The purpose of lien waivers is simple and fair: owners want assurance that, once they’ve paid a contractor, the contractor (or its subcontractors) won’t come back later and try to obtain a mechanics' lien for the same money.

While this practice makes sense in the abstract, owners dealing with contractors (and general contractors dealing with their subs) often use a lien waiver to gain additional rights beyond what they are entitled to under the contract. While the purpose of the lien is—in theory—to prevent liens for work that has been paid for, many owners and contractors include additional language requiring the party seeking payment to waive other claims or to indemnify them for any claims by third parties relating to the work. This is far beyond what most contractors and subcontractors seeking payment intend, but such requirements are often innocuously buried within a document titled “Lien Waiver”—so companies often don’t notice or know to object.

Common Variations—What is Acceptable and What’s Not

There are countless forms of lien, and it would be impossible to list every version that is acceptable or to identify every risk. The key thing to remember is that—generally speaking—lawyers don’t have any special tools that contractors don’t have when it comes to evaluating these documents. They simply have to read the language. With that in mind, there are some considerations to look out for.

1. Is the waiver conditional or unconditional?
A conditional waiver will include language stating “upon payment of _____ [...]” This generally means that the lien waiver goes into effect once a contractor is paid. A contractor does not lose lien rights until payment is received. An unconditional waiver does not include that language and simply states that the contractor is waiving his rights. This can hurt if the contractor signs the waiver expecting payment, but doesn’t actually get paid. If a contractor is giving a lien right for money already received, it is perfectly normal and reasonable for the owner or general contractor to request an unconditional lien waiver.

2.Does the waiver release claims through the requisition date or the date of payment?
The Lien Waiver is supposed to release liens for the period for which the contractor is being paid, so it is important that the date must match up with what is on the form. Many lien waivers will say that the contractor waives rights “for work performed or materials supplied through the date of payment.” The problem with that language is that if a contractor makes additional deliveries between the date the waiver was signed and the date paid, the contractor may continue supplying additional materials beyond the period included in the requisition.

For example, if the contractor requisitions materials delivered between February 15 and March 14, he might not send out the requisition until March 20. If the contractor signed a lien waiver that says “through the date of this waiver,” he would be waiving his rights with regard to any materials delivered between March 14 and March 20. It is even worse if the contractor waives rights through the date of payment, because he may not receive payment within 30 days of doing the work. In that case, the contractor could have waived his lien rights through April 20, even though he is only being paid for the materials supplied through March 14 and may have shipped additional product since then.

Ideally, the lien waiver should state that the contractor is waiving lien rights “for the period covered under the attached requisition.” Alternatively, the contractor can list a specific date as long as the date is consistent with what he is billing for.

Ideally, the lien release should also preserve the right to lien for pending and disputed items such as outstanding change order requests and unpaid retainage as discussed below.

3.Does the waiver release liens, or does it release all claims through the applicable date?

As stated above, the lien waiver is supposed to waive the right to lien for work that a contractor is being paid for. In reality, many owners—when dealing with their contractors (and general contractors when dealing with their subs)—include language that is far broader and requires the party signing to waive their right to all claims, not just claims of lien, on the project. This means that if a contractor has a claim for delay or disruption caused by the owner or an unforeseen site condition, he waives it when he signs the lien waiver. If there are unapproved change orders, the lien is waived. In fact, most standard lien waiver forms even require subs to waive any retainage, because they require the contractor to state that he has been fully paid, and to waive all claims through the date specified. If they are withholding retainage, the contractor has not been fully paid, but the other party could make that argument if by signing the lien waiver, the contractor gave up lien rights.

Don’t think that it doesn’t matter because everyone knows about the pending claims and the waiver was signed to get paid on the undisputed requisition. That argument generally won’t hold up. Courts will (with a few exceptions) enforce a signed lien waiver.

The offensive language may state:

Upon payment of _________, Subcontractor does hereby release and give any and all liens or rights of lien for any labor heretofore performed, materials heretofore furnished, and for any equipment heretofore supplied in connection with the Project and further does release and waive any and all claims or rights of claim, demands, bond claims, judgments, suits, debts or other damages relating to material and/or labor heretofore furnished and/or equipment heretofore supplied on the Project.

That is very common language, but will waive any right to payment the contractor may have other than what is in the requisition, including unasserted claims, pending or disputed claims, and even retainage.

4.Does the waiver add indemnity obligations beyond payment of subcontractor claims?

Many owners dealing with their contractors (and general contractors dealing with their subs) also attempt to use the mechanics' lien waiver as a vehicle to add an indemnity requirement where the contract did not otherwise include such a requirement. For example, many waivers will include a paragraph stating:

Subcontractor agrees to indemnify, defend, and hold harmless Contractor from and against any and further does release and waive any and all claims or rights of claim, demands, bond claims, judgments, suits, debts or other damages relating to the payment for material and/or labor heretofore furnished and/or equipment heretofore supplied on the Project by Subcontractor or its subcontractors or suppliers, or otherwise relating to the Work. 

The first part of this paragraph is not necessarily unreasonable. It says that if the contractor pays the subcontractor, and then end up receiving a claim from one of the subcontractor’s subcontractors or suppliers for the work included within that payment, then the subcontractor should be responsible for the resulting cost. However, the last clause goes a step further. It extends the indemnity obligation to claims “otherwise relating to the Work.” That means that if the party receiving the lien waiver is sued for any reason, the subcontractor could have to pay the legal fees to defend the case—even if he did nothing wrong.

5.How to handle electronic billing?

Many general contractors now use electronic billing systems, such as Textura, to track subcontractor lien waivers. These can present a challenge because subcontractors don’t have the opportunity to physically markup a lien waiver before signing and the general contractor won’t make a payment until it has been electronically signed.

In these instances, it is essential that subcontractors contact the general contractor and explain the issue. Print and sign a reasonable lien waiver and submit it physically to the general contractor. Ask the general contractor to override the electronic requirement in their system. If they still require an electronic signature on the bad form, ask for a written statement that the electronic lien waiver will not be relayed to anyone (including the owner) and that the paper document will be the only document enforced. While this is inconvenient for everyone, the only alternative is to accept the bad lien waiver and the risks that this brings.

While lien waiver forms are full of risks, the good news is that, generally speaking, (with a few rare exceptions) there are no magic words. Read the lien waiver carefully and don’t just treat it as a formality. Look for the risks and any language that raises a red flag.