Why you should collect Lien Waivers?

Lien waivers are a pain.

They are confusing and tedious to keep track of. Getting subcontractors to sign them is always a challenge. Then, most of the time, they get filed away to never be seen again. This begs the question: Why collect lien waivers?

In order to understand why it’s important to collect lien waivers, we must first understand what a lien waiver is.

The different types of lien waivers

After a subcontractor performs work or supplies material to a job site they send an invoice for payment. Since these subs are taking a risk by not being paid ahead of work completed the Government protects them through what is called a Mechanics Lien.

If the sub doesn’t receive payment, they have the right to lien the project owner. This means the sub gets a piece of the title of the real estate and if the property were to sell the sub is entitled to the payment that they are owed. A lien waiver is a document that releases any rights for a contractor to lien a project.

There are two traditional types of lien waivers.

Unconditional Waiver & Releases

The most common type of lien waivers are unconditional. This means that full payment has already been received by the sub. After the invoice is paid, the contractor should sign an unconditional lien waiver.

Lenders tend to require unconditional lien waivers for all payments made to subcontractors. Collecting these releases removes most risk of a sub filing a lien on the property.

Conditional Waiver & Releases

A conditional lien waiver is used when payment has not been made. You might be asking yourself: WHAT!?! The whole purpose of the release is to prevent a lien once payment has been made.

Exactly, this type of document is signed to release liability when progress or final payment is made to the sub, but may need time to send through the mail or processed by a financial institution. The conditional waiver is signed before the payment is officially released to the subcontractor, but there is evidence of the payment to be made, either through written acknowledgement or physical receipt.

Lien Waivers in California

Each U.S state has its unique set of regulations surrounding lien waivers. Understanding these can aid in effectively employing these instruments and protecting one's interests.

In California, known for its strict laws regarding construction payments, they refer to these documents as “Lien Waiver and Release.” In the Golden State, the law has outlined four types of waivers, including Conditional and Unconditional Waivers based on Progress or Final Payments. This delineation emphasizes the differing implications based on the payment phase and whether payment is made partially or in full.

Conditional Waiver and Release on Progress Payment

Use this form when the claimant is required to sign a waiver and release in exchange for, or in order to, induce a progress payment, and the claimant has not yet been paid. This form is useful when the claimant is not yet paid, but will be paid out of a progress payment that is not the final payment. This conditional waiver and release is only effective if the claimant is actually paid. This release does not cover all items.

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Unconditional Waiver and Release Upon Progress Payment

Use this form when the claimant is required to sign a waiver and release in exchange for, or in order to, induce a progress payment, and the claimant asserts in the waiver that he or she has received the progress payment. This release does not cover all items.

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Conditional Waiver and Release Upon Final Payment

Use this form when the claimant is required to sign a waiver and release in exchange for, or in order to, induce a final payment, and the claimant has not yet been paid. This release is only binding if there is evidence of payment to the claimant. Evidence of payment may be demonstrated by:

• The claimant's endorsement on a single check or a joint check that has been paid by the bank upon which it was drawn; or
• Written acknowledgment of payment given by the claimant.

Unconditional Waiver and Release Upon Final Payment

Use this form when the claimant is required to sign a waiver and release in exchange for, or in order to, induce a final payment and the claimant asserts in the waiver that he or she has received the final payment.

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A Note of Caution

In the case of a conditional release, the release is only binding if there is evidence of payment to the claimant. Evidence of payment may be demonstrated by:

• The claimant's endorsement on a single check or a joint check that has been paid by the bank upon which it was drawn; or
• Written acknowledgment of payment given by the claimant.

Lien Waivers in Colorado

Meanwhile, Colorado takes a more flexible approach. The Centennial State does not specify the form or language required in a lien waiver, thus conferring more freedom to involved parties drafting this document. Despite the flexibility, parties in Colorado should be wary of the broad language often found in lien waivers that could inadvertently waive more rights than intended.

Using the supplied templates above for California would be a good starting point for a Colorado lien waiver. However, be sure to consult legal counsel before utilizing these in your business practices. inBuild is not responsible for any misused documents.

In Summary

The differences in how these two states approach lien waivers underscores the need for parties to familiarize themselves with their jurisdictions' rules and regulations.

Collecting lien waivers is a critical task for all parties involved in a construction project, especially the property owners and the general contractors. For them, it is an assurance against unexpected financial and contractual disputes stemming from unpaid claimants filing mechanics liens. Even more so, lien waivers help maintain harmonious relationships between all parties involved as they stand as undeniable proof of payment and can quickly resolve any disputes over compensations.

For more information about lien waivers and your other financial needs, get in touch with our team here at inBuild. We have an integration with DocuSign that can make your lien waiver processing and sending a breeze.