Lien waivers are commonly exchanged on construction projects, and they are crucial to the payment process. However, the ubiquity of lien waivers doesn't mean they are always well understood, or that problems don't arise from their exchange.

This article will explore two relatively common issues related to lien waivers, one from the bottom of the chain and one from the top. It will also provide some potential best-practices to deal with the situation.

Issue 1: Request for unconditional waiver prior to payment — even when there is evidence of forthcoming payment like a copy of a signed payment check

This is a practical challenge in construction payment. It takes time for money to be exchanged, and parties want to avoid potential lien liability. This can cause conflict between the practical realities of the job site and legal best practices.

In a general sense, it's generally never a good idea sign an unconditional lien waiver until you are paid — oftentimes, what the waiver says is more important than what actually happens. In this particular situation, it's legally a bad idea to sign an unconditional lien waiver in exchange for a copy of a check, or anything less than actually having the money in the bank.

From a legal standpoint, signing an unconditional lien waiver is a statement by your company that you have money in the bank. Third parties are supposed to be able to rely on lien waivers, so, as mentioned above, what the waiver says may be more important than what actually happened.

So that's the legal answer, but what about the practical reality? What do you do if the general contractor refuses to pay you without a signed waiver? One way to get around this is through the use of conditional waivers when the payment has not yet been received.

In fact, sending a conditional waiver along with an invoice or pay app before a waiver is even requested is a great way to start the waiver-for-payment-exchange fairly, and show the paying party you are ready and willing to waive lien rights for payment received — which can result in faster payment.

Conditional waivers are only effective once the prerequisite condition has been met, so the right to file a valid mechanics lien if payment doesn't come is retained. Displaying a willingness to waive lien rights when it's fair to do so can help develop a good business relationship with the party you are contracted with.

However, if the paying party is demanding an unconditional waiver prior to payment, you will need to make a business judgment. That position is a loser for the paying party, a court isn't going to require anyone to sign an unconditional waiver prior to payment, but it requires filing suit.

You probably don't want to get involved and entangled in escalating the dispute. You have to tread carefully if you sign the unconditional waiver because you will be exposed. At the very least, you should understand that you are exposed, that you are signing a lien waiver that is unfair, and that it could be used to take advantage of you — to help frame the decision.

It's also worth exploring other options. If a conditional waiver is off the table, maybe a letter of credit from the GC's bank, a joint check agreement from the GC and the owner, or something else may make you feel secure without using your lien rights.

Issue 2: The problem of obtaining waivers, and the protection they afford, from suppliers or other parties that are unknown

This is one of the most difficult parts of the lien waiver / lien rights scheme. Many projects include a number of participants, and not everyone knows who the others are. It's difficult to obtain lien waivers when you don't know every party on the project.

This can result in a project in which everything seems to be going fine, until the project is blind-sided with a lien from a party no one knew ever existed. What can be done? This is tough.

Visibility is key in construction projects, for both sides of the contracting chain. And, luckily, sometimes mechanisms to promote visibility are built into the law.

In many states, a supplier must deliver a preliminary notice at the start of the project to protect their lien rights. These preliminary notices provide a made to order checklist of the parties from whom a lien waiver must be obtained.

In other places, where such notices are not required, there's just no way to know for sure unless you ask. You can (and should) make formal requests to the participants you do know on the project to provide you with a list of everyone they are using on the project.

This is a difficult issue, but more visibility and cooperation helps everybody.