In last week’s post, we continued to explore ways that Owner’s can protect themselves from unscrupulous contractors. We focused on strategies for managing the way payments are handled.
Among those payment management strategies was the concept of Lien Waivers. I realize that the concept of a lien and the way these works may not be obvious, so I wanted to dedicate this post to that topic.
What is a Lien?
A lien is a legal document that imparts ownership onto a third party until a specific debt is paid. There are three types of liens.
Consensual liens are voluntary liens that an Owner might accept when they take a mortgage. These liens typically have a payment schedule that once completed cedes ownership of the property back to the Owner.
Judgement liens are the kind of liens that may be imposed on someone by a court of law. Any incident that results in a legal judgement against you could result in a judicial lien.
Statutory Liens break down further into two kinds. The first are known as Tax Liens and are expressly used by the government to collect unpaid taxes. The second kind of Statutory Lien is called a Mechanic’s Lien. Mechanic’s Liens are the kinds of liens we deal with in construction.
Who can place a Lien?
A Mechanic’s Lien can be placed on your property by anyone that performs work on your home. This is not limited to tradesmen and contractors. Mechanic’s Liens can be placed on your property by Architects, Engineer’s, exterminators, or cleaning people. Anyone who performs a service or provides equipment that is attached to your property can place a Mechanic’s Lien on your property.
A very important thing to note is that a lien holder does not have to be hired by you. They could be a subcontractor of someone you hired, so if you hire a General Contractor to do work on your home and the GC does not pay a subcontractor, the subcontractor can place a lien on your home.
How are Lien’s enforced?
A Mechanic’s Liens places an encumbrance on the property that limits your ability to sell or dispose of the property without first satisfying the debt. You could have a lien on your property for many years. You may even forget that a lien was placed on the property, but as soon as you attempt to sell the property, the lien will come up and you will be required to satisfy the debt before you can sell the property.
Once a lien is placed, only the lien holder can remove the lien. If a lien is placed on your property, you will be obligated to address the lien in order to have it removed.
Contesting a Lien.
If you feel a lien was placed improperly on your home, the most expedient and least intrusive way to deal with this is to negotiate directly with the lien holder. If this does not resolve the matter you have two other options.
If you need to vacate the lien from your home in order to sell it before you satisfy the lien, you can have the lien bonded. This means that you engage an insurance company to issue a bond to you to cover the lien. This removes the lien from the property and attaches the debt to the bond. In order to get a bond like this, the insurance company will want you to demonstrate that you can pay the debt.
The other way to vacate a lien is to file a lawsuit against the contractor. You will need a Real Estate lawyer for this. The suit will require the contractor to demonstrate to the court that they are in fact owed the monies called for in the lien. You (or your attorney) will counter and the courts will decide. This can be a very long and expensive process.
So now that we have a better understanding of liens, we can address lien waivers.
A lien waiver is a document from a service provider that certifies that they were paid for the service they provided. It is also a statement from the service provider that they are waiving their rights to file a lien.
It is a form of receipt with the added value of a statement of waiver.
There are two forms of waivers that are used.
Conditional Lien Waivers
Conditional Lien waivers are lien waivers that are provided to the Owner by the Contractor under specific conditions. The condition is typically that they receive the payment within a certain amount of time.
Typically these waivers are used when payment is expected to lag a few days or weeks behind the date the waiver is issued.
We typically see this form of waiver when the waiver is provided at the same time as the invoice and there is some kind of corporate process that requires time for a check to be issued. In order for this type of waiver to be effective, you must keep it with proof of payment. It is important to note that up until the contractor receives the money, he could still file the lien and the waiver has no effect until he receives the money.
Unconditional Lien Waivers
An unconditional lien waiver is a waiver that is presented at the same time the money is received. This kind of waiver has no conditions.
Typically this waiver is used when there is no lag between the time the contractor presents the invoice and the time the Owner makes the payment (issues a check).
This is the kind of waiver you should require if you are a small business or a home owner that is issuing checks directly to the contractor with no lag or process to go through to issue a check.
Remember that anyone that provides service to your home or business can place a lien on the property, so one last recommendation I have is that you get a waiver from every service provider (even sub-contracted ones). This will give you the documentation you need in case your prime contractor ever fails to pay his subcontractors and you get hit with a lien.
Liens are a great tool for service providers to deal with property owners that don’t pay their debts. Liens are also an encumbrance that limits your rights over your own property.
If you are a property owner who pays their debts, be sure to protect yourself through use of waivers. Waivers will provide you with evidence of having satisfied your debt and you will have the contractor’s own statement waiving their rights to lien your property.
What about you? Do you ask for lien waivers on every project? Do you collect waivers from your subs? Tell me your stories.
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