Jason Lambert | Construction Executive
It is common in construction for a subcontractor or material supplier of any tier to be required to provide a lien waiver when receiving payment. But not all lien waivers are created equal. While at a minimum, a lien waiver, by definition, needs to include a release of liens, it can also include many other terms that can tie up loose ends or resolve potential problems before they begin.
A typical lien release is going to release any liens and right to claim liens on the subject property. But a lien waiver can also include releases of any claims against surety bonds, other statutory rights or claims, and at its broadest, claims against the paying party. One example of a provision that could help accomplish this is a release of “any right arising from a payment bond that complies with a state or federal statute, any common law payment bond right, any claim for payment, and any rights under any similar ordinance, rule, or statute related to claim or payment rights.” Broad release language can also be used to effectively preclude any claims arising prior to the date of the release.
PAYMENT REPRESENTATIONS AND WARRANTIES
A typical lien release has no representations or warranties about payment to subcontractors or material suppliers of a lower tier. But contractors can include language requiring the company receiving payment to represent and warrant that all subcontractors of a lower tier have been paid or will be paid within a certain timeframe using the funds provided and that these are material representations and inducements into providing payment. On a related note, if the contract requires subcontractors to provide lien releases from lower tier subcontractors in addition to their own release when seeking payment, contractors can require the sub-subcontractor releases to include representations that they have been paid by the subcontractor to try and tie up payment loose ends all around.
Piggybacking on the prior suggestion, contractors can also turn a lien waiver into a miniature payment affidavit and require the party receiving payment to swear that subcontractors have been paid or will be paid. They can also require that a list of unpaid subcontractors or material suppliers be listed on the affidavit to give them the ability to track a continuing lack of payments or to confirm that previously unpaid subcontractors have been paid as the project continues.
To the extent the contract does not already include indemnification language, a contractor can include an indemnification provision requiring the party receiving payment to indemnify them (and maybe even the property owner) from payment claims made by lower tier subcontractors or material suppliers. This can provide another incentive to a payee to use the funds to pay downstream subcontractors if they know that failing to do so will subject them to additional liability.
OTHER REPRESENTATIONS AND WARRANTIES
The lien waiver can also include representations that the work for which payment is being made is free from defects, that no defective work was covered by their work and that local code requirements were followed by the subcontractor. While the “sky’s the limit” in terms of what could be included, it’s important to consider that many of these types of provisions should be included in the main contract and any reference to them in a lien waiver should be a short “belt and suspenders” type provision. One exception to this could be a reaffirmation that there are no additional agreements between the parties other than those in writing and that compliance with those documents has not been waived.
There are two additional points to be made with regarding to using a more comprehensive lien waiver form. First, these lien waiver forms can be used by anyone in the chain of work. Subcontractors can use a more substantial lien waiver form, even if the general contractor is not requiring one.
Second, not every state allows the use of more substantial lien waiver forms. California, Nevada, Utah, Arizona, Colorado, Texas, Missouri, Michigan, Massachusetts, Mississippi, Georgia and Florida all have statutory lien waiver forms that must be used for some or all construction projects. These statutory forms vary in complexity and comprehensiveness. For example, Florida’s statutory final lien waiver form is just 73 words long.
That being said, some states will allow use of a more comprehensive lien waiver form so long as the parties agree to use that form in their contract. Contractors should consult with an attorney if in one of the aforementioned states to see if they can contractually alter the statutory requirement or if they must use the statutory form.