Be Careful When Signing Partial Lien Waivers
Lien waivers are frequently required of contractors prior to progress payments and final payment. Lien waivers tell the property owner, as well as the bank, the insurance company, and other parties, that payment has been made to the contractor, and that the contractor will not lien the property.
In Virginia, banks are particularly interested in obtaining lien waivers prior to making draws. This is because a mechanic’s lienholder can, in some situations, achieve “priority” over the bank in the event the property is sold to enforce a mechanic’s lien. In other words, if the property is sold, the mechanic’s lienholder might be entitled to be paid first out of the sale proceeds, with the remaining proceeds (if any) flowing to the lienholder. Banks are typically wary of lending additional monies until they are satisfied that the full amount of their loan has the best chance of being paid back in the event the property is sold.
It is important to recognize that not all lien waivers are alike. While they may appear similar and “standard,” oftentimes they can be dangerous to the unwary contractor. The Virginia case of United Masonry Incorporated of Virginia v. Riggs, 233 Va. 476 (1987) is a perfect example of a lien waiver situation that turned ugly for a contractor. In United Masonry, the contractor signed lien waiver for a partial payment. The lien waiver set forth the amount of the payment being received by the contractor. However, the payment amount was not the total amount due to the contractor at the time. The lien stated that it released all of the contractor’s lien rights up a date certain.
Because the contractor had inserted the amount of the payment, and not the full amount due, the contractor believed that he could still assert a lien on the balance due and owing. However, the court held otherwise, and denied the contractor’s right to file a lien for the balance due. The court found that the lien waiver did not specifically state that the lien waiver was enforceable only to the extent of the amount paid (i.e. the amount listed in the lien waiver). The court read the lien waiver strictly, and held that the contractor had waived its right to file a lien on the entire amount due up to the date certain.
Lien waivers can also cause other problems. For example, some contractors (for example, material suppliers and equipment rental companies) may be engaged with a particular general contractor, owner or other party, on several projects at the same time. Any lien waivers signed by such contractors must be careful to specifically define the project at issue, and the specific parties involved in the project at issue. Otherwise, a signed waiver could be deemed to preclude liens – and potentially other collections efforts – with respect to other projects. Inadvertently signing an overly broad lien waiver can have serious consequences, and can cost contractors a great deal of money.
While it may seem unnecessary, contractors should strongly consider having an attorney review lien waivers presented to them for signature. If the project is ongoing, chances are the same lien waiver will be presented to the contractor with respect to each payment. So an attorney review would only be needed on one occasion. The cost to review the lien waiver is minimal. And considering the potential loss that can occur, a review is well worth the time and money.
Brian Loffredo is a principal in Offit Kurman’s Baltimore/Washington office. If you have any questions about the content of this article or other construction matters, please contact Mr. Loffredo at 301.575.0345 or bloffredo@offitkurman.com.