situation becomes complicated or the supplier refuses to negotiate, you may need to seek legal advice to resolve the issue. An attorney can advise you on your legal rights and help you navigate the lien process.
Addressing a pre-lien notice as soon as possible is essential to avoid negatively impacting your relationship with the owner. Remember, you are in the customer service business in the eyes of the owner. They may not fully understand what is going on when a lien notice gets filed. A good project manager will put the owner's mind at ease and reassure them it will be resolved soon with no action against their property.
Ok, great, I understand the basics of liens. Now tell me about lien waivers.
What is a Lien Waiver?
A lien waiver is a legal document that releases someone from their right to file a lien. In the construction industry, waivers are typically used to release a lien claim on a property. Waivers can be broken into two categories conditional or unconditional. There are typically two types for each category. These are
Unconditional progress waiver
Conditional progress waiver
Unconditional final waiver
Conditional final waiver
So let us define each of these and show easy-to-understand examples.
Conditional Waiver Overview - A conditional waiver is a document that waives a lien claim on a property, but only if certain conditions are met. A contractor might sign a conditional waiver that states they will waive their lien claim on a property once they receive payment for their work.
Conditional Waiver Example: Let's say that a subcontractor is hired to install new windows in an office renovation project. The subcontractor completes the work and sends the general contractor an invoice for $200,000.
The general contractor disputes the invoice, claiming that some of the windows were not installed correctly and that the subcontractor needs to fix the issues before payment can be made. The subcontractor agrees to make the necessary repairs but needs to receive compensation for the work already completed.
The subcontractor and general contractor negotiate a conditional waiver to facilitate payment while the repairs are being made. The conditional waiver states that the subcontractor waives their right to place a lien on the property for the work completed thus far, but only if the general contractor makes a partial payment of $125,000 within seven days.
The conditional waiver also includes language stating that if the payment is not made within seven days, the waiver will be null and void, and the subcontractor reserves the right to file a lien on the property for the full amount owed.
The general contractor pays within the agreed-upon timeframe, and the subcontractor completes the necessary repairs. Once the work is completed to the general contractor's satisfaction, the subcontractor sends a final invoice for the remaining $75,000, and payment is made without issue.
In this example, the conditional waiver was a useful tool for both parties to facilitate payment while also ensuring that the subcontractor retained their lien rights if payment was not made as agreed. Using a conditional waiver, the subcontractor could protect themselves while allowing the project to move forward without delay. The same principle applies to the final conditional waiver at the end of the project.
Unconditional waiver overview - An unconditional waiver is a document that waives a lien claim on a property without any conditions. For example, a contractor might sign an unconditional waiver after receiving payment for their work.
Unconditional Progress Waiver Example: Let's say that a subcontractor is hired to install a new roof on a commercial building. The subcontractor completes the first phase of the roof installation and sends an invoice for $90,000 to the general contractor. The general contractor agrees that the work has been completed satisfactorily and is ready to make payment. However, the general contractor requires the subcontractor to sign an unconditional progress waiver before payment can be made.
The unconditional progress waiver that the subcontractor signs waives their right to file a lien on the property for the $90,000 owed for the work completed up to that point in time. The waiver specifies that the waiver is unconditional and that the subcontractor will not file a lien for any reason related to the work completed up to the specified date.
Once the waiver is signed and submitted to the general contractor, payment is made promptly, and the project moves forward without delay.
In this example, the unconditional progress waiver was a useful tool for the subcontractor to facilitate payment for work completed up to a certain date while also protecting their lien rights for any work completed after that date. The waiver allowed the project to move forward smoothly without the need for a dispute over payment or the threat of a lien.
Unconditional final waiver - An unconditional final waiver is essentially the same as the unconditional progress waiver however, it waives the right to file a lien for all work or materials provided for the entire project without any conditions. This is typically when retention is released to the subcontractor. However, certain states have a separate waiver specific to retention payments. For example, an unconditional final waiver in California is generally sufficient to release all retention payments owed to the claimant. In contrast, in states like Texas, retention payments may be considered separate from the final payment and may require a separate waiver to be released.
