A construction lien waiver is used extensively in the construction industry as part of the payment process. A lien waiver is a document from a contractor, subcontractor, material supplier, equipment lessor or other party to the construction project regarding payment. This document waives lien rights on the owner’s property for stated amounts and time periods. A good risk management plan should mandate the provision of construction lien waivers with every contractor or subcontractor invoice or progress payment as they provide important protections. Lien waiver law varies among states—the general guidelines discussed in this article pertain to California state law.
Preliminary notices. The first step for a subcontractor or others to preserve lien rights is to file a Preliminary Lien Notice, often called a 20-day notice, with the County Recorder where the property is located. The purpose of a preliminary notice is to inform the property owner, general contractor, lender or other interested party that the subcontractor or material supplier is performing work on a project and maintains mechanic’s lien rights in the event they are not paid. Notices must be filed within 20 days of first furnishing labor or materials and must be sent to the property owner by certified, registered, express mail or overnight delivery. If notice is given more than 20 days after work has commenced, lien rights only apply to the work provided 20 days before the notice was given.
Such a preliminary notice is a prerequisite for subcontractors and suppliers to file a mechanics lien later if required. The intent of the law is to provide transparency regarding entities performing work that are not contracted directly to the owner, so that the owner is informed about their work and can take steps to ensure they are properly paid. As with lien waivers, be sure to use the correct document for your type of project—residential or commercial and for your specific state. Note that general contractors or others contracted directly with the owner do not have to file preliminary notices as their contracts are visible to the owner.
There are typically four types of California lien waivers used at specific points in the payment cycle:
- Conditional waiver on progress payment. This waiver should be supplied with a contractor’s request for payment and specifies that once they are paid (this is the conditional part) for the services or materials rendered in that billing cycle, they release any future lien claim on the property related to that work. If there are any exceptions such as change orders in progress, they and their amounts should be noted on the release. Progress payment waivers are used when there are multiple invoices for a project—for example, when a contractor is paid periodically for work performed, on a cost plus, percentage complete or milestone basis.
- Unconditional waiver on progress payment. This waiver is provided once payment has been received and unconditionally releases all claimant rights through a specific date.
- Conditional waiver on final payment. This waiver accompanies the final billing and releases all claimant rights to file a mechanics lien once they have been paid. This release usually accompanies the contractor’s final billing and request for retention, if applicable and is an important part of the project close-out documents and procedures.
- Unconditional final waiver. This waiver unconditionally releases all rights of the claimant to place a mechanics lien on the owner’s property. Contractors should issue this type of release only when they have been paid in full and the check has cleared the bank. If a contractor receives a check and signs an unconditional waiver but the check bounces, the contractor may be stuck with no payment and no lien rights. Owners should require this release as a condition of payment in full.
Lien waivers are important risk management documents.
Good practice requires the regular provision of lien waivers in every billing cycle to ensure the general contractor is paying its subcontractors and that subcontractors are paying their material suppliers. General contractors should include conditional waivers in their monthly billing packet to the owner and follow up with unconditional waivers once they have paid their subs. This gives the owner protection that the contractor is paying his subs and suppliers—as the owner is ultimately legally responsible for their payment. Properly executed and signed lien waivers benefit the paying party because it documents that their payment has been made and acknowledged by the payee, ensuring the owner won’t pay twice for the same services.
How to create lien waivers. California law requires specific lien waiver forms for the waiver to be enforceable. Free lien waiver forms are available for download on state websites and numerous other internet sites. Some websites let you create a waiver and either download a hard copy to print or exchange your waiver online. Many collaborative project management programs facilitate the generating and tracking of waivers as part of the payment cycle.
Make sure the form you are using is correct for your state. Review the waiver before sending to confirm it is for the correct project, work and time frame. No lien release is binding unless signed by the claimant. Be sure to include any exceptions such as pending change orders in the release.
What is a mechanics lien? Mechanics liens are a very effective collection remedy for contractors, subcontractors and material suppliers that are unpaid or paid late on construction projects. A mechanics lien in California is a security interest attached to the improved property (think collateral or encumbrance) until payment is made and the lien is released. Mechanics liens can motivate owners to pay because the liens can affect the owner’s ability to borrow against, refinance or sell the property. Not only contractors, but architects, engineers, consultants and other professionals who perform construction related design services also have lien rights.
Filing a mechanics lien claim is a multi-step process with time limitations but it is a powerful tool. Filing a lien should be a last resort—subcontractors and contractors should contact the owner directly to resolve any misunderstandings before even considering filing a lien. There are many websites that provide free mechanics lien form templates and information on how and where to file a claim in your county. Whether you are the contractor or the owner, the sender or the recipient of a mechanics lien action, we recommend you contact a construction attorney for more information on your responsibilities and protections under the law.
For large projects, lien waiver compliance is generally handled by a professional construction manager, along with numerous other project management tasks. The documentation and procedures for proper payments and compliance with lien waivers is complex—owners should rely on experts and follow their advice.