Builders and Contractors Exchange
Weekly Bulletin: 02 Feb 2004
Lien Waivers: Pitfalls For The General Contractor
By: Richard J. Crouch
What's that lien waiver for anyway?
Depending upon how they are drafted, lien waivers can serve multiple purposes. One key purpose, though, is to give limited peace of mind to the construction lender, buyer's lender, or real estate title company involved with either or both, who want to insure monies paid to the contractor flow to those who have furnished labor or materials, or both, for the project and that no liens will be filed against the property during or after construction. However, here's one of the key pitfalls: How many contractors or subcontractors have signed a lien waiver affirming they have paid all persons who have furnished labor or materials through them for the project before they actually receive the money for that pay application, when in truth they need that money to pay those persons?
The typical response is: But everyone knows I'm going to use the money to pay those persons once I get paid, so what's the big deal? The big deals are, primarily, threefold. First, most lien waivers are signed under oath, so such an inaccurate representation is, in legal terms, a fraudulent misrepresentation (i.e., a lie given to induce another). Second, Virginia Code §§ 43-13 and 13.1 make certain inaccuracies fraudulent and, potentially, criminal. Third, the contractor has set himself up for both breach of contract and fraud claims, not just by the owner, but also by any other person made an arguable third-party beneficiary to the contract, such as the lender or the title company.
Revising the lien waiver language to say that payment will be made from the proceeds received with the applicable draw can easily solve this problem. Or, if you intend to withhold money because of a contract dispute, simply say so and, at worst, the disputed funds may be withheld from that particular draw. Finally, watch out for waiver language in the lien waivers. Often, lien waivers include releases of claims, not just for the monies you have received but also with respect to all work previously done, which would include change order disputes and other disputed matters. If signed, the broader the language, the greater the rights you may be later surprised to find you might have waived.
Our real estate attorneys are seeing increased action by owners, lenders and title insurance companies to hold contractors and subcontractors to the representations in their lien waivers, and to their obligations, contractual and statutory, to properly flow those monies to those who have furnished labor or materials, or both, for the project. So, before you sign your next lien waiver, be cautious, read it fully, understand it, include any exceptions that are applicable (not just to payment but also to claims), and if you have any questions contact your attorney who can advise and assist you as necessary. For more information about these or similar issues, please contact Richard Crouch, or any of the other members of the Vandeventer Black Construction Team.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.