Do I need to have my contractor sign a lien waver?

Question

I am using a reputable company to do some work for me under 5K. They will bill me when the work is done. I will look at the work, and if satisfied I will send them a check. Do I need them to sign lien waver at some point?

Jason Nesbitt · Answer

This is definitely the way do it.  We don't go as far as getting them notarized and I just use DocuSign, but the notarized signature is a good idea.  All you have to do is pop into a UPS store to do that.

If you don't get a lien waiver signed, the worst thing that could happen is that the sale of your property is held-up due to a mechanics lien. This would be a disaster on a flip as the goal is to get in and out as quickly as possible.  The lien waver is just certifying that you paid them for work completed and they can't place a lien on your property for that amount.  The GCs that we work with have no issue in doing so.  Send me a message if you want me to send you a blank copy of the one we use.

George Azita · Answer

But, don't forget that getting a Lien Release from the Prime Contractor (the contractor you hire) is not worth the paper it is written on when the Prime Contractor does not pay the sub contractors nor material suppliers. A Lien Release from a Prime Contractor does not release the property owner from money owed to sub contractors and material suppliers.

As someone mentioned, the property owner needs to get a Final and Unconditional Lien Release, but it needs to come from the sub contractors and not from the Prime Contractor.

The only way I will give a Final and Unconditional Lien Release is when the contractor hands me a bonafide Cashier Check from a well-known bank because the word ' Unconditional' means the contractor and property owner are released from all obligations to pay the sub contractors even if the Cashier Check is counterfeit and bogus. I think some Unconditional Releases stated that they became effective when the payment cleared the bank, but I can't remember. The problem with the Unconditional Lien Release is the lender who dibbies out the money for the job will release all the remaining funds to the Prime Contractor. So, the Prime Contractor will have all his money by the time the sub contractors find out that the checks they received are bogus and then the subs get to sue the Prime Contractor, get to pay tens of thousands of dollars to try to collect money owed to them and most-likely will never collect one penny. I had a friend who got stiffed for $240,000 by one of Los Angeles' largest contractor who was building thousands of homes in Universal City near Universal Studios and this contractor stiffed every contractor who worked for him and still remained in business because he knew how to work the system in regards to Lien Releases and construction laws.

George Azita · Answer

The only time you need sign Lien Releases is when you are dealing with sub contractors who work on your job site and when you are dealing with material suppliers who deliver materials to your job site, but your Prime contractor (the contractor you signed your contract with) is not required to give you a signed Lien Release, but many will give you one just to appease you, or because a high percent of contractors don't understand the contracting laws.

The purpose for a Lien Release is so when you (the property owner) has construction work performed you want to make sure all the sub contractors and materials suppliers are paid.

Since you are dealing with only the Prime Contractor (the contractor you hired) the Prime Contractor does not have to sign a Lien Release because you already know you hired the Prime Contractor and you are aware of how much you owe him.

Every sub contractor has to give you a Lien Release because you need to make sure the sub contractors are paid before you pay the final amount to your Prime Contractor.

This is why the Lien Release is for sub contractors and how it works. When you hire the sub contractor many workers show up to work on the job and you don't know Adam from Eve regarding whether or not your Prime Contractor is using sub contractors because your Prime Contractor can lie to you and tell you every worker is one of his employees. Then, after you pay the Prime Contractor all his money you could get bills for thousands of dollars from sub contractors.

TO PREVENT THIS LEGAL PROBLEM WITH SUB CONTRACTORS the sub contractors are required by law to give you what is called a Preliminary Notice within 21 days from the time they start work  in most states. This Preliminary Notice is to notify you that they are sub contractors, they are working on your job and the notice tells you that if your Prime Contractor does not pay them then they will come to you for the money and sue you if you don't pay them. So, to make sure you are free from the sub contractors you need them to give you a Lien Release that stated that they have been paid

There are two types of Lien Releases you need to get from sub contractors. The first Lien Releases are for Progress Payments for every time the sub contractor is paid as the job progresses and the second type Lien Release is a Final Payment Lien Release (can't remember the exact name) for when the job is 100% finished.

As the job progresses, the property owner usually writes checks and makes payments directly to the sub contractors.

If a sub contractor fails to give the property owner a Preliminary Notice and nobody pays the sub contractor then the sub contractor is poop-out-of-luck and can sue you and file a Mechanics Lien against your property, but the Mechanics Lien will expire within something like 90 to 120 days and if the sub contractor takes you to court he will lose the case.

