Three Common Lien Release Issues

We have seen a lot of mistakes folks make when it comes to issuing lien releases. In this article, we are going to discuss the three most common lien release issues and how you should approach each.

What form of partial and final waiver should I use?

The first thing you need to be aware of is where you are in the pecking order of any particular construction project. If you are the general contractor, you are going to be looking for something  different than if you are one of the subcontractors. Generally speaking, you want to give a narrow release when you are receiving a check. When someone is handing you a check for a release, you only release the fewest number of rights possible and you preserve the greatest number of rights. The converse is true if you’re giving a check to somebody. You want them to release anything and everything under the sun, so you don’t have to worry about those things being an issue later in the course of the construction project.

The basic form of release

The basic form of release is the release that’s found in Florida Statutes chapter 713. It is a form of both partial lien release upon progress payment and final waiver upon final payment. It releases contractor or subcontractor lien rights through a certain day for partial releases and through the time specifically stated on final releases. The component parts of the partial release upon progress payment include the amount of money that you’re getting and the through date which is the date through which the release rights are effective. Note that this release form does not cover any retention or labor, services, or material furnished after the through date specified. The final lien release, however, has only one major part, and that is the amount of money you are receiving. The final release form doesn’t have a through date. The most important thing you need to know is that this release form only releases the contractor’s lien rights. It releases no other rights that the contractor may have against you or the property.

Custom form of release

This release looks very different from the basic release form. This form is not found in the statute. The first thing you’ll notice in a custom form of release is that it has a lot more words. You need to read this type of release form carefully because you are giving up on a lot of other things, not just lien rights. The statutory release form only releases your lien rights. This form is releasing anything and everything that you may have as a possible claim. This include delays, change orders, any work done, and it’s all effective prior to and including the through dates. If you are a general contractor, this is the form of release that you should be getting from your subcontractors. With this, every time you give your subcontractors or suppliers a check effective through the through dates, all their rights go away. If you are a subcontractor and you’re receiving a check and having to give a release like this, you need to understand what rights you’re giving away. If you agree to a form of release in your contract, then that’s the form that you are bound to accept during the course of the project. So, if the general contractor or owner attaches a form of release to your contract, or they make a reference to the fact that you agree to use whatever release form they deem fit, you need to review it as you negotiate your contract. Negotiate the form of release just like you negotiate other components of the contract.

Not using a conditional release form when you’re giving a release without receiving a check

You need to condition your release upon payment of money. You can achieve this by issuing what’s called a conditional release whenever you’re giving a release without receiving a check. A conditional release is a release that is expressly conditioned upon payment. It is not effective until you receive the payment that’s recited in the document. A conditional release will say something like, “Notwithstanding anything to the contrary, this waiver and release is conditioned upon and not effective until the undersigned receives paid funds of XXXX.”  You are expected to put whatever amount you’re expecting to receive in the blank space. Statements like this makes the release expressly contingent on actually getting the money.

As a supplier, it is important you only provide releases that are contingent on actually receiving money. Let’s say as an electrical supply house, you provide an unconditional release to the electrician who gives it to the contractor, who gives it to the owner. But you never got your money. You only received an e-mail copy or fax copy of the check you were promised was coming. But that check never arrived. Your options to collect on the debt are severely limited because the release you issued is now effective to all the parties up the chain since they have no reason to know that you didn’t receive your money.

We have a client right now who’s a drywall contractor. He has a contract with a general contractor who has a contract with an owner. He was promised a check and based on his long-time relationship with this contractor, he gave an unconditional release based on the promise of a check which never arrived. We have now been forced to send a letter to the contractor and the owner saying “You have received the release but our client never received consideration for that release. Therefore, the release is void and unenforceable.” We are still waiting to hear back. But they have already funded the contractor based on our client’s release. We are going to be in a tough spot to suggest that the owner didn’t have the right to rely on that release. So, it’s absolutely critical that if you are giving a release without actually getting a check that you make it conditional.

Also, watch out for releases that are titled conditional but are not. Sometimes, we see releases that say conditional partial release and then when you read the document, they’re not conditioned. Conditional releases need to specifically spell out the condition – they’re effective once you receive the money you’re owed. The fact that the title says conditional means nothing if the body of the release does not actually contain conditional language.

Another thing you need to know about a conditional release is that it must correctly indicate the amount of money that you’re expecting to receive. Don’t just put in $10 as the condition. If you do and you receive $10, the condition is satisfied.

