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New Elements of Construction Lien Waivers

Article  |  Real Estate & Construction Law  |  February 26, 2013

For many years, those hiring a contractor, subcontractor or supplier, and their lenders, title companies and others, have relied on written lien waivers for assurance that at the time of a payment contractors and their subcontractors and suppliers waive any right to claim a mechanics lien for work performed prior to the date of the waiver.   In a recent Utah Court of Appeals decision, the court held that unless a lien waiver form includes specific elements as required by Utah’s mechanic’s lien act, a lien waiver not on the prescribed statutory form is unenforceable.

As background, in 2007, the Utah Legislature enacted legislation that created a broad prohibition on lien waivers.  Responding to criticism from lenders and others, the Legislature in the same year amended the legislation to provide that a lien waiver is enforceable to the extent of a payment only if the lien claimant signed the waiver and received payment of the amount identified in the waiver.   The amended statute adopted two forms of lien waiver -- one for progress payments and the other for final payment, and indicated that the form of waiver “may be in substantially” the form provided in the statute.  Focusing on the apparent statutory leeway given to use other forms of waiver, many owners, contractors and lenders crafted their own forms which were similar in purpose, if not in content.  However, a recent Utah case interpreted the lien waiver statute such that, to be valid, all lien waiver forms must include specific elements.  Any lien waiver form that does not include the required elements is invalid.

Case Summary

In the 2012 case of Meyers Construction v Countrywide Home Loans, et al, the court wrote that the overarching purpose of the lien provisions contained in Utah Code 38-1-39 is to protect the rights of contractors and help to ensure they are paid for their work in improving property.   In Meyers this case, the plaintiff was the contractor for two homes to be built for the same owners with financing to be obtained from two separate lenders.  In the several draw requests issued by the contractor, the document wording included a certification “that no suppliers, subcontractors, laborers, or other persons are claiming or are entitled to claim a lien against the property securing the loan.”  In addition, a final draw request was similarly worded and added language that “the General Contractor has to date been paid in full . . . and that no such sub-contractors, suppliers, materialmen, laborers or other persons providing goods and services used in the improvements to the property have unpaid claims” and “no liens or claims that may result in liens exist against the above-described property other than set forth herein.”  Finally, the draw request stated “upon said disbursement by Lender the General Contractor will be paid in full under the Construction Contract.”  

When the contractor was not paid amounts alleged to be due, the contractor recorded mechanics’ liens against each home and brought suit to foreclose the liens.   One of the lenders defended against the liens by asserting that the draw request language was sufficient to waive the contractor’s lien right.  The trial court found that the draw requests complied with the statute for an effective lien waiver and granted summary judgment in favor of the lender, effectively dismissing the contractor’s mechanics’ lien claim.  On appeal, the contractor challenged the grant of summary judgment, alleging that the draw request language was not legally equivalent to the required language in the mechanics’ lien act.

On appeal, the court compared the language of the draw requests to the statutory language.  Looking at the act’s “plain language and ordinary meaning”, the court balanced the necessity of protecting “those who perform the labor and furnish the materials which enter into the construction of a building or other improvement” against the creation of “an encumbrance on property that affects the owner’s right to freely use or transfer it.  The court found that by requiring that a waiver and release be “in substantially the form provided”, the legislature indicated its intent that for a waiver and release to be valid, it must contain at least each of four distinct component parts embodied in the forms.  
The four distinct elements are:

1.    A statement that the document is intended to be a waiver and release in accordance with Utah law.

2.    Specific information pertinent to the lien rights, including “Property Name,” “Property Location,” the identity of the “[Contractor]’s Customer,” “Invoice/Payment Application Number,” and “Payment Amount.”

3.    An explicit notice to the contractor that signing the release will impact rights that the contractor would otherwise have under the statute and the conditions upon which waiver of those rights become effective.

4.    A statement that the contractor has paid all subordinate claims subject to the waiver/release or the contractor must promise the funds received in exchange for the waiver/release will be used to make those payments.

In Meyer, the draw requests and forms used to obtain funds did not contain the words “waiver” or “release” that served to draw the contractor’s attention to its rights being relinquished   In reaching its decision, the court cautioned that “[o]ur conclusion that the draw requests . . . here do not contain all the component parts . . . means we do not reach the question of how much a lien waiver and release form that has the required component parts may deviate from the specific language . . . and still be “in substantially the form provided” . . . “That is an issue for another day” .  

Result

Because of the 2012 ruling by the Utah Court of Appeals in Meyers, if those involved in a construction project create their own lien waiver or release forms, or rely on outdated versions, they do so at their own peril.  Any variations from the forms set forth in the statute must contain the four elements cited.  Without those elements, the lien release or waiver will be invalid.

Roger D. Henriksen is a shareholder with the law firm of Parr Brown Gee & Loveless. Roger specializes in construction, industrial contracting and real property law and is continuously recognized by his peers and clients for his outstanding customer service and innovative solutions.