Tag Archives: lien

Subcontractors: Do You Really Know What You’ve Waived in Your Lien Waiver?

By on April 27, 2015

Many subcontractors treat lien waivers interchangeably:  that is, if you’ve seen one, you’ve them all.  More and more, treating lien waivers in this manner could lead to significant and costly consequences.  Increasingly, general contractors and construction managers are providing subcontractors and suppliers with a new breed of lien waiver.  Unlike traditional lien waivers that sought only to protect the owner from the prospect of unwanted labor and materials (mechanic’s) liens cropping up on their projects, many new “lien waivers” are crafted with the intent for the subcontractor to agree to far more than a simple waiver of its lien.

In New Hampshire, and other jurisdictions, it’s well-settled law that contractors and subcontractors may waive their right to assert or perfect a mechanic’s lien by contract.  Savvy owners, developers and general contractors have long drafted contracts with this in mind.  As more and more subcontractors rejected provisions that limited or restrained their right to assert mechanic’s liens, owners, developers and general contractors have started to shift additional waiver language from subcontracts into lien waivers.  As an illustration, consider the following, taken in part from a lien waiver recently reviewed by the author:

 “In consideration of receipt of payment, the undersigned irrevocably and unconditionally releases and waives any and all mechanic’s liens or other liens or right to claim any and all mechanic’s liens or other liens against [the property].  Additionally, the undersigned waives and releases any and all other claims against the Owner, the property or the Contractor, or any other claims of any kind whatsoever in connection with the Subcontract and the property.  The undersigned shall defend, indemnify and hold harmless the Owner and Contractor against any lien, bond, claims or suits in connection with the materials, labor and everything else in connection with the subcontract.

In this instance, the subcontractor waived not only its right to assert a mechanic’s lien or any other lien upon accepting payment, but the subcontractor also waived its right to assert ANY claim related to the contract or the property.  Furthermore, the subcontractor has affirmatively agreed to indemnify the owner and contractor for any claims connected to the materials, labor or “anything else in connection with the subcontract.”  Among other things, this means that contractor has agreed to pay the general contractor and the owner for any costs they might incur in dissolving a lien on the project arising from the subcontractor’s sub-subcontractors or suppliers or in resolving any other claim or lawsuit connected with the sub-subcontractor or material supplier’s involvement in the project.  This so-called “waiver,” contains substantially more than a waiver of the subcontractor’s right to claim a lien in consideration of its partial payment on the subcontract.  

Some lien waivers go a step further.  Consider the following language, taken in part, from another lien waiver recently reviewed by the author:

 “In consideration of the receipt of the payment above, the receipt and sufficiency of which are hereby acknowledged, [the subcontractor] releases and forever discharges [the contractor and owner] of and from any and all claims, causes of action, liabilities and other obligations respecting payment for, upon or by reason of work, labor and/or materials furnished through the date shown below to the construction project.”

At first blush, this provision appears ordinary enough.  A more thorough consideration of the highlighted language, however, reveals that the provision is carefully calculated to insure that each month the subcontractor waives its right to pursue payment for all work performed before the date the lien waiver is signed. 

So why is this a problem?  To the extent that the subcontractor signing such a lien waiver performed extra work, change order work or has disputed work that occurred prior to signing the lien waiver, and the subcontractor accepts the payment referenced in the lien waiver without carving an exception for the added, changed or disputed work, the subcontractor has agreed to relinquish its right to any further payment, a lien or a claim for payment for that work.  In other words, the subcontractor has agreed not to be paid anything further for work performed through the date the lien waiver is signed, regardless of whether the subcontractor is otherwise entitled to payment.  In tying the subcontractor’s waiver to a particular date in time, rather than to an agreed upon amount to be paid, this waiver extinguishes any claim for payment for any work performed that wasn’t included in the subcontractor’s payment for which the lien waiver was signed.  This subtle, but very important distinction, can prove costly when the subcontractor fails to appreciate its impact on its right to payment.

Other lien waivers seek to make the subcontractor a trustee, converting the funds paid to the subcontractor into trust funds for the benefit of its subcontractors and suppliers, by agreement.  Take the following example:

 “The undersigned [subcontractor] acknowledges and agrees that it is receiving the funds paid in consideration of this payment application as a trustee, and said funds will be held in trust for the benefit of all subcontractors, materialmen, suppliers and laborers who supplied work for which the beneficiaries or their property might be liable, and that the [subcontractor] shall have no interest in such funds until all these obligations have been satisfied in full.”