As a general contractor, you need to be careful about receiving and paying against conditional releases from subcontractors and suppliers. If the electrician gives you a conditional release and you give the electrician the money, that release is good because you’ve now satisfied the condition in the release. Right? If there is ever an issue, you would say “well, the release is conditioned on receiving $25,000 and here’s the canceled check for $25,00; condition satisfied and the release is good”. Not necessarily.  If the electrician has to also give you a release from his supplier and that supplier’s release is also a conditional release, you don’t have a direct ability to control that condition. You pay the electrician but the electrician may not pay the supply house, then the supplier can put a lien on the job. To avoid this, you have two options. The first one is to ask the subcontractor to fund the supplier or otherwise give you an unconditional release from the supplier. The other one is to issue a joint check.

Using the wrong “Through Date” on your release

This is another big mistake that we see happen all the time. What “through date” should you use? What if the “through date” and the payment amount do not match? The through date is the effective date of the release. It can be signed today but has the through date of 2 months ago.  That means, you can sign the document today and say that the effective through date of this release is April 5th, March 9th or September 1st. You can make it any day you want. Know that the through date is going to control over the payment amount. For example, you are owed $100,000. If you sign a release in exchange for S75,000 and the through date is the end of the month when you’re expecting a $100,000 check but only got $75,000, you just released $100,000 worth of your rights for $75,000. What you need to know is that if the through date and the payment date don’t match, then you need to change one of them or both of them, but you cannot accept it as it is.

Why does the release say $10?

I’m not getting $10 neither am I giving them $10. So, why do I need to have a release that says $10? $10 releases are valid if you receive any type of consideration and sometimes even if you receive no money. For example, you’re a subcontractor on a job, and you have sent your notice to owner only because you’ve signed the contract, but you really haven’t done any work. Now that the owner and the contractor need a release from you, but you haven’t done anything or submitted any bills. In this case, issuing a $10 release at that point is perfectly fine. If you’re expecting a check, however, let’s say it’s $25,000, you must ensure your release says S25,000 and not $10. If you are a contractor and you are giving money and getting a release, you would always like it to say $10. The reason is that you don’t want any argument later. For instance, if the subcontractor comes to your office to pick up the check or you mail it to him or her, and they say “wait, you only sent me $20,000 it should have been $25,000.” If the release said $20,000 or $25,000, that’s the consideration that was given. And if they’re claiming more money, they may have a basis to say that you shorted the payment. However, if the release says $10, and you gave them $20,000, and they want $25,000. You can say “it doesn’t matter because I gave you consideration that you thought was adequate, I said $10 and I gave you a $20,000 check and the through date is the end of the month, we are done!”

If you are a general contractor, you would like to have all your releases to subcontractors and suppliers say $10. But If you are a sub, I would suggest that you scratch out $10 and put the actual amount that you’re expecting to receive on the check.

The only other time we see that a $10 release is acceptable is when a contractor does not want the owner to know what he or she is paying to the subcontractors. So maybe a contractor has a lump sum contract with an owner, and they don’t want the owner to be able to run through all of the releases, and add the amounts and realize that the contractor is charging so much more than he’s actually paying for the work. Some contractors may want all the releases given to them by the subcontractors and supplies to be $10 so that the owner is unable to add up all of the amounts associated with the project. The way to deal with that if you are a subcontractor is to issue two releases. You would give a release that has the correct amount on it and after you get that money, you will give the contractor a subsequent release, and it would say $10 for the same period.

Lien Release Pitfalls

Many folks don’t understand how important it is and why legally it is essential that you read and understand what your lien release says. We’re going to discuss some very specific things you can do to increase your chances of protecting yourself when you exchange your release for payment.

The Legal Significance of a Lien Release

A lien release is a document that releases certain rights. Most of the time, these rights are lien rights but depending on the document itself, they could be more. When we deal with a construction case, one of the first things we do is to look at the releases. The reason is that when we can line up the releases, we can extinguish certain claims through the date of those releases. So, it’s important that you understand what the release is doing when you’re exchanging it for payment. This will ensure you don’t give up more rights than the check that you’re receiving.

In construction, almost every release is called a lien release or a lien waiver. And depending on the language of the document, you may be releasing rights far in excess of just your lien rights. That means if you sign one of those releases characteristically known to have lots of fine print, you are probably releasing rights far in excess of your lien rights. The document probably says that you are releasing any claims for change orders, delays, costs, and many other things. This may not be a problem if you don’t actually have any of those claims, but if you have those claims and you wish to assert them later, when you sign a release with that language, then you’re giving away those rights. Here is a practical example. We had a client who was a contractor and was making partial payments to a subcontractor. The term of the release that the subcontractor was signing every month was a broad release (this releases more than just lien rights).  While the document itself was titled lien release, it was effectively broad, and as a result, that subcontractor was releasing all of his rights every month. When a dispute arose, the first thing we did is to show the subcontractor that he has been releasing all these claims that he thought he now had every month. He signed a release – a good thing for our client, the contractor.

