How lien waivers can benefit entire projects
Thursday, April 07, 2016
The mechanics lien is a powerful legal tool available to construction parties, but often parties fear filing a lien may create bad blood or destroy a business relationship. Lien waivers exist to benefit all parties involved on construction projects and help avoid nasty situations.
Getting paid quickly (what lower-tiered parties want) and keeping the project free of lien claims as well as avoiding double payment (what the upper-tiered parties want) intersect at lien waivers. When used properly, lien waivers can keep a construction project running smoothly by protecting everyone involved from legal and financial risk.
The process of waiving lien rights can seem daunting and risky. On one side, the party requesting a lien waiver does not want to come off as pushy and demanding. On the other side, the waiving party does not want to be left with no financial protection or recourse in the event of nonpayment.
Parties should not and do not have to feel this way. When the lien waiver exchange is completed in a fair manner, it really is an aspect of the construction payment process that can be smooth and beneficial for every participant.
The "general" view
Parties near the top of the construction chain, such as owners and GCs, want to obtain valid waivers from lower parties, especially for payments that have been made. There are a few ways these parties can go about obtaining these waives that will maximize effectiveness.
Construction projects can be complex, and with complexity comes low visibility. Many higher-tier construction parties lack specific data that would allow them to know each and every party on their project — for example, a general contractor probably doesn’t know which sub-subs or suppliers their subcontractor hired.
Frequently, parties making payment will not attempt to obtain a waiver from a lower-tier subcontractor or material supplier because they have no knowledge they are working on the project. This lack of knowledge and visibility hinders lien waiver exchange and opens higher-tier parties up to more financial risks.
Thankfully, there is a solution to this problem: preliminary notices. Organizing and using preliminary notices correctly — as they are intended to be used — can keep owners, GCs and other upper-tier parties in the loop and promote financial security.
Preliminary notices provide upper-tier parties with a complete look at the construction project, allowing parties to see parties that are far removed from the GC. These notices should be used to create a "family tree" of the construction parties on the project. The more complete the tree is, the more prepared parties can be to prevent and solve problems that may arise.
Lien waivers should be on a set schedule or plan. Every top-tier party should have a specific lien waiver policy. A structured and ordered policy will help parties achieve the maximum amount of protection from potential financial risk. Every payment that is sent out should have a waiver with it all the way down the chain.
What makes a successful waiver policy? Waivers must be sent with the proper payments. Also, the waiver must written correctly and fairly (some states provide statutorily required forms) and the proper type of waiver should be used (there are four types depending on the stage of the project and the type of payment being made).
Sending an unconditional final lien waiver with a payment in the middle of a project does not promote a good business relationship. Parties want to send waivers that only waive the specific amount associated with the specific payment.
Another tactic that would help top-tier parties is making sure lien waivers are distributed to and obtained from all parties associated with the payment all the way down the chain. A top-tier party can greatly limit and possibly eliminate the risk of valid mechanics liens being filed against the project by following a successful lien waiver policy.
The "sub" view
Upper-tier parties are concerned about obtaining lien waivers and protecting themselves. Lower-tier parties' main focus is to avoid getting hustled. The lien rights that lower-tier parties possess exist to balance the power between lower- and top-tier parties by giving them recourse in the event of nonpayment.
Once a lower-tier party gives up that power, they are at the mercy of owners, GCs and other parties higher up the contracting change. This perspective is not unrealistic, but the focus is definitely pessimistic. Lien waivers don't just result in the waiving of rights. Many lower-tier parties that sign a conditional lien waiver for each payment made increase the speed at which they are paid.
It makes sense: If a party is willing to give up lien rights in exchange for payment, an owner, GC or other high-tier party will be more inclined to pay those parties immediately. Using lien waivers also creates a strong business relationship between parties that can be an invaluable asset.
The benefits of lien waivers are apparent, but waivers sometimes have a bad reputation because of the mismanagement that often occurs on construction projects, such as lack of visibility, horrible organization, incorrect documentation and more. These problems are all too common on construction projects and cause parties to become frustrated with each other and unwilling to use lien waivers.
Scenarios like this will most likely result in slow payments and sometimes even nonpayment. Then, mechanics liens and legal disputes arise, and the whole situation becomes even more of a mess. No construction party wants to deal with a chaotic scenario like that, whether they are at the top or the bottom of the contracting chain.
When used properly, lien waivers help everyone get what they want. Recognizing this, and using it to one's advantage, can enable savvy lower-tiered parties to get themselves paid more quickly, and alleviate cash flow problems.
Lien waiver best practices
This being said, it is best practice to use one specific type of waiver for every payment: a conditional lien waiver. A conditional waiver (conditioned upon the actual payment) should be sent by every party along with every pay app or invoice.
A standard conditional lien waiver is effective once payment has been received unlike unconditional waivers that go into effect and waive rights as soon as they are signed, even if payment has not been received. With conditional lien waivers, the lower-tier party retains their lien rights until payment is actually received, and the top-tier party is protected from liens once they make the payment.
Properly executed lien waivers are fair for all parties involved. They legally and financially protect parties on both sides of the payment exchange and foster strong business relationships.
Lien waivers should not be viewed as complicated, difficult or manipulative. Used correctly, lien waivers can be beneficial to every party involved with a construction process. Every party should be treated fairly, and that is exactly what a proper lien waiver ensures.
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