What to Know about Mechanics’ Lien Waivers
A mechanics’ lien waiver is an agreement to forgo the right to pursue the lien in the future. Lien waivers are common when payment is received by the construction company. A savvy property owner will often condition making payment on receiving a mechanics’ lien waiver from the company.
If we look broadly at waivers, a waiver is the intentional or voluntary relinquishment of a known right. The “right” we are talking about in this context is the right to file a mechanics’ lien on property in which you completed work on.
A lien waiver is a type of contract. If you sign a mechanics’ lien waiver, then you are agreeing by the terms of the contract not to file a mechanics’ lien on applicable property for the work you completed. If you sign the waiver, then are contracted to do additional work in the future, you may have the lien right for the new work that you do.
There is a Colorado statute directly on point and it states as follows:
No agreement to waive, abandon, or refrain from enforcing any lien provided for by this article shall be binding except as between the parties to such contract. The provisions of this article shall receive a liberal construction in all cases.
Since you are giving up the right to a statutory lien, that is to say a lien that a Colorado statute has granted, the language in the waiver must be clear and unambiguous. If the language is not clear in indicating an intention to waive a lien, the Court will not assume that is what the contract intended to waiver their mechanics’ lien right.
In these situations where the language is ambiguous and open to differing reasonable interpretations, the Court will read it in the light most favorable to the contractor. While this is great news for those in the design and construction business, you should always consult a mechanics’ lien lawyer before signing to be sure you fully understand your options.
The appeals courts in Colorado have dealt with these situations. A particularly interesting situation arose with a lien subordination clause. The Court detailed that lien waivers must be by express agreement in and to the contract. If a company is only a beneficiary of another company’s contract, which is often the case between a general contractor and the property owner, a subcontractor cannot be bound by that agreement in most situations. This is especially true with waiver clauses in those contractors that attempt to bind subcontractors who are not actually parties to the contract.
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When It’s Okay to Sign a Mechanics Lien Waiver
It is very common for experienced property owners to require the construction company to agree to sign a lien waiver in exchange for making payment. If you are receiving full payment and the check clears at the bank, there are no issues in signing a mechanics’ lien waiver. After all, when you receive payment in full, you actually no longer have a right to a mechanics’ lien. There is no downside in these situations.
Problems are more likely to occur when partial payment is made and the contractor does not read the contract or fully understand it. At that point, the company may be left without any viable legal remedies. This is why speaking with an attorney specializing in mechanics’ lien is absolutely critical.
As we discussed above, most waivers for mechanics’ liens are conditioned on receiving payment. They can also be conditioned on payment clearing at the bank. You may also come across non-conditional waivers. Both types of waivers come in various forms.
You may come across construction contracts that have language in them that states a mechanics’ lien is waived when full payment is received. These clauses are drafted by incompetent attorneys since the lien right no longer exists when full payment is received for the project. Nevertheless, the clause will look something analogous to this: Acceptance of final payment by the Contractor, a Subcontractor, or a supplier shall constitute a waiver of claims by that payee except those previously made in writing and identified by that payee as unsettled at the time of final Application for Payment.
Something commercial contractors will see more often with savvy developers is language in the contract that waives the right to a mechanics’ lien even if payment is never made.
The Contractor and all subcontractors and material suppliers hereby waive all mechanic’s liens and material supplier’s liens. The Contractor shall hold the Owner harmless from any costs and damages, including but not limited to attorney’s fees, incurred by the Owner as a result of the filing of any mechanic’s liens or material supplier’s liens, or any litigation or arbitration arising out of such liens.
You need to know that this language is valid and enforceable. If you sign a contract with this clause, you are giving up the option in the future to record a mechanics’ lien on the property. As the language is written, it will only be enforceable against those who sign it. If the subcontractors never signed it, they are not waiving their right to a lien.
Another situation you need to be aware of is language in the memo line or back of a check. If language is on the check in some form that states a lien is being waived by depositing the check, it very well could be valid. Since lien waivers must be clear and unambiguous, they are not common on checks since they don’t meet this burden. Either way, make sure you read the check to be sure it does not contain additional language.
By negotiation of this check and in consideration of the concurrent disbursement of funds as represented in this check, the endorsee hereby waives all rights to claim or record a statutory lien under the lien laws in any state wherein the labor, service and/or material were furnished in the construction of improvements at (the project) up to and including (date). The endorsee further warrants, covenants, and agrees to defend, indemnify and hold (owner or contractor) harmless from any claim whatsoever by any subcontractor or materialman of the endorsee. Indemnification shall include attorney fees, court costs and payment of any lien claim.
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Back in 2009, there were to new statues put into law that may affect mechanics’ lien waivers. The first deals with unlawful activity concerning the selling of land. The statute addresses fraudulent conduct and representations made in the context of selling land. The primary point of interest in this statute imposes criminal sanctions for the failure to timely pay funds received from a construction loan where a lien waiver is signed.
(3) a person who signs a lien waiver for a construction loan under section 38-22-119, C.R.S., and knowingly fails to timely pay any debts resulting from a construction agreement covered by the waiver commits a class 1 misdemeanor, unless there is a bona fide dispute as to the existence or amount of the debt.
On the civil side of the law, a new statute went into effect as follows:
(2) An agreement to waive lien rights shall contain a statement, by the person waiving lien rights, providing in substance that all debts owed to any third party by the person waiving the lien rights and relating to the goods or services covered by the waiver of lien rights have been paid or will be timely paid.