In this instance, rather than taking payment as the rightful owner of the funds paid, the subcontractor accepts payment as a trustee for its sub-subcontractors and materials suppliers, installing affirmative obligations and fiduciary duties on the subcontractor to its sub-subcontractors and suppliers, which otherwise do not exist.  By virtue of the language in this provision, the subcontractor has agreed to restrict its discretion and ability to use the funds paid to it for its work as it deems necessary, replacing its discretion with the affirmative obligation to hold and distribute the funds paid to its subcontractors and suppliers on behalf of the owner and general contractor.  In a perfect world, every subcontractor would pay each of its sub-subcontractors and suppliers in full out of each payment it received on a project.  In the real world, there are often good business reasons for subcontractors to withhold some or all of the payments claimed due by its sub-subcontractors and suppliers, or to apply certain portions of the payments it receives elsewhere.  This language removes the subcontractor’s discretion to do so.

With increasing frequency, developers, owners and general contractors employ “lien waivers” intended to do much more than insure that mechanic’s liens aren’t perfected against a property after payment has been made.  Instead, this new breed of “lien waivers” is intended to create “knowing” waivers of subcontractors’ affirmative rights after they have signed their subcontract.  These “lien waivers” are intended to rewrite the bargain to which the parties agreed in their subcontract by downshifting the owner’s and general contractor’s desired contractual terms into a lien waiver when it might otherwise have been rejected in the subcontract.  It’s no longer sufficient for subcontractor’s to review only the proposed subcontract and scope of work.  Subcontractors must review proposed lien waivers carefully to insure that the lien waivers aren’t an agreement not to be paid.  If you have any questions or concerns regarding the provisions of your lien waivers, consult your construction attorney for a thorough assessment of the risks and exposures.

 

What Every Massachusetts Subcontractor Must Know to Limit Risk and Get Paid for Work in New Hampshire

By on February 2, 2015

Massachusetts subcontractors securing work in New Hampshire will encounter an unfamiliar legal landscape containing more than one trap for the unwary. In order to strike a fair deal and to put your business in the best position to get paid for your work, every subcontractor should be aware of certain basic differences in laws of the Granite State.

Put Your Business in “Good Standing”

Before any foreign based entity can transact business in New Hampshire, it must be registered with the Secretary of State. The process for registering your business is relatively straightforward and requires that the entity file several basic documents, pay a filing fee and name a registered agent in New Hampshire to accept service of process on behalf of the foreign entity. After complying with the Secretary of State’s requirements, your business will be in Good Standing with the State of New Hampshire and ready to move forward with projects in New Hampshire.

Striking a Fair Deal

In order to reach an agreement with a general contractor or construction manager that your business can live with and live up to, you need to know the laws that govern your contract. New Hampshire law varies in important ways from its counterpart in Massachusetts. Being familiar with some of the basic and important distinctions in the law will put your business in a better position to compete and succeed on your subcontracts.

One of the more important distinctions of which to be mindful is that in New Hampshire a subcontractor can waive its right to assert a mechanic’s lien against a project by contract. Because many general contractors, construction managers and savvy owners in New Hampshire know this, these waiver provisions are found commonly in contracts provided to subcontractors. Because Massachusetts law prohibits these provisions, subcontractors agreeing to perform work in New Hampshire must devote full attention to this detail, in order to avoid extinguishing mechanic’s lien rights unknowingly. If any doubts linger about whether a particular provision in a contract will result in a waiver of lien rights, it is important to consult your attorney.

Another important distinction exists with respect to conditional payment provisions, often known as “pay-if-paid” or “pay-when-paid.” With the enactment of the Massachusetts Prompt Payment Act in 2010, subcontractors gained significant rights in private contracting that were formerly the subject of bargaining between the parties. One of the chief among those rights is that in private construction projects with a prime contract in excess of three million dollars, so-called pay-if-paid provisions are unenforceable except in two rare instances. Since the enactment of this statute, pay-if-paid provisions in Massachusetts rarely result in significant losses to subcontractors.

In New Hampshire, however, no prompt payment act or functional equivalent has been enacted, and the New Hampshire Supreme Court has not addressed the pay-if-paid issue directly. Accordingly, significant uncertainty remains regarding the enforceability of these provisions in all private construction contracts, and subcontractors are wise to avoid or limit these provisions when possible.

