Updating Payment Releases and Lien Waivers to be Effective

By Joseph Schuler, Sheats & Bailey, PLLC

It is common construction industry practice for projects to be broken down into a monthly payment schedule. Due to the statutory right for subcontractors to place liens on projects they have supplied materials or labor for, monthly payment applications representing work completed are often approved contingent upon the signing of payment release or lien waiver by a subcontractor. In itself, this practice is sensible. Payment for completed work is exchanged for a subcontractor waiving its right to place a lien on the project for the work allegedly completed.

Where problems often arise is when the scope of the work completed is inconsistent with original contractual obligations, and the payment application and lien waiver process does not coincide with the approval of change orders or construction change directives for the excess work. When a change order has not been properly documented, but an expanded scope of work may have been completed, a payment dispute over the change order can implicate a lien release signed after the extra work was completed.

If a subcontractor feels work outside the original contract scope was completed but has no approved change order in hand, and the general contractor, construction manager, or owner is holding a lien waiver postdating completion of the extra work, a question of whether the lien waiver bars a lien based on the extra work arises.

Traditionally, the legal standard was that a lien waiver was effective against any work completed before the date the lien waiver was signed, and any intent by either the subcontractor or general contractor to resolve extra work payment down the line was irrelevant. However, over the years the legal standards have shifted, and courts have elected to construe the waivers more liberally given the circumstances on each project.

At times, courts have disregarded lien waivers that appear on their face to bar claims to extra work already performed. Courts have more recently construed these waivers to be ineffective against extra work claims in cases where, even after the waiver was signed, the general practice was to pay for some extras performed prior to the waiver. Furthermore, a general contractor simply indicating it was awaiting owner approval to pay for extras can show intent not to enforce a previously signed lien waiver. This may effectively give subcontractors an opening to lien a project based on the extras despite any waiver. In some cases, the waivers have been considered to be no more than a receipt for the payment referenced in the waiver, having little relation to payment for extras.

Ultimately a lien waiver may not provide much protection if it is only effective against work underlying the payment amount referenced in the waiver. This is especially true since the payment released is often limited to an amount contemplated in the original contract for the original scope of work. Those extras outside the original scope that may or may not be properly documented could still be grounds for a subcontractor filing a lien on your project.  That lien waiver you have trusted ever since you came into the business may not mean what you think it does anymore. Unfortunately, it is simply unrealistic to complete a project without any changes and with perfect agreement on scope of work completed. So, given the shifting legal landscape, is there anything you can do?

Fortunately, within the last year, courts have indicated what kind of language is clear enough to work around these relatively new legal doctrines. While it can be frustrating to keep up with the law, it is hard to beat the “cheap insurance” of a truly effective lien waiver. Diligence updating your forms for documenting projects can pay dividends down the road, especially those forms securing payment and releasing potential claims.

The attorneys at Sheats & Bailey, PLLC are experienced with drafting, revising, and litigating construction contracting forms. For more information or assistance with navigating the construction payment release and lien waiver landscape contact Sheats & Bailey, PLLC, Tel: (315) 676-7314.

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials are for general informational purposes only. Readers of this article should contact their attorney to obtain advice with respect to any particular legal matter. No reader of this article should act or refrain from acting on the basis of information in this article without first seeking legal advice from counsel in the relevant jurisdiction.