Author(s)

PDF DownloadWhat Have We Done to the Lien Waiver?
Way Too Much

By Susan L. McGreevy and Heath A. Hawk

Probate & Property Magazine: January/February 2009, Vol. 23, No. 1

Real Property|Trust & Estate

Susan L. McGreevy is a partner and Heath A. Hawk an associate in the Kansas City, Missouri, office of Stinson Morrison Hecker LLP.

The concept of the mechanic’s lien is little known outside the construction industry and is further limited to certain industrialized nations. The concept is encountered every day, however, by the attorneys representing parties to a construction project—whether such parties be owners, lenders, title or escrow companies, contractors, subcontractors, or vendors. The original common law lien, “by which the workman was permitted to retain possession of the chattel, which had been increased in value by his labor and material,” has now been codified by statutory mechanics’ liens “in every State of the Union, in the provinces of Canada, and in the District of Columbia.” Mathews v. Myers, 145 S.E. 352, 353–54 ( Va. 1928) (citing Burks’ Pl. & Pr. § 430 (2d ed.)). Just as familiar is its corollary, the lien waiver or release. (For purposes of this article, no distinction will be made between the terms lien waiver and lien release although the difference in rights given up or “waived” in advance versus rights given up or “released” after they have accrued will be addressed below.) What started out as a simple means of providing evidence that payment had been received for improvements made, however, has come to be used as a tool for obtaining representations, warranties, disclaimers, and releases of rights far beyond any justifiable need.

Reacting to pressure from contractors and subcontractors, state legislatures have intervened, creating laws that have in some cases over- corrected the scope of lien waivers, leaving the recipient with a nearly worthless piece of paper. Because in general the drafters of the documents have created this state of affairs, it should fall on lawyers to right this ship and get it back on course. To do so, however, requires some consensus on what is the proper role of the lien waiver and lien release.

Origins of the Mechanic’s Lien

A popular view attributes the concept of the mechanic’s lien—that is, the recognition that the property itself may be a means of security to assure payment for improvements to it—to French civil law. 1 Jean Domat, Civil Law in Its Natural Order §§ 1736, 1744 (Strahan trans.). Other scholars have traced the concept back as far as Roman law. Louis Houck, A Treatise on the Mechanics’ Lien Law in the United States § 4, at 34-35 (1867). The mechanic’s lien was first codified, in Western Europe, by the Napoleonic Code of 1804. Strahan, supra.

In the United States, it appears that the earliest version of a mechanic’s lien statute was passed by the Pennsylvania legislature in 1784—but the lien was not to attach to real property. Neil v. Kinney, 11 Ohio St. 58, 66 ( Ohio 1860) (referencing the Act of 1784 created to protect the rights of shipbuilders in Philadelphia); Harper v. New Brig , 11 F. Cas. 577, 578 (E.D. Penn. 1835) (stating that the Act of 1784 “declares its object to be, ‘to secure the persons employed in the building and fitting ships and vessels for sea, by making the body, tackle, furniture and apparel of such ships and vessels, liable to pay the several tradesmen employed in building and fitting them, for their work and materials’”).

The closest thing to a present day lien on real property most likely came out of Maryland in 1791. Out of a desire to establish and improve the city of Washington as the permanent seat of government of the United States as speedily as possible, Thomas Jefferson and James Madison urged Maryland to enact a statute assuring that “master builders” operating on the project would have a lien on their work as security for their payment. O-Porto Constr. Co. v. Devon/Lantham, 741 A.2d 576, 577 (1999); see also Freeform Pools, Inc. v. Strawbridge Home for Boys, Inc. , 179 A.2d 683, 685 n. 1 (Md. 1962) (stating “the first mechanic’s lien law enacted in the United States was enacted by the General Assembly of Maryland in 1791 at the urging of Thomas Jefferson and James Madison, who championed such legislation to stimulate and encourage the rapid building of the City of Washington”). Some have suggested that Thomas Jefferson learned of the remedy while studying major European cities in connection with the planning of the national capital. O-Porto Constr. Co. , 741 A.2d at 578 (citing Morris v. United States, 174 U.S. 196, 344–46 (1899) (White, Peckham, JJ., dissenting)).