Working in tandem with the Prompt Payment Act, the recently enacted Massachusetts Retainage Act limits owners and general contractors withholding retainage to no more than five percent on each progress payment on private construction contracts of three million dollars or more. Like the Prompt Payment Act, New Hampshire has no equivalent law to the Retainage Act. As a result, retainage provisions in construction contracts are subject to bargaining, and general contractors and owners commonly propose withholding retainage of ten percent or more. Because these provisions are not subject to any maximum by law, subcontractors should endeavor to negotiate these provisions down or, at a minimum, negotiate a phased release of retainage over the course of a project. Reducing or phasing retainage is vitally important for subcontractors that perform work at the inception of a project, like site work contractors, because commercial contracts commonly direct that withheld retainage be released only after completion of the entire project, and not after completion of a particular subcontractor’s work. As a practical matter, this can mean months or years of delay until retainage is released if the retainage provision is not drafted or revised to avoid this result.

Getting Paid

Subcontractors that avoid waiving lien rights, avoid pay-if-paid provisions, and negotiate fair retainage schedules have taken important steps toward getting paid for completed work. The job isn’t done completely, however, as important steps remain to secure payment. Most notably, subcontractors are well advised to take steps to preserve their mechanic’s lien rights at the outset of a project and during its duration as New Hampshire’s mechanic’s lien law and procedure are markedly different from that encountered in Massachusetts.

New Hampshire mechanic’s lien law draws an important distinction between those that have a direct contract with the project owner (usually the general contractor) and those that do not (subcontractors and suppliers). If you fall into the latter category, as a first or second tier subcontractor or supplier, you must have a contract with the general contractor or first tier subcontractor and provide the project owner written notice of your lien rights. Ostensibly, the law requires the written notice to prevent the owner from becoming subject to liability for claims asserted by parties that were unknown to the owner. As practical matter, providing written notice to the owner of lien rights is a matter of preserving a subcontractor’s ability to establish, perfect and maintain a mechanic’s lien on a project in the event that payments are late or aren’t coming at all.

In New Hampshire, a subcontractor’s right to assert and enforce a mechanic’s lien is directly tied to when the subcontractor provides the required notice of lien rights. In an ideal world, subcontractors would provide the required notice to the owner at the outset of the project, preserving the full value of their lien. More frequently than not, however, subcontractors fail to send the owner notice of lien rights until after beginning work and a problem has arisen. When that occurs, a subcontractor’s lien rights are limited to the amount remaining due from the owner or general contractor to the party upstream of the subcontractor. In other words, the subcontractor’s lien is good only to the extent of any payment remaining due to the party from which the subcontractor will be paid when notice is given to the owner. This can be problematic when payments slow down or stop completely toward the end of a project and the subcontractor failed to provide notice of its lien rights at the beginning of the project, because notice may arrive at a time when little or nothing remains due to the party from which the subcontractor seeks payment through its contract. In that instance, even if the subcontractor has complied in all other respects with its contractual obligations, no valid lien exists in connection with its work on the project. As a result, the importance of providing early notice of lien rights to the owner cannot be overstated.

The lien process has other pitfalls for uninitiated. In New Hampshire, mechanic’s lien rights are valid and enforceable for only 120 days following the subcontractor’s last date of work, or delivery of materials in the case of a supplier. Ordinarily, a subcontractor’s last date of work is calculated from the point of substantial completion of the subcontractor’s work, and closing punch list items or returning to the project to remedy deficient or defective work will not support an extension of the 120 day deadline to perfect the lien.

In order to perfect a mechanic’s lien, subcontractors must file suit in court, petition the court for a mechanic’s lien attachment and record the lien with the Registry of Deeds in the county in which the project is located within the 120 day period subsequent to substantial completion. Failure to do any of the foregoing is fatal to enforcing a mechanic’s lien.

So, given the complexities associated with establishing and perfecting a lien in a timely fashion, why do it when the general contractor or owner will simply “bond it off?” The simple answer is that in New Hampshire the prevailing law does not compel a subcontractor to accept alternate security for its perfected lien. As a result, owners and general contractors cannot force a valid mechanic’s lien to be discharged solely on the basis of providing alternate security for subcontractors’ claims. In many circumstances, there are very good reasons why subcontractors prefer to maintain mechanic’s liens rather than accepting bonds or other security. For a more detailed recitation of those reasons, or to understand mechanic’s lien law in New Hampshire in greater detail, please consult a New Hampshire construction attorney.  

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