Mechanics liens are powerful tools, for many reasons. Ironically, one of the most effective "uses" of your mechanics lien rights is not using them. Waiving your right to file a lien may be the fastest way to get paid.
To understand why, it helps to consider the potential consequences of a validly filed mechanics lien: stopped projects, compromised funding, lawsuits, foreclosed property and more. Due to the severity of these potential consequences, parties at the top of the contracting chain want to avoid mechanics liens being filed against their property and on their projects.
In an effort to avoid facing lien claims, top-of-chain parties want to obtain "lien waivers" — documents through which a lower-tiered party gives up the right to lien. This type of document can be harnessed not only by the higher-tiered parties for protection, but also by the parties needing payment to speed up the payment process.
However, lien waivers must be provided with care and forethought. While the top of the contracting chain is concerned with obtaining waivers and limiting lien exposure, parties below are worried about losing more than they bargained for, and being leveraged into unfair situations because they need payment.
Since lien waivers are generally exchanged when a payment is to be received, the exchange can result in an imbalance of power between the party with the money and the party that needs it. So, how can a party use lien waivers to get paid?
Steps to promote fast payment through waiver use
Lien waivers, despite representing the loss of a security interest, aren't all bad news for lower-tiered parties. In fact, they are a tool that can be used to promote relationships and prompt faster payment.
Misunderstandings, complications and poor lien waiver management practices often cause lien waivers to be the source of slow payment rather than the solution they can and should be. Optimizing lien waiver processes is an easy step to fundamentally change the speed of payments, while still providing protection for both sides.
The needs of the lower tiered parties (getting paid quickly) and the needs of the upper-tiered parties (keeping the project free of lien claims and avoiding double payment) intersect at the lien waiver document. Proactive and intelligent parties realize this, form their waiver process accordingly, and use it to their advantage. You can effectively use lien waivers to prompt quicker payment without taking unnecessary risks, and begin to alleviate the common construction problem of a restricted cash flow.
How can this be done? Conditional waivers (conditioned upon the actual payment) should be sent by every party along with every pay app or invoice. This provides a neat and immediate "handshake," providing each party what they want and nearly eliminating risk.
Since the waiver is conditioned upon actual payment, it is not enforceable until such payment occurs. When the payment does occur, the waiver immediately becomes enforceable and waives the right to lien for that amount.
By proactively providing lien waivers, a lower-tiered party shows it is willing to waive lien rights when applicable and removes a step or two from the payment process. This is a way to build relationships, get more business and get paid faster.
Be careful about the actual waiver
If the waiving party is not the party providing the waiver (and even if it is and is using a generic form), it is important to review the form and watch out for some common trip-wires and sticking points.
Sometimes, owners or general contractors will (or will attempt to) include provisions in lien waivers that attempt to accomplish more than just waiving a lien right tied to a particular payment. This type of provision may also result in a loss of other claims or defenses, to the detriment of the party signing the waiver.
Specifically, waiving parties should be on the lookout for the following clauses:
- Waiver of all rights and claims of any kind and nature — not just of mechanics lien claims/rights
- Waiver (or no exceptions for) retainage, change orders, extra work
- Promise to indemnify higher-tier entities in the event of claims from lower-tier subcontractors and suppliers
- Personal attestations
- Wrong waiver type for payment
Lien waivers, especially in any of the 38 states that don't specifically set forth their form by statute, can be drafted to waive rights other than lien rights — not just the lien rights they purport to waive. This means a party that does not critically review a lien waiver document can find itself having waived defenses and other claims.
This can have serious consequences. A best practice, then, is to review all lien waivers thoroughly and examine them for clauses such as those outlined above.
This is a problem that can also be avoided by providing a signed conditional waiver along with every invoice or pay app. By already getting a signed waiver, the receiving party doesn't need to provide their own paper and can go about getting you paid.
Intelligent use of waivers, by giving up lien rights in a strategic and well-thought-out manner, can build relationships and speed up the payment process.
