How a lien waiver can help your business
If your business provides labor, materials, equipment, or services for a construction project, you have the right to file a claim with the state against that property if you’re not paid for work you do.
This claim is called a mechanic’s lien or lien, for short, and it applies to both residential and commercial property. A mechanic’s lien extends to both the structure and the land beneath it, and until the debt is paid, the landowner doesn’t own a clear title.
Simply put, a lien waiver is a simple legal document that you give the property owner after you’ve been paid stating that you give up your right to file a claim (or lien) against his property.
Since lien rights exist to induce payment and waivers are proof of payment, it’s quite common for a general contractor or project owner to request a lien waiver from you in exchange for payment.
If your customer is going to sell the property or borrow money using it as collateral, he won’t usually get the full amount until the other party is sure everyone who has worked on the property has been paid and cannot file a lien. That’s why owners frequently require lien waivers from anyone who has worked on a property.
Filing a lien waiver
The information you need to file a lien waiver is pretty straightforward: your business name, party who hired you, work you’ve performed, owner of the property, state and county where property is located, amount you’re being paid, date you signed the waiver, and your signature. While there are numerous types of waiver forms you can use, there are only two types of lien waivers – Partial and Final.
If you’re being paid in multiple payments, called progress payments, submit a Partial Waiver for each payment until you receive the final payment. Then submit a Final Waiver to indicate that no additional money is due you. If you’re being paid the full amount in one installment, submit a Final Waiver. Be sure you use the correct form for each. Although, they look similar and contain the same information, the language printed in the forms is different.
Never sign a Final Waiver if you’re owed additional money. Once you do, all of your lien rights on the property are released and you have no leverage for collecting the unpaid amount. Also, never sign a waiver for a higher amount than what you’re actually being paid.
If retention is being withheld from the payment, which is common when billing through progress payments, only waive the actual dollar amount you’re receiving now. Don’t sign a waiver for the retention amount until you receive it.
Lien waivers should only be exchanged for the actual amount you receive. If this is not possible, for example, if the person sending the check is located elsewhere and is mailing the check to you, submit a “Conditional Waiver.” This type of waiver includes language stating that your Final Waiver is only valid once you have received payment and the check has cleared the bank.
Sometimes, a general contractor or owner may ask you to provide a waiver before payment is made, called an “upfront waiver.” Avoid signing it. If you do, you give up your lien rights and might not get paid.
Although lien laws are similar from state to state, there are some significant differences. For example, to initiate lien rights in California and Arizona, you must file a “20-Day Preliminary Notice” within 20 days of when you first provide labor or materials to a project. Serving the notice after 20 days will result in partial or full loss of your lien rights. A lien claim for nonpayment must be recorded within 90 days of completion of the work.
In some states, the time a contractor can file a lien starts when the work begins. In others, the time begins when the labor is completed. Also, the lien must be filed in the appropriate county office. For more on lien laws in the state where you’re working, consult the Internet, the public library or your construction association.
Under state law, mechanic’s liens are invalid on federal construction projects.
When properly created, a mechanic’s lien secures the payment of the debt owed to the contractor or subcontractor, just like a mortgage protects a bank. If you’ve not been paid and the time period for filing a lien is expiring, you may need to consult a construction lawyer for legal advice concerning your particular circumstances.
—By Kay Petermeyer, Construction Liens Manager