To fully grasp the concept of liens and waivers its helpful to understand the benefits for each party as liens and waivers can be beneficial for both.
Benefits of liens for contractors, subcontractors, and suppliers:
Secure payment for work or materials provided
Can force the sale of the property to collect payment. This threat is typically enough to resolve payment requests that are being ignored.
Benefits of liens for property owners:
Encourage contractors, subcontractors, and suppliers to complete work on time and to a high standard
Provide a legal framework for resolving disputes over payment
Benefits of waivers for contractors, subcontractors, and suppliers:
Ensure timely payment for work or materials provided
Simplify the payment process by eliminating the need to file a lien claim
Benefits of waivers for property owners:
Protect against the risk of liens being filed against the property
Encourage contractors, subcontractors, and suppliers to complete work on time and to a high standard
What does a Notice of Mechanics Lien look like?
A Notice of Mechanics Lien will typically be formatted like this example below.
NOTICE OF MECHANIC'S LIEN
To: [Name and address of property owner]
Please take notice that [Name and address of contractor or subcontractor] has filed a mechanic's lien against the following described property:
[Legal description of property where work was performed or materials were supplied]
The lien is filed in the amount of [Amount owed for work or materials] for work performed or materials supplied on [Date when work or materials were provided].
[Name of contractor or subcontractor] asserts the right to file this lien and enforce it against the property. If payment is not made for the amount owed within [Number of days allowed by law] days, the lien will be enforced through legal action.
Dated: [Date of filing]
[Signature of contractor or subcontractor]
What does a Lien Waiver look like?
Most lien waivers will include some standard information, such as:
The name of the party issuing the waiver (i.e., the contractor or subcontractor)
The name of the party receiving the waiver (i.e., the property owner or general contractor)
A description of the work performed or materials supplied
The amount owed for the work or materials
The date when the work or materials were provided
The date when the waiver is issued
A statement of the type of waiver being issued (i.e., unconditional or conditional)
A statement that the waiver is effective only upon receipt of payment for the work or materials
Here is an example of what a lien waiver may look like:
LIEN WAIVER AND RELEASE
To: [Name and address of property owner or general contractor]
The undersigned [Name of contractor or subcontractor] acknowledges receipt of payment in the amount of [Amount owed for work or materials] for work performed or materials supplied on [Date when work or materials were provided]. In consideration of this payment, the undersigned hereby waives, releases, and relinquishes any and all lien rights, claims, and demands against the property described below:
[Legal description of property where work was performed or materials were supplied]
This waiver and release is unconditional and effective upon receipt of the payment referenced above.
Dated: [Date of waiver]
[Signature of contractor or subcontractor]
Bonus Tip
Terminology - Liens and waivers may go under different names depending on the jurisdiction and industry. Here are some examples:
Mechanic's liens may also be called construction liens, material man's liens, or supplier's liens.
Conditional and unconditional waivers may also be referred to as lien releases, lien waivers, or waiver and release of lien.
In some states, conditional and unconditional waivers may be further categorized as partial or final waivers, depending on the stage of the project and the scope of the work covered by the waiver.
Other types of liens may include tax liens, judgment liens, or property liens, which can be filed by governmental entities, creditors, or other parties seeking to secure payment or enforce a legal claim against a property.
Conclusion -Liens and waivers are important legal concepts in the construction industry. Understanding how they work and when to use them can help contractors, subcontractors, suppliers, and property owners protect their interests and ensure that projects are completed successfully. Whether you are filing a lien or signing a waiver, it's important to follow the specific process required by your state and to seek legal advice if necessary. By using liens and waivers appropriately, you can protect your business, your property, and your investment in a construction project.
Please note that the information provided in this blog post is for general informational purposes only and should not be construed as legal advice. The author of this blog post makes no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the information contained herein. Any reliance you place on such information is therefore strictly at your own risk.
By reading this blog post, you acknowledge and accept that the author shall not be held liable for any actions or decisions you make based on the information provided herein.
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