Early Lien Waivers and Releases

Because any lien remedy subjects the property owner to risk of its abuse, it was not long before the lien waiver and lien release were created to give evidence that proper payment had been made. The documents used to achieve the prophylactic goal took one of many forms. Some were contracts, others were promissory notes, and some incorporated conditions that directly addressed validity and priority of the waiver itself. Despite their varied forms, these early lien documents all had one thing in common: they relieved protected property from the cloud of liens in exchange for an amount of money either paid or to be paid (or other consideration), and courts enforced them to that effect.

Of course, as commerce itself evolved, the early lien waivers quickly became more complicated. By 1932, the Florida Supreme Court recognized the legitimacy of making lien waivers conditional on the occurrence of another related event. Bruce Constr. Corp. v. Fed. Realty Corp. , 139 So. 209 ( Fla. 1932). Specifically, the court upheld an advance waiver that waived priority of a portion of a mechanic’s lien to a subsequent mortgage, but only to the extent of the amount of money actually paid to the lien claimant.

In Bruce Constr. , the mechanic’s lien claimant agreed to allow another creditor to take priority over a portion of the lien claimant’s property interest. The parties executed a subordination document that provided:

[W]hereas the Federal Realty Company desires to borrow from the Bankers Bond and Mortgage Company about $20,000.00 to be paid to the Bruce Construction Corporation . . . in consideration of the payment to it of the said $20,000.00, [Bruce Construction does] waive and release its lien on the said building to enable the said owner to borrow enough money . . . for the completion of the building . . . .

Id. at 210. Based on this language, the bank claimed that the entire amount of the mechanic’s lien was subordinated to the mortgage. The Florida court, however, disagreed. Instead, the court recognized that “a waiver of priority over a mortgage is not a waiver of a lien on the property as to other parties.” Id. at 212. Furthermore, in this case the document was executed after the work of the contractor was under way. The purpose for obtaining the loan was specifically mentioned in the release several times, and it is always for the stated purpose of completing the construction project. Consequently, the Bruce court concluded: “There can be no question but that the release in the instant case is conditional; otherwise its terms would have been absolute.” Id. The court found that the release was effective as against the bank, but only to the extent of $20,000, which the lien claimant acknowledged as having been received as the consideration for the release. Id.

About the same time as Bruce Constr. was decided, the Supreme Court of Errors of Connecticut had the opportunity to consider whether a lien claimant could waive its lien rights for work that was yet to be performed, particularly when it was intended that third parties be able to rely on the waiver. Townsend v. Barlow, 124 A. 832 ( Conn. 1924). Looking to the plain language of the release, the court noted that “the term ‘waiver of mechanic’s lien’ has by long usage become descriptive of a writing having the purpose and effect of releasing, according to its terms, the statutory right to a mechanic’s lien.” Id. at 833. Furthermore, the court recognized that “[t]hough in terms purporting to affect only the mutual rights of the lienor and owner, it is intended for the information and security of third persons, who may be induced thereby to loan money to the owner of the premises on the lienor’s assurance that his statutory incumbrance has been released . . . .” Id.

Modern Lien Waivers— Evolution from a Good Idea to System Overload

As noted above, early lien waivers and releases took many forms to meet the needs of the parties and the flow of commerce. The evolution of the waiver/release has not been limited to the method of the release, be that by contract, conduct, or subsequent waiver document. With kudzu-like growth, lien waivers have come to address a multitude of rights, remedies, and claims beyond the mere release or waiver of lien rights. It is not uncommon for a modern “waiver” to address the following issues.

The Relief Being Released or Waived

Just because the document is entitled “Lien Waiver,” the claimant cannot be sure that it does not cover much more ground, such as:

  • statutory or contractual payment bond rights,
  • breach of contract rights,
  • unjust enrichment or noncontractual rights, and
  • rights against guarantors.

