What is a lien release in construction?
Whether you are a general contractor, a subcontractor, or perform other work in the construction industry, it’s important to understand the definition of lien releases – because if you don’t, there could be unwanted (and avoidable) financial consequences for you and your business.
Put simply, a lien release is a written contract in which you agree to “release” your rights as of a certain date. Details like the dating, wording, and content of the release can impact your rights in unanticipated ways, which is why it is so critical to learn how lien releases work in construction.
A contractor came to me at the end of a project wanting to pursue about a million dollars of delay claims. Unfortunately, he had no case. During the job he had forfeited his rights by signing lien releases that were quite sweeping in nature. Essentially, each month he had exchanged a broad release for payment checks and in doing so released all his lien and bond rights for claims, changes, and damages. If he had only made some changes to those releases before he signed them, he would have preserved those claims and been able to pursue recovery at the end of the job.
A lien release is a legal document. It releases rights that you (the signer) may have through a specific date. If you’re not careful, there may be other rights that you will give away along with that lien release. These may include a right for unapproved change orders, work-in-place that is part of a claim, a delay claim, or a time-impact claim that is still pending.
Lien release process
The contractor lien release process can vary, as can the necessary lien release forms, depending on whether the agreement involves general construction business liens, subcontractor liens, or contractor liens.
A contractor’s lien, colloquially called a “construction lien” or “mechanic’s lien,” is a legal claim whose purpose is to obtain payment by potentially granting the contractor rights to the homeowner’s real property.
Subcontractor liens are also called “mechanic’s liens” and function similarly, but, as the term implies, are filed by subcontractors who have not been compensated for their work.
A lien may also be placed on a business entity, enabling contractors to collect debts not only from individual homeowners, but also from companies. This is known as a “business lien,” such as a construction business lien. Note that there are strict deadlines, which vary by state, for notifying homeowners and businesses of liens.
There are ways, however, to preserve these rights when signing a lien release. Here are five tips to keep in mind:
Negotiate the form of the release
We find that most contractors tend to skim over exhibits that are attached to contracts, because they’re just in a rush to get the job started. Often, one of those exhibits is the form of release that they’ll be expected to sign as the job progresses. That release usually has broad language that needs to be negotiated just like every other provision in their contract.
Of course, the owner or contractor may tell you that you have to use the form they provide, or else. And sometimes you need to make a difficult business decision to provide a release that is broader than what you would like in order to obtain that check. But from a legal perspective, it’s best to negotiate for a form of release that has limiting language to protect your rights.
Pay attention to the through date
While it’s dependent on how the document is drafted, most lien releases have a through date. Any rights you have up to that through date are typically released when you sign that release. So you need to make sure the through date and the amount of money you are expecting match.
Here’s an example:
If you are expecting a $50,000 check that reflects your work through the end of the month, then you would put in the release $50,000 and a through date coinciding with the end of the month. If your customer tells you they are only going to pay you $30,000, you then need to change the through date so that it reflects the equivalent period of time for the $30,000 of work.
If there is no through date, then legally the day you sign the document becomes the through date. So be careful. If there is no through date and you’re expecting a $50,000 check that gets you to the end of May but now its February, you will give away your lien rights for that check the day you sign the release.
Understand when a $10 release is okay, and when it’s not
My clients frequently ask me why the release says $10 when they are picking up a check for much more money. According to the law, $10 is simply a “recitation of consideration.” It doesn’t really mean $10; it means some amount of money. The problem is $10 isn’t specific enough. If you are expecting a check, you should always try to change the $10 to the actual amount you are expecting. Why? Say you are expecting a $30,000 check and you only pick up $20,000. If the release says $10, you have accepted “some amount of money” and it may be difficult later to argue that you were shorted $10,000.
It is, however, okay to give a $10 release when there is no payment required. For example, if you send a notice to owner today and you don’t start work for two months, you may still be asked to provide a release from now until work begins. That’s a situation when it’s okay to give a $10 release because you’re not expecting a check in exchange for that release.
Use conditional release language
There may be times when you are asked to give a release in advance of receiving a check, a check that is supposed to come later. When that happens I would strongly encourage you to use conditional language. Here’s an example:
“This waiver and release is expressly conditioned upon the undersigned’s receipt of (enter amount of money here) in paid funds. Otherwise this waiver and release is void.”
This language can be written in various ways but essentially states that unless you receive the check for the stated amount of money, the release you are giving is not valid and enforceable.
Create an exception to the release
What if you have claims that you are trying to preserve, such as delay claims or unexecuted change orders? How do you account for that claim in your release? Here is some sample language you can add:
“Notwithstanding the foregoing, this waiver and release specifically excludes (add what you want to exclude here) which is reserved by the undersigned.”
This language states that whatever you identify as an exception, such as a pending change order, is being excluded from the release. One thing to remember is if you exclude something from your release this month, you need to add it again to next month’s release if the exception still exists. It’s a good idea to keep a running list of exceptions that you add each time you submit a new release.
Many contractors perceive that a lien release is just an administrative step they have to take in order to pick up their check. But a release is much more. It’s important to read, understand, and sometimes modify a release, because if you don’t, you could be giving up significant legal rights.
Editor’s note: To learn more about this topic, listen to Alex’s podcast on “Lien release traps to avoid.”