I've been a contractor for 50+ years and the following is a clause in my contracts:

"LIEN RELEASE - XYZ CONTRACTOR will never file a Mechanic's Lien on a property unless a payment is not made when due. The Conditional Waiver And Release upon Final Payment is a form that protects you (the Buyer). This form states that after making a payment, when due to XYZ CONTRACTOR, XYZ CONTRACTOR is giving up the right to file a Mechanic's Lien.  Since XYZ CONTRACTOR is your prime contractor, XYZ CONTRACTOR is not using sub contractors, and all materials and supplies are delivered directly from XYZ CONTRACTOR'S own warehouse, XYZ CONTRACTOR, nor XYZ CONTRACTOR employees, nor any of XYZ CONTRACTOR'S suppliers are required to provide you with a lien release. Even so, there is no harm in providing the Lien Release even before XYZ CONTRACTOR receives any payment."

The same Lien Release requirements apply to material suppliers who deliver materials to your job site. Suppose, you hire a Prime Contractor and a lumber company delivers a truckload of lumber. Since you don't know whether the lumber came from your Prime Contractor's warehouse, or whether it came from a lumber company then the lumber company is supposed to give the property owner a Preliminary Notice so the property owner is made aware that if the Prime Contractor does not pay for the lumber then the property owner must make sure the lumber is paid for by the Prime Contractor, or paid for by the property owner, or the property owner will be sued. So, the property owner is required to give all materials suppliers a signed Lien Release and, of course, it is better to get those lien releases from the materials suppliers and sub contractors before paying the Prime Contractor.

Most property owners and even most contractors don't understand the Lien Release laws and Prime Contractors try to make their life easy by giving every customer a Lien Release, but since many contractors don't understand the laws the customers get ripped off and end up paying for their work several times before lawsuits are settled.

It is good to know that you can tell sub contractors and materials suppliers to pound sand when they don't provide you with a Preliminary Notice. Otherwise, how would you know whether or not sub contractors are working on your job.

Jennie Berger · Answer

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Hope this helps!

Jason Nesbitt · Answer

We do fix and flips using hard money and they require lien wavers to be signed before releasing funds.  We pay the GC first and then seek reimbursement from the construction loan.  When we decide that we need a draw from the construction loan, we ask our GC to sign a lien waver for what we paid and they have no issues doing so.  You can absolutely get them to sign lien wavers as you pay them and I definitely recommend doing so.  In the fix and flip business, time is critical and you don't want to mess around with having liens on the property when you put it on the market.

Jason Nesbitt · Answer

This is a very good point.  We supply most materials and hire several subs ourselves, but there are still some subs working under the GC that we need to get get lien wavers from.  I think we will start changing the way we use lien wavers.  Thank you for jumping in on this thread George.

George Azita · Answer

This is not accurate since you don't need to get a lien release from your contractor because you signed your contract with the General Contractor, you know how much you owe  your contractor, the contract you signed states the amount you owe your contractor and copies of your checks prove whether or not you paid all moneys due. The lien releases need to come from the sub contractors who work on your job and lien releases need to come from material suppliers who deliver materials to your jobsite. You do not need a lien release for materials when the materials come from the general contractors warehouse and you don't need a lien release when a supplier delivers materials and does not give the property owner a 21-Day Preliminary Notice and you don't need to get a lien release from sub contractors who don't give the property owner (you) a 21-Day Preliminary Notice.Banks and lenders may ask the general contractor and material suppliers to provide lien releases, but that is a request solely so the bank can protect itself, but the general contractor does not need to give the property owner a lien release and is not required to do so by contracting laws.The lien release laws have to be the most-misunderstood laws in the contracting business and thinking you are free from lawsuits because your prime contractor gave you lien releases causes property owners to lose hundreds of thousands of dollars and are often put into bankruptcy by bad contractors.The reason the lien release laws are very serious to understand is general contractors work on very small profit margins and even the best contractors make huge mistakes when bidding jobs. Even though a contractor has a good reputation one mistake when bidding a job can cause the contractor to lose more money than he can afford to lose causing his business to spiral out of control and crash down like a set of dominoes and all this is happening when he is working on your job. Then, the contractor robs Peter to pay Pail and guess who Peter is. He is you!!!

John Warren · Answer

@Mario Morales I never used lien waivers until I started using construction loans for my rental portfolio. On day to day unit turns, we just pay our guys and move on. Some of our jobs are over that 5k threshold, but we it would be exhausting in the apartment world trying to keep track of separate lien waivers.

Now I just did a complete rebuild on a Chicago style porch, and that is a different story. We are talking around 20k in materials, so we are getting a lien waiver for the bank.

Kai Kopsch · Answer

get a final and unconditional Lien Waiver signed before you make the final payment and before they start asking for their insurance.

Do I need to have my contractor sign a lien waver?

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