The Monetary Value of Rights Being Released from or Preserved by the Document

Despite the intuitive appeal of a lien waiver that is releasing the value of the work completed, the course of construction is rarely so simple as to make this waiver appropriate. Typically, at the time money is exchanged for a lien waiver during construction, the owner by contract is withholding as retainage a portion of the funds already earned. In addition, often change orders have yet to be finalized and disputes yet to be resolved. Yet frequently, the lien waiver/release form requires the claimant to give up rights to lien security for funds that are not being paid currently. Lien waivers can include a release of rights involving:

  • the amount paid in exchange for the release/waiver,
  • retention earned but unpaid as of the effective date of the release/waiver,
  • extra work not yet finalized in change orders as of the effective date of the release/waiver, and
  • claims and disputes as of the effective date of the release/waiver. In Traco Steel Erectors, Inc. v. Comtrol, Inc., 175 P.3d 572, 581 (Utah App. 2007), two interim lien releases provided that the contractor gave up “all rights to . . . claims . . . for labor and materials furnished on or before [the release execution date].” The court rejected Traco’s argument that the documents were ambiguous and that the amounts claimed later were not payable when the releases were signed. As a result, Traco was precluded not only from maintaining a lien but also from recovering on its affirmative claims. Id. at 581–82.

The Effective Date of the Waiver

The trap for the uneducated contractor is that the document could become effective before payment is actually received (an “unconditional” waiver), rather than becoming effective only when the check has been negotiated and paid out by the issuing bank (a “conditional” waiver). Although in most jurisdictions a waiver that is not supported by consideration will not be enforceable by the party who knew that it had not made the payment called for, such a waiver can be relied on by “innocent” third parties (such as title companies and lenders) who can establish that they relied on it to their detriment. See, e.g., Fisher v. Harris Bank & Trust Co. , 506 N.E.2d 418, 423 (Ill. App. Ct. 1987).

The Temporal Extent of the Waiver

What is the earliest date of work being removed from lien protection, and what is the latest date? Unfortunately, often the time period is not tied to the period of the work for which payment is being made.

The authors have seen waivers written to release work from the day work starts, constituting an advance waiver of all lien rights. In Durant Constr., Inc. v. Gourley, 336 N.W.2d 856, 857 (Mich. Ct. App. 1983), the Michigan Court of Appeals was presented with a document that read “the undersigned hereby waive, release and relinquish any and all claims or right of lien which the undersigned now have or may have hereafter upon the premises” (emphasis added). The court determined that a contractor waived its right to file a lien on work performed after the execution of a lien waiver. This interpretation placed the contractor’s rights behind those of an after-filed mortgagor. Such advance blanket waivers are enforceable in some states. See, e.g., Jankoviak v. Butcher, 159 N.E.2d 377 (Ill. App. Ct. 1959). In other states they are unenforceable. See, e.g., Mo. Rev. Stat. § 429.005.

The authors have also seen waivers:

  • through the date of the last work for which payment is being received—so if a prior payment application had not been paid in full, a subsequent waiver could release work covered by it;
  • through the date of the payment application, which might be later in time than the date when the last work was performed for which payment is being requested; and
  • through the date when payment is received, which could cover even more work that is not paid for by the incipient check.

Certifications and Attestations

There is no end to the creativity of counsel who inject additional contract terms via the lien waiver or release. Additional terms might include:

  • certification that all work was properly done in conformance with contract requirements;
  • certification that all payments to subcontractors and suppliers have been made, including tax liabilities;
  • attestation that funds received will be treated as “trust funds” for payment of subcontractors and suppliers first;
  • indemnification of identified parties in the event any claim or threat of claim arises against them; and
  • acknowledgments that third-parties will be entitled to rely on the accuracy of all certifications and attestations in the lien release/waiver forms.

Personal Liability of Signing Party

Although construction contracts are enforceable against the entity signing them, and the liability of the individual signing in a representative capacity is limited as in other spheres of law, many lien releases/waivers are drafted to require personal attestations by the individual signers, who then could be personally liable for misstatements on which the recipients or third parties relied to their detriment.

  • Subordination of Lien Rights

Even when a contractor is not asked to entirely waive its lien rights, it is not unusual for it to be asked to subordinate its lien rights to the rights of another party—generally, the owner’s lender. The effect of this subordination can be a minimal encroachment on the contractor’s priority or it can have the effect of wiping out any possible recovery for work performed (as in the case of a nonrecourse obligation).

Lien waiver/release forms have become so varied and intricate that contractors now frequently err on the side of caution and engage counsel to review every new one that comes along before signing it. For a document routinely used every month on every project, this added cost of doing business is an unnecessary expense.

