Construction Lien Waivers: Conditional vs. Unconditional Waivers, Retainage, Reservation of Rights

Description

Lien waivers are documents that give the relevant parties notice that an entity gives up the right to file a lien in exchange for payment. Lien waivers are generally divided into two categories: conditional and unconditional waivers. The main difference is that unconditional lien waivers are effective as soon as they are signed. In contrast, conditional lien waivers are only in effect once a predetermined condition (most commonly, a payment) is fulfilled. Typically, conditional lien waivers are submitted with every contractor and vendor invoice, while these parties sign unconditional lien waivers upon receipt of payment.

Some states (12) strictly regulate lien waivers and employ mandatory lien waiver forms. There are no set forms for waivers in states that do not strictly regulate lien waivers. Various construction contracts contain similar technical wording (for instance, a "lien waiver" is not the same as a "lien cancelation" or a "no lien clause.") Counsel must pay close attention to the contents and the conditions of the agreement.

Retainage creates a tricky issue because the lien waiver is supposed to waive lien rights to all work performed up to the effective date. If an owner is withholding retainage, contractors risk waiving their lien rights if they submit unconditional lien waivers. To preserve lien rights to retainage, a contractor can either list the precise dollar amount for work being paid and waive its lien, or expressly exclude retainage from the lien waiver with a notation to that effect.

Some lien waivers provide space to identify open change orders and claims that are not being waived or released. In these instances, contractors should identify COVID-19-related impacts as an open claim to be resolved later. Even when that option is not provided, contractors should append language to the lien waiver, excluding COVID-19-related cost and time impacts. What the reservation language should say may vary by the language in the lien waiver. Owners and other upstream entities may push back on such reservation language, but usually, the parties can work out agreeable language.

In jurisdictions where the government or health official mandates shut down of construction, the impacts of COVID-19 are apparent. However, in other jurisdictions where construction continues without extensive restrictions, the results may be more subtle or difficult to identify. Nonetheless, contractors should attempt to identify cost or time impacts and seek changes or submit claims as appropriate. But, submitting the change order request or claim is not always enough. If not expressly identified and excluded, lien waivers may still release and waive unsettled change orders or claims.

Listen as our authoritative panel of construction lawyers discusses lien waivers, when and if they should be accepted, how to address contingent issues such as retainage and reservation of rights.