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Lien on it

By: WISCONSIN LAW JOURNAL STAFF//March 29, 2016//

Lien on it

By: WISCONSIN LAW JOURNAL STAFF//March 29, 2016//

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Conditional lien waivers can save subcontractors, material suppliers

By David M. Henry
Kohner, Mann & Kailas, S.C.

David M. Henry is an attorney at Kohner, Mann & Kailas in Milwaukee. He concentrates on using construction-lien and bond laws to recover construction receivables owed to the firm’s clients on projects across the nation.
David M. Henry is an attorney at Kohner, Mann & Kailas in Milwaukee. He concentrates on using construction-lien and bond laws to recover construction receivables owed to the firm’s clients on projects across the nation.

Let’s be immediately clear and cut to the chase: Subcontractors and material suppliers cannot properly be required to and should not furnish signed unconditional lien waivers unless they have actually received payment for the balance due on the construction project. It’s a bright line, and it’s as simple as that.

Or is it?

Let’s face it, in the real world of the construction industry, project owners and prime contractors like to make it easy on themselves when it comes to lien waivers. To save time, they often prefer to obtain from subcontractors and suppliers in advance of payment what is commonly known in the industry as an unconditional lien waiver. Pursuant to an unconditional lien waiver, a potential lien claimant unconditionally acknowledges receipt of payment and waives its lien rights. If the potential lien claimant signs and delivers an unconditional lien waiver in advance of payment and then never gets paid, there is a significant risk that it has waived its lien rights and given up a valuable tool to recover the receivable it is owed on the job.

As a practical matter, there is a relatively simple and straightforward solution to this problem, but it requires an extra step (which project owners and prime contractors often prefer to skip). Initially, when a payment is anticipated, the potential lien claimant can furnish what is commonly known as a conditional lien waiver. This type of waiver explicitly states that the lien claimant waives its lien rights, but only if and when it actually receives the promised payment. Then, once the lien claimant has actually received payment (for example, the check has cleared or the payment was wired to the lien claimant), the lien claimant can sign and deliver the unconditional lien waiver. We have successfully used this procedure hundreds of times in our practice at Kohner, Mann & Kailas, S.C.

However, some owners and prime contractors will undoubtedly dig in their heels and insist on receiving a signed unconditional lien waiver before they release payment. If the lien claimant has a long-standing trusting relationship with the owner or the prime contractor, the lien claimant may be willing to take the risk of nonpayment. Absent that, in such situations, there is another option: Obtain an agreement in writing from the owner or the prime contractor or their title company stating that they will hold the signed unconditional waiver in a trust account pending actual receipt of the payment by the lien claimant. Many title companies, in particular, are familiar with using this type of procedure to avoid stalemates over lien waivers, and our firm has acted as the trustee (holder of the payment pending the unconditional waiver) in this situation as well.

The key is to ensure that the person who receives the signed the unconditional waiver is trustworthy. If the person breaches the trust and you haven’t been paid, you may have waived your lien rights.

The better route is the two-step process: provide a signed conditional waiver in anticipation of payment being made and a signed unconditional waiver once payment in good funds has actually been received. If the owner or the prime contractor won’t agree to this two-step process for waiving liens, then either try the trust-agreement approach or be prepared to file your lien to protect your rights to payment.

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