This week for our Guest Post Friday here at Construction Law Musings, we welcome back my good friend Scott Wolfe. Scott, a thought leader in the construction industry, combines his construction background, tech experience, entrepreneurial spirit, and legal education to bring a unique perspective to the industry’s construction payment problem. Scott is the founder of zlien, a venture-backed construction payment platform. A licensed attorney in six states, his writing has appeared in the New York Times, CFMA’s Building Profits, Supply House Times, Construction Executive, and tED Magazine. He has been a Keynote Speaker for the American Subcontractors Association annual conference, and spoken at CFMA events.
Lien waivers are perhaps the most legally and practically complicated documents exchanged in the construction industry. Unfortunately, this results in huge corporate inefficiencies, and worse, provides an opportunity for some parties to exert undue leverage over others.
Lien waivers — or lien releases, as they are commonly (but mistakenly) called — aren’t supposed to be complicated, though. They are designed to make the complex construction payment process easy and fair.
This article will address why that is, how it works, and where things have gone awry.
Lien Waivers Should Be Fair — But Frequently Aren’t
Construction payment is complicated and risky for every project participant. Money has to trickle through many parties in a pretty strict timeline, and even when there are no hold ups the money is distributed based on a priority schedule with its own controversies.
Lien waivers are designed to be simple and structured documents to keep track of what is being and received. It’s as easy as that. The lien waiver document, in other words, is designed to make the payment process transparent and to protect all parties against unexpected liens, associated delays, and more.
The lien waiver document, however, has taken on a life of its own.
The Form Is Regulated Sometimes, But Still Confusing
Only 12 states, as shown on this graph, have statutory requirements for lien waivers. (The 12 States with Statutory Lien Waiver Forms.) Anyone performing work in these states must use the statutory lien waiver forms, and there are sometimes stiff penalties for those who do not comply.
Nevertheless, even in these states, the choice of which form to use can be unclear and complicated. There can be up to 4 different forms for each state, with confusing legal jargon about the “conditional” or “unconditional” nature of the waiver document. This not only requires non-attorney employees to figure out which form goes with which payment, but it also clogs up the organization in a practical way, because the decision must be made over and over again with every single payment exchange.
When The Form is Unregulated, They Are Full of “Gotchas”
As seen above,12 states regulate what lien waiver forms say. In the other 38 states, however, lien waivers are the wild-wild-west of construction documents. They are frequently drafted to say all kinds of things, with the most unfortunate provisions being related to owners, lenders, and property owners seeking to leverage the opportunity presented by the exchange to get the subcontractors and suppliers to make unfair waivers, releases, and agreements.
Here are some examples of what may be found in these unrelated waivers:
- A waiver of certain contractual rights, such as the rights to change orders, delay claims, and more;
- A waiver of all lien rights, above and beyond the payment being made in consideration for that specific waiver;
- Changes to the terms of the contract about how disputes will be handled;
- The attachment of the signing party as a personal guarantee to the waiver and forfeiture of the lien filing option.
The fact that waivers can be loaded with these types of language is not fiction. Consider a circumstance in Texas where a general contractor and property owner battled legally for years over $20 million, all of which balanced on the interpretation of an overbroad lien waiver: Lien Waivers Cost Zachry Construction Millions.
Everyone Should Settle Down And Be Fair About Waiver Language
Despite, and perhaps because of, the problems discussed above, lien waivers are only as difficult, confusing, and unfair as the parties make them. While this issue has a lot of sensitivities, it benefits everyone in the industry to make the process fair and transparent, and all parties should work hard to find middle ground. The middle ground is simply to use lien waivers how they were designed to be used.
Lien waiver forms and language should be fair and do only what they purport to do: waive the right to file a mechanics lien for the payment that is actually being received.
General Contractors, Subcontractors, and Suppliers Must Find Efficient Ways To Track Parties Each Other and Exchange Lien Waivers
This article’s first section focused on lien waiver forms and lien waiver language, but this is only half of the problem presented by lien waivers. The other part of the problem is more practical, because these complicated little documents must be tracked and exchanged by everyone on the project in a perfect timed symphony.
This is very hard to do for a variety of reasons.
First, those at the top of the contracting chain — the general contractors, lenders, and developers — frequently don’t know who they need lien waivers from. Sure, they know who their subcontractors are, but they do not know who the sub-subcontractors, suppliers, equipment rental companies, and laborers are. Too often, they have to rely on the subcontractor revealing all of this information to them.
One overlooked process in the construction industry that solves this problem is the preliminary notice document. Pre-work notices, which are required in more than 35 states and frequently referred to as preliminary notices, notices to owner, or prelim notices, are designed to give top of the chain parties this exact visibility. It enables the parties to see everyone who is on the project, and consequently, enables them to track these parties and collect lien waivers when payments are made.
Second, the bottom of the chain parties — the subcontractors, suppliers, and equipment lessors – must receive lien waiver requests from a high volume of parties through a high volume of different methods. These documents use different forms and have different signing requirements. It’s a management nightmare.
Implementing a policy and procedure to handle this request and review process, and more importantly, adopting a competent lien waiver tracking and management platform, such as zlien, is key to succeeding in this complicated process.
Made with love in New Orleans, Louisiana, zlien is a cloud-based platform that gives construction industry participants control over their financial risk and payment processes. The zlien platform manages the mechanics lien compliance process for all parties in the contracting chain, automating and optimizing the exchange of preliminary notices, monitoring lien rights and exposure, and exchanging lien waivers. zlien empowers over 10,000 companies to optimize their credit and financial risk management, and works to promote a fair and transparent construction payment process, improve B2B relationships, facilitate faster payments, and reduce legal and financial risk. For more information, visit http://www.zlien.com.