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A Brief Guide to Lien Waivers in the Construction Industry

With the COVID-19 global pandemic sweeping through every industry, the construction industry has seen significant problems in the last 3-4 months. Construction projects are either completely shut down or delayed due to quarantine orders and government-issued lockdowns. With each passing week, the situation is crippling the construction industry.

One of the most common issues in construction is payment and cash flow. Payment delays are almost a norm as, under normal circumstances, it takes around 90 days for the release of payment after the invoicing. However, under the present crisis, businesses are worried about their financial health, and more and more contractors and subcontractors are filing a mechanics lien to ensure their payment.

What Are Lien Waivers and Why Are They Necessary During COVID-19

Everyone in the construction industry has encountered lien waivers once in their lifetime, but these forms are almost overlooked most of the time. Lien waivers are essential, whether you are a large corporation or a sole proprietor.

What is a Lien Waiver?

It is a document that is signed in exchange for the due payment, and it waives the right of the signage to file a lien in the future for the specific amount, as shown in the waiver. It is a form of a receipt for payment. Lien Waivers protect all the parties from the threat of a mechanics lien and non-payment.

For example, a GC pays a subcontractor $250,000 and request a waiver from the subcontractor. The subcontractor takes the money and signs the waiver to waive his right to file a lien.

On almost all the projects, GC or the owner requests the lien waiver from all the parties on the project right after they are paid. These parties include the GC, subcontractors, suppliers, rental equipment companies, and other parties on the construction project.

Why Is It Necessary?

In the construction industry, contractors, subcontractors, suppliers, and others are entitled to file a mechanics lien in the event of non-payment. But those in charge of the project, including the GC, Construction Manager, and the property owner want their project completed successfully without a lien claim. A mechanics lien can legally put your property on hold till the issue resolves.

This is where lien waivers come in. Lien Waivers are “proof of payment.” When the payer has paid the due payment to the payee, the payee then signs a lien waiver acknowledging the payment received and promising not to file a lien in the future with regards to the payment.

Considering the current pandemic crisis with delay in construction, it is recommended that every GC and Owner should consult a Quantum Expert and settle the payment with a lien waiver to avoid a mechanics lien claim in the coming days.

Types of Lien Waivers

There are two major categories of lien waivers as follows.

  1. Conditional Lien Waiver

Conditional lien waivers waive the mechanics lien rights of the payee on one condition, i.e., receipt of payment. Under this category, there are further two types known as partial conditional lien waiver and final conditional lien waiver.

In the construction industry, the payer always wants a signed lien waiver before settling the payment, and the payee (receiving party) always wants the full payment before signing the lien waiver. In such conditions, a conditional lien waiver is a perfect solution, that states lien is acceptable when the “condition” (full payment) is satisfied.

  1. Partial Conditional Waiver: This should be used when the payee is expecting to receive partial payment of the project or progress payment. This waiver shows that the payee is expecting future payments regarding the current project. Therefore, it doesn’t cover full payment.
  2. Final Conditional Waiver: This should be used when the payee is expecting to receive payment in full regarding the project. This should only be used when the parties are not expecting any future payment, and the current payment is the last or final one.

 

  1. Unconditional Lien Waiver

Unlike conditional lien waivers, these are effective completely and can be enforced at the time they are signed, regardless of the settlement of payment or a payment receipt. These are potentially dangerous for contractors and subcontractors than the owners of GC, therefore get assistance from a Construction claim expert before signing the document.

  1. Unconditional Partial Lien Waiver: This should be used when the payee is receiving partial payment regarding a project. Before signing this waiver, make sure to have the payment in cash, because after you sign it and there is some problem regarding check clearance, the waiver will not be reissued.
  2. Final Unconditional Lien Waiver: This should be used when the payee is receiving the full payment on the project. Make sure you have received all the payment in cash before signing the waiver because if you fail to receive the payment due to some unforeseen issues, the waiver will not be canceled.

Tricky Lien Waivers – Quick Takeaway!

Lien Waivers can be tricky for the majority of the people, and one mistake could mean loss of payment. Therefore, always make sure to read the whole document, determine the payment (full or partial), and, most importantly, match the payment received with that mentioned in the waiver.

Make sure to get help from construction claim experts and don’t waive more than intended!

Read also: Retention Bonds: An Alternative to Retainage Amidst COVID-19

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