Each subcontractor should decide for itself the contract terms and conditions which it believes will best protect its in
Mastering Negotiations on Mechanics Liens
Published by American Subcontractors Association, Inc. Foundation of the American Subcontractors Association, Inc. 1004 Duke Street Alexandria VA 22314-3588 (703) 684-3450
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Copyright © 2017 by American Subcontractors Association, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the American Subcontractors Association, Inc. Disclaimer: This publication does not contain legal advice. The discussion is intended to provide information and guidance to individual subcontractors. Specific circumstances vary widely, so subcontractors may need to consult their attorneys before acting on the premises described herein. Each subcontractor should decide for itself the contract terms and conditions which it believes will best protect its interests. Subcontractors should not agree among themselves as to the form of contract terms and conditions they will use. Such agreements may violate federal or state antitrust laws and could result in the imposition of civil and/or criminal penalties.
Mastering Negotiations on Mechanics Liens State Lien Laws A mechanic’s lien is a claim on improvements to buildings and, in most jurisdictions, the land itself. These liens offer protection for workers, prime contractors, subcontractors, suppliers and others involved in improving real property. The need for liens arose from recognition that labor and material incorporated in construction become part of the property. Normally, they cannot be repossessed by a claimant or reused economically in case of nonpayment. Lien laws have been in use since the founding of the United States. They vary greatly from state to state. Each state law has its own procedures for filing and perfecting liens. A subcontractor seeking to protect its right to payment must strictly follow these procedures, or its lien may be invalidated. These procedures may include designated notices, filing methods and timing, priorities of claims, etc. Thus, it is important that a subcontractor be thoroughly familiar with the lien laws of the states in which it operates. Individual state requirements are outlined in the Foundation of ASA’s publication, Lien and Bond Claims in the 50 States. A subcontractor also may want to consult with attorneys familiar with the lien laws in the states in which it operates. Some states have laws that create a lien against funds. Such a lien provides a subcontractor with a claim against moneys flowing into a project to finance construction. These liens usually cause the funding institution to hold up further payments until the liens are satisfied. In those states, funds available to satisfy liens are limited to the amount owned by the owner to the prime contractor. Numerous other state lien laws confer a security interest in the property being improved. In those states, the subcontractor’s lien amount often is not limited to the amount due to the prime contractor by the owner. While the subcontractor’s security interest is subject to prior claims in most states, a few states give subcontractor liens a higher priority. The main usefulness of a security interest lien is that it creates a cloud on the title to the property. Owners need clear title to refinance or transfer the property. Thus, liens are typically paid off or bonded at these times. State mechanics lien laws also specify who is protected. A lien law may apply to the prime contractor, the subcontractor and various others supplying labor or material on the project. It is particularly important that a lower-tier sub-subcontractor or supplier be aware of the terms of the lien law under which it is operating, and its place in the contract tiers of the project. 1
Lien rights typically are not available on public work. Surety bonds are used, instead, to protect the payment rights of subcontractors. An exception to this general rule is found in several industrial states’ lien laws, which also allow liens for bonded state public work projects.
Lien Right Waivers Subcontractor lien rights are established as a matter of law. In other words, it is not necessary to insert lien entitlement language into a subcontract. However, many states do not allow lien rights to be waived by contract. Conversely, many state lien laws invalidate any lien waivers as being against public policy. In other states, an agreement to waive a subcontractor’s lien rights is only binding if it is unambiguous, and if the subcontractor was aware or should have been aware of the waiver when it entered into the subcontract. In spite of protective laws, a subcontractor should not sign a subcontract or lien waiver form that would preclude or diminish any lien rights prior to the receipt of payment in full for the work described on a lien release or waiver. After all, the protective law might change or be invalidated by a court decision. Frequently, the subcontract itself may contain a clause requiring a subcontractor to waive its lien rights. The following is a typical subcontractor lien wavier provision: “To the fullest extent permitted by applicable law, the Subcontractor hereby waives and releases any and all lien rights for labor, material, equipment and services furnished by the Subcontractor to improve or modify the Owner’s premises or related property.” Another lien waiver clause sometimes included in subcontracts is shown below: “The Subcontractor does hereby release, waive and forever relinquish its rights to any and all manner of liens, claims or demands whatsoever that the Subcontractor ever had, now has or which it hereafter can, shall or may have upon any portion of the property of the Owner for labor, material, equipment or services furnished by or on behalf of the Subcontractor.” These provisions clearly waive all of the subcontractor’s lien rights, to the extent allowed by the law, in the state in which the project is located. It may even sufficiently muddy the issue in states that prohibit lien waivers to lead to litigation or favor a settlement of a claim.
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A subcontractor can invalidate broad lien waivers, such as the ones shown above, by substituting the following plain-language clause. This clause limits the waiver to labor and materials for which the subcontractor has been paid. “We agree to provide lien waivers with respect to material or work for which we have paid in full but not for any unpaid work or material.” During the progress of the job, a prime contractor may ask a subcontractor for work performed to the date on which payment is made. This may include retainage, withholding or other claims about which the subcontractor may not yet be aware. A subcontractor could use the language in the example above to clarify that it is not waving lien rights for work performed, but not yet billed, or for work billed, but not paid in full. Finally, a subcontractor should take the precaution of obtaining partial lien waivers from its sub-subcontractors on jobs on which the subcontractor is providing such waivers to the prime contractor.
Negotiating Tips Subcontractors usually do not encounter strong objections to the preservation of their lien rights, or to limiting lien releases to material and work that have been paid for in full. After all, prime contractors ordinarily take the same position in dealing with owners. Here are some typical arguments to use in negotiations with prime contractors: •
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Your subcontract says that I’m waiving my lien rights in advance of any payments. I can agree to partial waivers for the amounts I’ve been paid, but I can’t give an advance waiver. I need to protect my interests, just as you protect your interests with the owner. If the owner insists on lien waivers in advance, then I’ll need a direct payment system, so that I can get my money straight from the owner. (Note: This often will cause the prime contractor to accept waivers limited to payment amounts, rather pursue the direct disbursement idea.)
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