Secrets of Bonding #122: Don’t Sign That Lien Release!

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WAIVER OF LIEN BY CONTRACTOR, SUBCONTRACTOR(S) AND SUPPLIER

We, the undersigned, acknowledge receipt of the amounts stated below as full payment for all labor, professional services, materials, or equipment furnished for use on or about the property of…”

In construction, lien releases are common. Project owners expect their general contractor to execute them. GCs demand them from their subcontractors and suppliers. They are part of the routine. If you want to get paid, you sign it. But when should you not sign it? Let’s look at what a lien release does, and when you should be cautious about executing.

The Purpose of Lien Releases
Typically, a lien release is required in connection with a monetary payment. It comes up in any of these situations:

  • Monthly payment made from project owner to the general contractor
  • Monthly payment from GC to a sub or suppliers
  • Final contract payments to any of these

The lien release enables the accounting to transition from one billing cycle to the next. It is a form of receipt that protects the Payor by acknowleging that the Payee has received funds – they relinquish the right to claim they were not paid.

danger-aheadNormally, when contractors and suppliers are unpaid, they can file a lien (a security interest) against the title of the physical property. With such a lien in place, the property cannot be sold.  The lien release / waiver gives up the right to file such a lien and possibly other legal remedies as well.

Lien releases come in two basic flavors, and it is very important to recognize the difference between them.

The Good One: Conditional

“THIS DOCUMENT WAIVES THE CLAIMANT’S LIEN, STOP PAYMENT NOTICE, AND PAYMENT BOND RIGHTS EFFECTIVE ON RECEIPT OF PAYMENT. A PERSON SHOULD NOT RELY ON THIS DOCUMENT UNLESS SATISFIED THAT THE CLAIMANT HAS RECEIVED PAYMENT.”

A release / waiver is Conditional if it waives rights once a condition (usually the receipt of payment) occurs. An example of conditional language is:

“Upon the receipt of $____, Subcontractor hereby waives and releases its lien and bond rights for labor and materials through _________ (date).”

Unless the waiver states otherwise, the conditional waiver is not effective until the condition, such as payment, occurs.

Also note, this wording includes a condition regarding time which protects the claimant’s lien rights arising in the next billing period.

The Bad One: Unconditionalcaution-proceed-carefully-md

“THIS DOCUMENT WAIVES AND RELEASES LIEN, STOP PAYMENT NOTICE, AND PAYMENT BOND RIGHTS UNCONDITIONALLY AND STATES THAT YOU HAVE BEEN PAID FOR GIVING UP THOSE RIGHTS. THIS DOCUMENT IS ENFORCEABLE AGAINST YOU IF YOU SIGN IT, EVEN IF YOU HAVE NOT BEEN PAID. IF YOU HAVE NOT BEEN PAID, USE A CONDITIONAL WAIVER AND RELEASE FORM.”

Actually it is only bad if the claimant has not yet been paid. Then it would be inadvisable to provide an unconditional release. The claimant will have no recourse if they do not receive their payment, and they will also relinquish their ability to claim against the Payment Bond.

Conclusion
The Conditional Lien Release includes conditions and wording that protects the claimant’s interests.

The Unconditional Release can be detrimental if executed unintentionally or under inappropriate circumstances.

Insurance Agents and Contractors: when tough bonding situations arise, we have the markets and the know-how to succeed even when others have failed.

Give us a call today!  856-304-7348

Not available in all states including Idaho.

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