Top 5 Mechanic’s Lien Waiver Pitfalls for Contractors and Subs

For contractors and subcontractors in New York, Mechanic’s Lien Waivers are a part of life, but the potential risks to the contractor in waiving more than intended or understanding of the terms are not always as common. Owners (and often their lender) require that the project be kept lien free through progression of the work to final completion.

This means that, as a contractor or subcontractor, you will undoubtedly be asked to execute a Mechanic’s Lien Waiver at some time or another, often in conjunction with applying for payment. If you do so however without paying attention to the specific language of the Waiver, you might lose more than you bargained for.

In general, there are two types of Mechanic’s Lien Waivers: those that are part of a contract, and those that are separate and executed later during the progress of your work (i.e. with the receipt of progress payments). As a practical matter, you don’t need to worry about waiving your right to file Mechanic’s Liens pursuant to contract terms, as any contract seeking to limit (or pre empt) a contractor’s right to file liens would be unenforceable under New York construction law.

In High Tech Enterprises & Electrical Services of N.Y., Inc.,[1] a subcontractor sued a prime contractor to recover for breach of contract and to collect under a bond that had discharged its mechanic’s lien. The court dismissed the contractor’s counterclaim for attorneys’ fees, which was based on a clause of the subcontract which provided that the subcontractor would not file any lien and would reimburse the contractor for attorneys’ fees in the event that one was filed, stating that this clause was “unenforceable as against public policy.” New York Lien Law Section 34 is clear that “any contract, agreement or understanding whereby the right to file or enforce any [mechanic’s] lien is waived, shall be void as against public policy and unenforceable.”

A contractor, subcontractor, material supplier, or laborer however can be required to execute and deliver a Waiver at the same time as, or after, payment is made.[2] For that reason, you can be required to waive and release your lien rights when payment is made to you. The problem in those cases becomes satisfying your owner without waiving more of your rights than you should. Here are some tips to avoid common contractor pitfalls with respect to New York Mechanic’s Lien Waivers

  1. Use your own Waiver of Mechanic’s Lien form. Whenever possible, submit your own Waiver of Mechanic’s Lien, which you can develop with your attorney’s advice to guard you against these and other pitfalls. This allos the contractor to retain control over your waiver of lien rights and ensure that you keep your Waiver language narrow enough to preserve other potential claims.

 

2. Be wary of waiving subsequent lien rights in connection with partial payments. In all fairness, when you release lien rights in connection with progress payments, you should only be releasing your right to lien for the work that you have already completed. However, some owners use forms which contain wording to the effect that you waive claims that you “now or hereafter may have” to a lien on the property. This language, unfortunately, can be construed to waive your right to all liens—even those lien rights which arise due to subsequent outstanding payments. This language should be avoided in most situations. (another good reason to have and use your own waiver of mechanic’s lien form).

 

3. Make the Waiver conditional. Although the economy has greatly improved over recent history, it is still not impossible that your project owner could go bankrupt sometime after paying you. This becomes an issue, however, if your project owner files for bankruptcy within 90 days of your payment clearing, because, in that case, the payment might be looked upon as a “preference”—unfairly paying one creditor at the expense of others on the eve of a bankruptcy—and can be cancelled, requiring you to repay the money. In that case, you would have waived your right to lien, but you would also not have the money. A better route is to insist on language in your Waiver of Mechanic’s Lien that makes your Waiver conditional not only on the receipt of the money, but also conditioned upon the owner not filing for bankruptcy within 90 days of funds clearing.

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4. The Waiver should apply only to lien rights. Ideally, you want to appease your owner (and their lender) with a Waiver of Mechanic’s Lien while preserving as broad rights as possible to allow other potential claims. For that reason, avoid signing a Waiver of Mechanic’s Lien that waives your right to “any and all claims” or that releases the owner from “all liability”. A better Waiver of Mechanic’s Lien language for contractors and subcontractors in New York would waive only lien rights while also preserving contractor’s other potential claim rights.

5. The Waiver should relate to payment, not performance. To explain, a Payment Waiver waives your lien rights only to the amounts for which payment is acknowleged (in other words, the amount of the payment that you’re receiving at the time of the waiver), while a Performance Waiver relates to all work performed up to a certain date. One concern for the contractor with a Performance waiver is that it could be interpreted to waive your right to lien for retention on the progress payment, among other things. Your best bet for a Waiver of Mechanic’s Lien is to acknowledge receipt of your current payment and waive and release your lien rights in an amount equal to that payment: look for a specific dollar amount, and be wary of Lien Waivers that refer instead to “all work up to” a certain date. Contractors should also be wary of signing and delivering a Waiver of Lien indicating contractor’s receipt of payment when if in fact contractor has not actually recieved the claimed payment as if payment is not actually provided the contractor may no longer be able to claim a lien for such payment.When executing Mechanic’s Lien Waivers, following these steps and understanding what is being waived is essential for the New York contractor. Although courts do sometimes find a way around lien waivers on behalf of contractors and subcontractors, the result is not guaranteed and not a place a contractor wants to be defending their claim for payment. Starting off on the right foot is the best way for the contractor to take control of their lien rights and be positioned for a better outcome. The language in legal documents can be tricky; if a project owner will not allow you to use the Waiver of Mechanic’s Lien form that you’ve developed, having legal review of the proposed language may be required to protect your rights.

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John Caravella, construction attorneyThe author, John Caravella Esq., is a construction attorney and formerly practicing project architect at The Law Office of John Caravella, P.C., representing architects, engineers, contractors, subcontractors, and owners in all phases of contract preparation, litigation, and arbitration across New York and Florida. He also serves as an arbitrator to the American Arbitration Association Construction Industry Panel. Mr. Caravella can be reached by email: [email protected] or (516) 462-7051.

This is a general information article and should not be construed as legal advice or a legal opinion.  Readers are encouraged to seek counsel from a construction lawyer for advice.

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[1] 113 A.D.3d 546, 980 N.Y.S.2d 387 (1st Dep’t 2014).

[2] Id.

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