Lien waivers are a critical component of the payment process for industries like construction, in which real estate and personal property can be used as collateral for payment.
In this post, we’ll cover the basics of lien waivers, discuss the different types of lien waivers, and explain why they are so important.
Lien Waiver Basics
Let’s start by defining a lien. Simply put, a lien is a claim against someone’s property. Liens are common in the construction industry because contractors invest extensive time and materials in a project, typically without receiving payment in full upfront. The option to make a claim against the owner’s property if the owner fails to pay acts as an insurance policy for the contractor. That claim against the property means that the owner cannot sell the property without first paying the contractor. These liens are also given priority in the event that the property owner ever files bankruptcy.
Now, what is a lien waiver? A lien waiver is a document in which the contractor effectively waives his or her rights to place a lien against the owner’s property.
You may be wondering why would a contractor waive this right. It’s because property owners often want assurance that the contractor will not make a claim against the property once the invoice is paid. Imagine paying a contractor, then having an unpaid subcontractor file a lien against your property, claiming that they never received payment. This is exactly what happened to Michael Pollak and Adam Ross, the co-founders of Heyday. A lien waiver acts as a special receipt for the owner, guaranteeing that contractors and subcontractors will not file a lien against their property.
As a quick side note, lien releases are not the same as lien waivers. A lien release is a legal document used to cancel an existing lien. So while lien waivers are used to (hopefully!) avoid liens, lien releases are only used after a lien has already been levied.
Different Types of Lien Waivers
Lien waivers are not one-size-fits-all. The picture below shows a basic overview to how lien waivers works.
You can choose from conditional and unconditional waivers. And either type can be based on a final payment or a progress payment.
Conditional Waiver vs Unconditional Waiver
Conditional waivers have one big contingency: the waiver is only effective once payment has been received. Even if a conditional waiver is executed before payment is made, it is only binding upon receipt of payment.
Unconditional waivers offer no such contingency. Even if the property owner were to cancel payment, the contractor would not be able to place a lien against the property if they signed an unconditional waiver.
As a contractor, the only time you should consider signing an unconditional waiver is if you’ve already received payment in full. You may have a prospect willing to give you the project as long as you sign an unconditional waiver upfront, but this is never worth the risk. In fact, many states have laws prohibiting contractors from fully waiving their lien rights prior to beginning a project, as shown in the map below:
Waivers on Final Payment vs Waivers on Progress Payments
Whether your waivers are conditional or unconditional, they can be made on final payment or on progress payments.
Waivers on final payment relate to payment in full for a complete project.
And waivers on progress payments only cover specific sums for specific periods of time. Progress payments are common in large construction projects with multiple phases. The agreement may stipulate progress billings after each phase, and each progress billing may come with its own waiver.
When issuing a lien waiver on progress payments, make sure the dates on the waiver match the dates the work was performed, not the date of the invoice. You don’t want to accidentally waive your lien rights for the month between completion of a phase and the date of the invoice.
And always triple-check the amounts on the lien waiver. Remember, a lien waiver is like a receipt: the amount waived should equal the amount paid. If you’re waiving more than you’re receiving, you could have a big problem. And if you’re signing waivers with amount fields left blank, as was the case in J.H. Larson Electrical Company v. C&S Electric, LLC et al., you may not have any recourse against amounts owed.
The Importance of Lien Waivers
You can probably understand how a construction project creates unease for both the contractor and the property owner. The property owner isn’t 100% certain that the contractor’s work will hold up over time. And the contractor can’t be 100% certain that the property owner will pay for their labor and materials at the end of the project.
Lien waivers are critical because they alleviate some of that unease in a few different ways.
Lien Waivers Establish Trust
Lien waivers build a measure of trust between the parties. By proactively issuing a conditional lien waiver with an invoice, contractors are indicating that they trust the owner to pay the invoice, which boosts the owner’s confidence in the contractor.
Lien Waivers Encourage Prompt Payment
When contractors issue an invoice without including a conditional lien waiver, many owners (or their accounts payable departments) will likely request a signed waiver before they’ll agree to pay the invoice. Rather than slow down the payment with this back-and-forth, contractors can include a conditional lien waiver with each invoice so there’s no reason to delay payment.
Lien Waivers Demonstrate Professionalism
Sending a conditional lien waiver with your invoices shows experienced owners that you know what you’re doing. It shows that you understand the construction industry, that you appreciate their perspective on the transaction, and that you are organized and proactive.
If you want to establish trust with your clients, encourage prompt payment, and demonstrate your professionalism with each invoice, make a habit of including an executed conditional lien waivers with all future invoices.
- A lien waiver is a document in which a contractor effectively waives his or her rights to place a lien against the owner’s property.
- It is assurance that money will be collected upon work being completed
- There are several types of lien waivers that can be used in so many scenarios
- Lien waivers establish’s trust between businesses and contractors