Reading between the lines to spot the risk hidden in lien waivers

Lien waivers play an important role in construction credit, marking progress throughout a project and managing lien rights along the way. Such a standard form pops up so often in a construction creditor’s day-to-day that it becomes easy to miss predatory language that can put your business in an uncomfortable position.  

When a lien waiver crosses your desk, whether it comes to you stapled to a check or buried deep in a payment portal, there might be a lot of pressure to sign and get the money in the door. Taking the time to read over and double-check key details in a lien waiver can make sure you’re not signing away more rights than intended. 

“When you receive a lien waiver be sure to confirm the project, the customer, the payment amount and, importantly, the date through which rights are being released,” said Christopher Ng, managing partner at Gibbs Giden Locher Turner Senet Wittbrodt LLP (Westlake Village, CA). “If the project information doesn’t match your preliminary notice, that may be a chance to catch the error and, where appropriate, serve an amended notice in some jurisdictions. Next, compare the waiver line by line against the job ledger, including unpaid invoices, unbilled deliveries, disputed charges and retention.” 

Before signing any lien waiver, be sure you understand exactly what type of lien waiver it is. A conditional lien waiver will preserve your lien rights until payment clears, while an unconditional waiver asks the signer to surrender their lien rights regardless of whether payment goes through.

“I can’t emphasize strongly enough that you should give only conditional waivers until the money has actually cleared your bank,” said Ng. “An unconditional waiver is generally enforceable even if the check bounces or the payment never arrives.” 

Credit managers are finding that lien waivers have become riddled with conditions outside the scope of lien rights that eliminate risk for general contractors while creating issues for creditors. “Looking back, five years ago we were dealing with pure lien waivers,” said Lisa Saul, CBA, credit and collections manager for Victaulic Company (Easton, PA). “Now we are seeing the addition of indemnification clauses and language that says creditors are waiving their right to any and all claims of any kind from the beginning of time to the end of time. We redline anything we don’t agree to and send it back to our customer who then forwards it to the general contractor who oftentimes accepts it.”  

At times, a general contractor may incorporate language into a lien waiver that spans far past agreeing to releasing rights on a portion of work, so it is important to read forms carefully. “The first thing to look for is scope words,” said Ng. “Phrases like ‘any and all claims,’ ‘known or unknown’ or ‘of every kind and nature’ tell me someone is asking for more than a lien release. I also circle any release of retention, disputed invoices or change orders still being negotiated, and I check that the through date matches the billing period actually being paid. Watch for indemnity language, too. Making the supplier responsible for other parties’ claims on the project may be appropriate if you have your own subcontractors or suppliers on the job, but it’s an important decision that deserves a careful look.” 

When you notice language that seems out of place in a lien waiver, it’s important to advocate for your company and redline language that goes beyond the scope. “Sometimes general contractors reject our redlined copy of the lien waiver,” said Saul. “At that point, we have an in-house lien waiver that was created by our legal department that’s basically a plain lien waiver. We complete that and try sending it out. Sometimes they’re accepted, sometimes they’re rejected. If it is not accepted, we send the statutory lien waiver created by the state where the work was done.” 

When the state where the project is located has a statutory form, it can be the safest bet. “In states with prescribed forms, a nonconforming waiver may not hold up anyway, at least as to lien and bond rights, which gives you a non-confrontational reason to ask for the standard form,” said Ng. “More often than not, the person requesting the waiver is working off an owner’s or lender’s draw checklist and hasn’t thought about what the extra language does. If the contractor still won’t budge, point to the exact clause, propose a narrow fix and make sure disputed amounts, retention and unpaid prior invoices are preserved to the extent the statutory form permits. A joint check agreement or direct-pay arrangement may also solve whatever the contractor is actually worried about.” 

Disagreements over lien waivers can put credit managers in an uncomfortable position, especially because tension between the general contractor and creditor can add strain to the latter’s relationship with their customer. At times, it may come down to a business decision not to mar a potentially strong relationship with a customer, but it is a decision that cannot be made without considering exactly how much risk is posed. 

“If the form won’t accommodate the exceptions you need, or you still can’t reach agreement, escalate it to management and call your construction attorney before you sign,” said Ng. “And don’t let the negotiation run out the clock.  Keep sending your preliminary notices and calendar your lien and bond claim deadlines as if no deal is coming. The pressure to get paid is real, but trading away your security to speed up one payment can turn a collection problem into a write-off.” 

The bottom line: A lot of risk exists between the lines of a lien waiver, so be sure to take the time to thoroughly read and understand exactly which rights you are giving up by agreeing. A lien waiver is often what might keep you from securing payment, but it is critical that you take the time to thoroughly vet them even when it can weigh on your cash flow, because missing predatory language could lead to much worse.

When lien waiver management gets tricky, Secured Transaction Services Lien Waiver Manager can help.