Don’t Sign a Release Unless it Says This 1 Thing - North Carolina Webinar

In this blog, presented by SunRay Construction Solutions and Alexandra E. Ferri, Litigation Attorney, and Luke C. Tompkins, Litigation Attorney, Ward and Smith, P.A., construction professionals in North Carolina can learn in detail about the different types of lien waivers, which waiver to use when, effects of lien waivers on subrogation rights, etc., to ensure that they get paid successfully.  

Lien Waiver Basics

As you are aware, a lien waiver is a document that waives a subcontractor or general contractor’s right to assert a lien on a property. Here are some lien waiver basics hat every construction professional should be aware of:

A) Owner v. Contractor

• Every construction project has multiple parties and each of them will have different interests in preserving or waiving their lien rights.

• If you are the owner, then you would ideally want your contractor and subcontractors to sign lien waivers, so that your property remains lien-free.

• If you are a contractor or subcontractor, you would want to avoid signing a lien waiver so that you can preserve your lien rights as much as you can.

B) Forms

• North Carolina does not regulate the content or form of lien waivers. What this means is that there is no specific statutory lien waiver form or any specific language that you need to use in your lien waiver documents.

• However, you must use a written lien waiver form, and it should include some key elements even if they are not a statutory requirement.  

C) Conditional v. Unconditional

• Lien waivers can either be conditional or unconditional.

• A conditional lien waiver is a waiver of lien rights that's contingent on receipt of a forthcoming payment. So, when you sign a conditional lien waiver, it is considered valid only once you receive the payment.

• An unconditional lien waiver is effective upon signing. So, if you sign an unconditional lien waiver, but you haven’t received the payment, then you don’t have any lien rights for that amount.  

• Ideally, you should sign an unconditional lien waiver only after receiving the payment or if it is happening simultaneously when you are signing the lien waiver.  

When to Waive?

There are different types of lien waivers used in a construction project, but typically, the most common ones are lien waivers for progress payments and lien waivers for final payments. Before we understand how progress payment and final payment lien waivers works, there is one important provision in North Carolina that you should be aware of:

• Any lien waiver that requires a waiver of claims for prospective work, i.e., work which is yet to be done, will be considered invalid and unenforceable.  

• This is in accordance with a 2022 change to the North Carolina statute which clearly states that prospective lien waivers are invalid, unenforceable, and unlawful.

• So, if you notice such prospective lien waivers or even if you sign them, you don’t have to worry because they would be invalid and unenforceable.

The only things that lien waivers can permissibly waive under North Carolina law is claims to work that has already occurred and for which payment has or is being received.

A) Partial Lien Waivers

As mentioned earlier, one of the types of lien waivers permissible is a partial lien waiver.

• A partial lien waiver is typically signed in exchange for a progress payment.

• So, when a party issues a partial lien waiver, and that party is going to file a lien claim, then they are limited to doing it for the services or materials furnished after the date of that partial lien waiver.  

• This is why it is important that you pay attention to the through date when signing a partial lien waiver.  

• For example, you have performed some scope of work, finished it on Monday and you have billed the general contractor for that finished work on Monday. Now, let’s say that the general contractor takes some time to prepare the lien waiver and to make the payment and they are able to do it only by Friday. This means that you have received the partial lien waiver for that progress payment on Friday, but you have continued working throughout the week, i.e., from Monday to Friday.

• When you sign that partial lien waiver, you have to make sure that the through date listed on the waiver is for Monday, i.e., for the work which you have completed.

• You only want to waive your lien rights up to the through date.

• Another key item to bear in mind while signing a partial lien waiver is to identify any outstanding claims or ensure that the lien waiver is appropriately limited.

• This is because during the project, you may have outstanding claims, pending change orders that haven’t been executed, etc. You want to make sure that when you're signing the lien waiver, if you have any of those outstanding claims that you do not want to waive, then you identify them so that they're preserved and not subject to the interim lien waiver.  

B) Final Lien Waiver

The other type of permissible lien waiver is the final lien waiver.

• As the name suggests, a final lien waiver is something that you would sign when you have received the final payment and there is no work left to be done, billed, or paid.

Lien Waivers’ Effect on Subrogation Rights

There are limited rights with regards to subrogation rights.

• First-tier and lower subcontractors in asserting liens on property step into the general contractor's shoes.

