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Originally published April 7, 2023 | Reposted with Permission
Most commercial contractors are familiar with construction lien waivers (also called lien releases). Typically, there are two types: partial and final lien waivers. Standard industry practice requires contractors to submit executed partial lien waivers on a regular (usually monthly) basis with their payment applications to show the progress of the work performed to date, while final waivers are required at the end of the project. Such waivers usually contain a representation that the contractor or subcontractor who performed the work was paid in full for the work performed and materials supplied and also release any claims or liens associated with that work. Waivers are also dated and signed by the contractor before a notary. Many contractors believe these waivers contain standard language that does not deviate significantly from one to the next, but that is not necessarily true. More dangerously, contractors also often think partial waivers only release claims to the extent of work performed, but they can release additional rights outside of the work already performed, such as mechanic’s lien rights and other claims (e.g., as delay claims). Accordingly, partial lien waivers should be scrutinized closely. Most contractors are familiar with mechanics’ liens, but their importance bears repeating. Mechanics’ liens are a valuable tool for contractors to leverage higher-tier contractors or owners to pay for work performed on a project. In essence, mechanics’ liens impose blemishes on titles to properties. After a blemish on a property’s title is established and if the lien amount is not paid, the lien claimant can force the sale of the subject property. Accordingly, project owners are incentivized to only withhold payment to their prime contractors for a good reason to avoid a lien on the property. Because mechanics’ liens are such powerful mechanisms, project owners and higher-tier contractors frequently seek to limit or eliminate those rights. One way is by having contractors execute partial lien waivers. By executing partial lien waivers, contractors give up their right to file a lien (and oftentimes any other claim that would otherwise be litigated). The waivers are executed in exchange for payment for work performed. Consequently, contractors waive their right to file a lien or other claim for all work that has been paid for to date. However, it is not uncommon to see language in lien waivers that waive and release all mechanics’ liens rights going forward. Thus, if a contractor is not careful, they can release all lien rights at the very beginning of a project and destroy their ability to file a lien claim for future work. Lien waivers can also waive and release a contractor’s ability to assert other claims. For instance, many waivers are drafted to release all claims for delays up to the date of the waiver or claims for work that has not yet been performed. Courts in some jurisdictions have enforced such waivers of future claims. Due to the implications of executing a lien waiver, contractors should take a three-step approach to ensure their rights are protected to the fullest extent possible:
• Analyze and fully understand the scope of the lien waiver; • Analyze the timing and conditions of the release; • If feasible, negotiate the language of the waiver to avoid releasing lien rights or other claims pertaining to the project.
Before executing a lien waiver, contractors should address a few scope-related questions (i.e., what exact rights are forfeited in the release). For example, contractors should determine whether the lien waiver is limited to only mechanics’ liens rights or whether other potential claims are included too (delay, impact, etc.). Additionally, contractors should consider whether the lien waiver applies only to lien rights and/or claims accrued as of the payment date or whether it includes future lien rights and claims. Notably, certain jurisdictions provide some protection regarding these waivers. For instance, Maryland does not allow a subcontractor to prospectively waive lien rights at the onset of a project, but it does let general contractors do so, and it does not protect subcontractors from waiving lien rights after work has commenced. Additionally, Virginia law does not allow any contractor to waive their mechanics’ liens rights for work not yet performed. Understanding the relevant rules limiting the scope of lien waivers in your jurisdiction is critical. Next, contractors should assess the timing and conditions governing a lien waiver. For example, a contractor’s lien waiver can be deemed valid and enforceable either upon execution and delivery of the form or only upon the contractor’s receipt of payment for the work performed. Ultimately, the language of a particular lien waiver will dictate both the timing and conditions governing it. That being the case, contractors must scrutinize the terms and conditions of a particular lien waiver. To ensure maximum protection and clarity before waiving mechanics’ liens rights and other remedies, contractors should identify the priorities of a project and negotiate based on those priorities. Contractors should consider, for example, whether a project has suffered delays or other impacts have been incurred due to events outside of its control. To the extent that is the case, one particular negotiating point might be to include language in the Release to state that the contractor only waives its mechanic’s lien rights and other claims for direct damages and not for indirect or consequential damages resulting from impacts to the project. Some lien waivers even explicitly provide an area where the contractor can list such exceptions. Alternatively, contractors should determine whether change orders remain outstanding. If that is the case, one negotiating point might be to include language in the lien waiver that the rights released are narrowly limited to the work paid for and do not include outstanding or unapproved change orders. Negotiating the terms of a lien waiver with an upstream contractor or project owner can be challenging. If you are unsure how to prioritize your negotiations or want to ensure that you fully understand what legal rights and remedies are being waived and released, consider engaging with legal counsel.
Jackson S. Nichols is a Partner with Cohen Seglias. In his construction practice, Nichols advises general contractors, subcontractors, sureties, owners, and other construction industry businesses in navigating disputes that arise during projects. He can be reached at jnichols@cohenseglias.com or 202.587.4756.
Jake B. Mitchell is an Associate with Cohen Seglias. He advises owners, general contractors, and subcontractors in construction and commercial disputes. He can be reached at jmitchell@cohenseglias.com or 202.587.4748.
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