Statutory Lien Waivers—Legislatures to the Rescue

In response to pressure from contractors, subcontractors, and the trade associations representing them, some states have enacted legislation to standardize the effect of these documents in their states and to curb perceived abuses. This legislative response has not necessarily produced uniform or equitable remedies. The apparent problem in these efforts, from the authors’ viewpoint, is the difficulty of balancing the interests of potential lien claimants, who seek to preserve as many rights as possible, with those of the property owners (and their lenders and title companies), who seek maximum assurance that liens will not be and cannot be filed. Seldom does a state not favor one side or the other in its statutory scheme.

Some states have required that lien releases will only be enforced to the extent of the amount of a payment received. See Cal. Civ. Code § 3262; Fla. Stat. Ann. § 713.20; Ariz. Rev. Stat. § 33-1008; Ga. Stat. Ann. § 44-14-366; Kan. Stat. Ann. § 16-1803; Mich. Comp. Laws Ann. § 570.1115; Mass. Gen. Laws ch. 254, § 32; Nev. Rev. Stat. § 108.2457; 49 Pa. Stat. Ann. § 1401. This limitation is of little or no help to a title company and commercial lender, who have no way of knowing what later claims will be asserted dating back to pre-waiver work. Some states explicitly provide that a “pay-if-paid” clause in a subcontract cannot bar a subcontractor’s lien. Kan. Stat. Ann. § 16-1803(c); Ind. Code § 32-28-3-18. South Carolina allows a project owner to prevent subcontractor liens by giving a statutory notice that it will not be responsible for a contractor’s debts. S.C. Code Ann. § 29-5-80. South Dakota directs that liens can be waived only through properly issued and endorsed joint checks. S.D. Codified Laws ch. 44-9A-2.

After several abortive efforts to draft appropriate legislation, the California legislature ultimately enacted a release “that waived mechanic’s lien rights, bond rights, and stop notice rights for services rendered and materials provided up to the date stated on the receipt, even if those services and materials were not compensated by the progress payment.” Tesco Controls, Inc. v. Monterey Mech. Co. , 21 Cal. Rptr. 3d 757, 763 (Cal. Ct. App. 2004). Such a release amounts to an advance lien waiver.

Although a number of state legislatures do not appear to have yet injected themselves into the lien waiver issue ( Arkansas, Hawaii, Iowa, Maine, New Hampshire, New York, North Dakota, Oklahoma, Washington, and West Virginia), the trend appears to be in the direction of legislative intervention in one form or another.

What Are the Legitimate Interests of the Parties? What Is Fair?

Although it will not likely be possible to craft legislation that will please all contractors, subcontractors, owners, lenders, and title and escrow companies, the construction bar can advocate for fair and reasonable parameters on lien waiver language.

What Are the Legitimate Interests of the Potential Lien Claimant?

The authors’ position is that a lien claimant has the right:

  • to reserve lien rights for work not yet performed;
  • to reserve lien rights for work performed but not yet paid for; and
  • to reserve lien rights when entitlement to payment for work performed is disputed.

What Are the Legitimate Interests of Waiver Recipients?

The authors’ position is that owners, lenders, upper-tier contractors, and sureties have the right:

  • to know that a lender who advances funds will have security in the property for the funds advanced;
  • to know that contractors and subcontractors to whom payments are released have used them to pay lower-tier contractors and suppliers who otherwise might file liens; and
  • to know that inchoate lien rights are waived/released to the extent of payment received and that any lien rights remaining through the effective date of the waiver/release are identified.

It may not be equitable to ask a contractor to give up the only security it might have in advance of being paid. There is no apparent unfairness, however, in asking the contractor to identify each and every retention, pending change or claim, or other right reserved at the time of the waiver/release. So warned, the owner/lender/upper-tier contractor can then assess the risks, escrow funds as appropriate, and perhaps confront issues more quickly to resolve them on an ongoing basis.

Conclusion

If the trend toward lien-waiver-as-canceled-check statutes continues, the day will come—particularly given the current climate of discomfort over real estate values—when recipients of lien waivers have so few means of assessing risk and assuring security interests that financing and development of construction projects will be affected. Efforts by the construction bar to encourage appropriate but not excessive restrictions on lien waiver language would surely have a salutary effect on the industry as a whole.

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