• So, if the contractor signs a lien waiver before the subcontractor perfects its lien on the real property, then the subcontractor's right to enforce that subrogated lien on real property is waived. This is why it is important for subcontractors to assert their rights as soon as it becomes clear that they haven’t received a timely payment for the work they have performed. You must ensure that you get those served on to the owner before payments go to the contractor and before lien waivers are signed, etc.

• With regards to final v. partial lien waiver, a partial lien waiver may also limit the amount of a subcontractor's claim to the amount remaining on the prime contract following the latest partial lien waiver if that amount is less than the amount owed to the subcontractor.

• One key point to remember is that a contractor's lien waiver does not affect the subcontractor's right to claim a lien on funds or a lien on real property due to wrongful payment. What this means is that if the subcontractor has asserted its lien on real property and the owner makes payments over that lien to the contractor, it would still have the right to pursue that lien.

Final Hot Tips

1. Lien waivers in North Carolina are pretty straightforward.

2. You cannot prospectively waive lien claims, which is an advantage for subcontractors and suppliers.

3. Make sure that you are checking your contract clauses thoroughly, especially those related to prospectively waiving lien claims.  

4. Make sure that you are preserving all your claims you don’t intend to waive. Also, any claims that you do not wish to waive should be clearly stated in writing. If required, you can also attach exhibits to make it clear what is included in the waiver and what is excluded.  

5. Remember that the clearer you can make it, the better your chances are of being able to assert those claims in the future.

6. If you are using your own contract, then make sure that it is up to date with the current laws, such as excluding prospectively waived lien claims.  

7. If you have signed any prospective lien waivers, then you don’t have to worry because they are invalid and unenforceable.  

Always remember to read your lien waivers thoroughly to understand what type of lien waiver it is, whether it is the relevant one, and whether you intend to waive off all the claims listed in the waiver.

Key Takeaways

Understanding Lien Waivers:

• Learn the difference between conditional and unconditional lien waivers.

• Understand the specific types of waivers used for progress payments and final payments.

• North Carolina does not have statutory lien waiver forms, so it’s critical to include necessary elements in any written waiver.

Prospective Waivers Are Invalid:

• North Carolina law prohibits waiving lien rights for future work. Any prospective lien waiver is unenforceable, which protects contractors and suppliers from inadvertently giving up rights for work yet to be completed.

Partial vs. Final Lien Waivers:

• Partial lien waivers apply to progress payments. Ensure the waiver only covers work completed by the specified "through date."

• Final lien waivers are signed after the final payment is received, waiving all claims on the project.

Preserving Subrogation Rights:

• Subcontractors need to act quickly to assert lien rights before general contractors sign waivers that could affect their subrogation rights.

Practical Tips for Contractors and Subcontractors:

• Always read and understand the full content of any lien waiver before signing.

• Clearly state any claims you don’t intend to waive. Attach exhibits if needed to clarify exclusions.

• Keep your contracts up to date to reflect current laws, especially regarding invalid prospective waivers.

Common Questions Contractors Ask

1. What are North Carolina's specific rules regarding lien waivers and prospective claims?

In North Carolina, lien waivers that attempt to waive claims for work that has not yet been performed, known as "prospective lien waivers," are invalid and unenforceable. This protects contractors and subcontractors from waiving rights to future payment or claims for work not yet completed.

2. Why is the "through date" important in a partial lien waiver?

The "through date" in a partial lien waiver indicates the specific period of work covered by the waiver. When signing, contractors should ensure the through date accurately reflects only the work completed up to that point to avoid accidentally waiving rights to payment for work performed after the through date.

3. How can subcontractors protect their rights if a general contractor signs a lien waiver?

Subcontractors should assert their lien rights as soon as they are not paid on time. If a general contractor signs a lien waiver, subcontractors must perfect their own liens before this happens, or they risk losing their subrogation rights. It's essential to act quickly and serve notices to owners before payments are made.

4. What are some final tips for ensuring your lien rights are protected in North Carolina?

• Always review your lien waivers carefully to understand what claims you are waiving.

• Ensure that your waiver does not include prospective claims, as they are invalid in North Carolina.

• Preserve any outstanding claims you do not intend to waive by stating them clearly in writing.

• Update your contracts to reflect current laws, including exclusions of prospective lien waivers.

• Attach exhibits to your lien waivers if necessary to clarify what claims are included and excluded.

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