After a week of being unable to post due to the rigors of my solo construction practice, I’m back on the blogging train. For those of you that missed my new musings this past week, I hope that you had a chance to look through some of the past Guest Post Friday posts for some good stuff to read.
During the course of my busy week last week, a question came up regarding the mechanic’s lien waivers that commercial construction companies routinely execute as part of the payment process. The waiver forms vary, but each essentially states that in exchange for payment the payee, whether a subcontractor or supplier (or even general contractor) waives its future rights to record a mechanic’s lien for the work that is covered by the payment received. Most if not all of these forms further require a certification that the funds paid will either be used to pay suppliers or that suppliers have already been paid. This general description is not the reason for this post.
As is always the case in the Commonwealth of Virginia where the contract is king and a court is unlikely to reinterpret any written contractual document, the devil is in how that waiver is worded. Some waivers are worded in such a way that they essentially require a payee to certify receipt of the funds prior to payment being received. These same forms require the same pre-payment certification that all suppliers and subcontractors of the payee have already been paid. In short they require a payee to both place complete trust in the payor that the check will be paid and that the check will not bounce while in many cases (often with an unstated “wink and nod”) claiming payment was already made when all know the likelihood is that it has not.
Clearly, this is a poor situation for a subcontractor seeking payment because in the event of non-payment a court will have to believe that the subcontractor actually did not receive the funds when the subcontractor certified that it did. A court will also wonder at the credibility of that company should one of its suppliers claim not to be paid should the waiver form state otherwise.
A better practice, at least in my mind and informed by experience, is to make sure that any lien waiver form, whether as extreme as that described above or not, state that the waiver is effective upon receipt and clearance of funds and that the funds will be used to pay subcontractors and suppliers. This last is the law in Virginia in any event. This language protects both sides of the transaction while not putting a payee into the vice described previously.
Another best practice is to require lien waivers of this type from all downstream subcontractors and suppliers. This protects you, as a subcontractor, from liens after your payment to your downstream subs and suppliers and also gives assurance to the general contractor and owner that they won’t be in a place to pay twice. Furthermore, many construction contracts require such downstream waivers so you may not have a choice.
Of course, each lien waiver form will have its nuances so please have an experienced Virginia construction attorney review any form prior to executing it.
These are just my thoughts. If you have others, please feel free to share them in a comment below.
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