Finally, remember that the perspective that you have on a release is dependent on whether you’re giving a release or getting a release. If you are giving a release in exchange for payment, ensure that you are protected. But if you are expecting a release from somebody, make sure that you get the broadest release possible.

Pitfall #1:  Not Negotiating the Form of Release at the Time of Contract

Florida statutes have a basic form of release, and the law says that no one can make you sign a release form other than the form that’s in the statute. However, what is important to know is that if you sign a contract and that contract says that you will use the form of release prescribed by the owner or the contractor or that the sample form that you’re going to use is part of the contract, then you are bound to use that form. Therefore, when you are negotiating and reviewing your contract don’t skip over the exhibits, you need to look at all of them and make sure that the release that you agree to provide every month is consistent with the release that you’re willing to give. If your contract requires a specific form, then that’s the form you have to use. To avoid this problem, you need to negotiate the form of release you prefer to use at the time of contract. Whenever your contract is silent on the issue, but the contractor demands that you use his form, what do you do? This is called the Golden Rule which says he who has the gold makes the rules. That means you have to make a business decision unfortunately on whether or not you’re going to give up your rights in order to get a check. It’s not that the contractor has the right to demand a release other than the statutory form, it’s just that you have to decide whether you’re going to keep waiting in order to get paid or you’re going to sign the release and work out some compromise. The best way to avoid this in the future is to have an understanding at the beginning of the contract on what the release forms are going to look like.

Pitfall #2:   Having the Wrong Through Date (or no Through Date)

The text above is a sample of a basic release form. This form says that this release is effective for the materials furnished through a date certain. The effective date of this release is the date that’s inserted there. Make sure that the through date in the release matches the amount of money that you’re expecting.

This release also has a spot where you can put in the amount. If you’re expecting a check for $25,000, make sure that the date that you are putting as the through date in the release is the equivalent of the check that you’ll receive. If there is no through date in the release, then the release legally speaking is effective as of the date that you signed it. That means that if you are expecting a check for the work through the end of April and you sign the release in June, but it has no through date, the legal impact of that document is that it’s a release as of June.

Pitfall #3:   Not Using Conditional Release Language

A conditional release is a release with conditional language. Here’s the language for a conditional release “this waiver and release is expressly conditioned upon the undersigned actual receipt of the above referenced amount in paid funds. Otherwise, this waiver and release is void.” If you are giving a release before you are actually receiving payment, you should use conditional language in your release. It’s also important that when you use conditional language, you don’t use the normal recitation of consideration of $10. Use the amount that you’re actually expecting to receive. So, if you’re giving a release in exchange for $25,000, the release should say $25,000 and not $10. This is because obviously, the condition isn’t receipt of $10, it’s receipt of the $25,000.

Something we hear a lot is that “but I kept the original release, isn’t that enough?” The short answer is no. The fact that you have an original and someone else has a copy (that is, in fact, a true copy and not a forgery) doesn’t give you any leverage. Sometimes people want the originals but legally speaking a copy is as good as the original.

One of the things that we recommend to speed up and increase the use of conditional language is to make a stamp with the conditional language stated above. So that every time you give a release, you can just stamp it and make that release conditional.

Pitfall #4:     Not creating exceptions to the release

The two most common exception that we see are claims for delay or claims for unexcused or not fully approved change orders.

Keep in mind that if you sign a release and that release has a broader language then the standard form that’s in the statute (most releases that people sign are usually broader than the statute), it probably says that you’re releasing claims for cost, expenses, unexecuted change orders or delays. It probably has a long list of items that you’re releasing. If you don’t preserve your claim, you will lose it by signing those types of releases. So, the question is how do you protect yourself. Here’s a sentence you can use. You can add to the documents, and you can handwrite it or make a stamp that says “Notwithstanding the foregoing this waiver and release specifically excludes _______. (This is where you’re going to insert what you don’t want to release)

The next thing to remember is that you have to do it month after month. If you do it in the first month but forget to do it in the second month and you sign a release. That releases everything from that date back. You’ve lost those rights. So, you need to make sure that if you have exceptions to the release that you carry them forward month after month.