Lien WaiverA document that also acts as proof of payment

Any service provider would want to ensure that he or she receives payment for his or her services.

On the other hand, any customer would want to ensure that he or she does not make double payments on services already paid for.

This situation is often addressed with receipts – proof that the customer has paid, and simultaneously, proof that the service provider has received payment.

However, commonly in the construction industry, there is another type of document that acts as proof of payment.

We refer to this document as the lien waiver.

While lien waivers are often looked at as a mere formality, managing them is important, especially for those who operate a construction business.

For example, disregarding the collection of lien waivers may result in making multiple payments for one service.

Also, if issues arise during the construction process, not having lien waivers can amplify the effects of such issues.

In this article, we will be learning about what a lien waiver is.

What does it do?

Who are the parties involved in it?

Is it an important document?

We’ll try to answer these questions as we move along.

What is a Lien Waiver?

A lien waiver refers to a written agreement between a payer and a claimant (contractor, subcontractor, or supplier) which states that the claimant waives his/her right to file a lien on the payer’s property.

Most claimants only sign a lien waiver when they receive payment for their services or goods.

Essentially, you can say that a lien waiver acts as proof of payment akin to any usual receipts.

Proper documentation of lien waivers can ensure that those who need to be paid are paid, and those who were already paid are not paid multiple times.

The documentation of lien waivers becomes increasingly complex as the scale of the project and the number of parties involved increase.

However, such construction projects usually have the involvement of a general contractor.

It is then the general contractor that handles the documentation of lien waivers.

The general contractor makes sure that any party that receives payment signs a lien waiver.

These parties may include subcontractors, suppliers of materials, and any other party (those who can claim a lien) to the construction project.

For example, let’s say that a general contractor pays one of its subcontractors $60,000.

Along with payment, the general contractor sends a lien waiver for the subcontractor to sign.

By signing the waiver, the subcontractor acknowledges receipt of the $60,000 payment.

Also, the subcontractor waives $60,000 worth of lien rights.

In our example above, both parties benefited from the lien waiver.

It protects the general contractor from the threat of a mechanics lien.

It also protects the subcontractor from not receiving payment.

When working properly, a lien waiver guarantees that all parties involved in the project are sufficiently provided for.

It also makes the payment process fair and transparent.

The Importance of Lien Waivers

In a construction project, anyone who provided materials, labor, or services may be entitled to file a mechanic’s lien should they not receive payment.

A mechanic’s lien basically guarantees payment to these claimants.

And it generally has a higher priority than other forms of debt.

This means that those who file a mechanic’s lien are paid first before any debtor in the event of liquidation.

As the one in charge of the project, you don’t want anyone to file a mechanic’s claim as it may mean that payments are not done properly.

It could be that the claimant really didn’t receive any payment.

Or that the claimant is taking advantage of the fact that there’s no proof of any payments.  

Either way, it shows a lack of proper documentation of payments.

That’s where lien waivers come in. Lien waivers basically serve two purposes: (1) it ensures that the party signing it won’t file a lien; and (2) it is proof that payment has been made to the signee (payee).

Whenever there is payment involved, there should be a corresponding lien waiver to ensure proper documentation of any payments made during the construction process.

When this system of exchanging lien waivers works properly, all parties involved in the project should be sufficiently provided for.

The payee is ensured that s/he gets paid for whatever it is that s/he provided to the project.

The payor then ensures that the payee won’t be filing a mechanic’s lien.

Remember to have your lien waiver properly outline the specific materials, work, and project that they are issued for (on top of the amount of payment).

This not only adds another layer of documentation but also protects the payer.

It ensures that the payee cannot claim that the payment was made for another work or project.

The 4 Basic Types of Lien Waivers

A lien waiver can either be conditional or unconditional. Just from this alone, we can deduce that there are at least two types of lien waivers.

However, since a lien waiver acts differently when it’s for a progress payment or final payment, this results in having four types of lien waivers:

• Partial Conditional Waiver
• Partial Unconditional Waiver
• Final Conditional Waiver
• Final Unconditional Waiver

Let’s discuss first the conditional waivers.

Conditional Lien Waivers

Conditional lien waivers typically have a clause where the signee (payee) promises to waive any lien rights only when s/he actually receives payment.

This sets a condition where the waiver only becomes effective upon receipt of payment.

Once the signee receives payment, the lien waiver becomes effective.

Conditional lien waivers address a problematic situation where the payor wants a lien waiver before making any payments, but the payee wants to secure payment before signing any waivers.

Partial Conditional Waiver (i.e. Conditional Waiver for Progress or Partial Payment)

A partial conditional waiver applies for progress payments.

In most construction projects, payments are made when certain milestones are reached (i.e. progress).

As the payee, you might be expecting to receive payment upon reaching these milestones.

Since it’s a partial conditional waiver, it’s still safe to sign even without the actual receipt of payment.

That’s because it only becomes effective when you receive actual payment.

So until you receive payment, you may still file a lien claim on the project in the event of non-payment.

Final Conditional Waiver (i.e. Conditional Waiver for Final Payment)

When the project is completed, or your part as a payee on the project is done, you may receive a final conditional waiver.

Just like the partial conditional waiver, it’s fine to sign a final conditional waiver even without receiving your final payment yet.

Until you actually receive your final payment, you can still file a lien claim in the event of non-payment.

Unconditional Lien Waivers

Unlike conditional lien waivers, unconditional lien waivers don’t have a condition to them.

This means that if the signee (payee) signs one, s/he unconditionally waives any rights to a mechanic’s lien.

Meaning that the waiver becomes effective once the signee (payee) signs it.

This applies whether the signee receives payment or not.

As such, they are more dangerous on the part of the payee than a conditional lien waiver.

Once signed, they offer no protection from non-payment.

Typically, a payee should only sign an unconditional lien waiver when s/he actually receives payment.

This is to ensure that the payee is properly provided for when s/he waives the right the file a lien.

Partial Unconditional Waiver (i.e. Unconditional Waiver for Progress or Partial Payment)

A payor may require a payee to sign an unconditional partial waiver upon the receipt of a progress payment on a project.

Since it’s unconditional, the payee must make sure that s/he receives payment first before signing it.

For example, you may want to make sure that a check clears first before signing the waiver.

If you have received any payments yet but the payor wants you to sign a lien waiver, insist on a conditional partial lien waiver instead.

This makes it so that the waiver only becomes effective upon receipt of payment.

Final Unconditional Waiver (i.e. Unconditional Waiver for Final Payment)

When the project is complete, or when the payee’s part on it is done, the payee should expect a final payment.

Upon receipt of the final payment, the payor may require the payee to sign a final unconditional waiver.

Just like the unconditional partial waiver, the unconditional final waiver becomes effective once the payee signs it.

This applies whether the payee actually receives payment or not.

As such, it’s prudent to only sign an unconditional final waiver once you, as a payee, actually receive your final payment.

Otherwise, it’s safer to sign a conditional final waiver if the payor insists on it.