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Recap: How to Preserve Mechanic’s Lien Rights in Arizona
In our previous two webinars we discussed how to preserve mechanic’s lien rights in Arizona.
a. Timely serve a proper Preliminary 20-Day Notice
The first and probably most important thing to do is timely serve a proper Preliminary 20-Day Notice. This was discussed in detail in the first blog of our Arizona lien law series - Arizona Preliminary 20-Day Notices, Lien, and Bond Claim Refresher (with Pro-Tips).
b. Do not forfeit lien rights by signing an improper and/or incorrect lien waiver
Do not forfeit lien rights by signing an improper and/or incorrect waiver of lien is what will be discussed in this blog. It is also a very important step and something to be mindful of as you navigate the lien process.
c. Timely record statutorily compliant Notice and Claim of Lien
Timely record a statutorily compliant Notice and Claim of Lien with the county recorder in the county where the project is located.
d. Timely serve the Notice and Claim of Lien
This next step was part of the second part of our Arizona lien law series - What Happens After I Record My Mechanic’s Lien in Arizona? How Do I Get Paid? What do you do after a lien is recorded? You timely serve the Notice and Claim of Lien.
e. Sue to foreclose the lien within 6 months of recording
Lastly sue to foreclose the lien within six months of recording the Notice and Claim of Lien.
Lien Waivers in Arizona
In Arizona, lien waivers are creatures of statute, which means that they are specifically the types and specific forms of lien waivers are delineated in A.R.S § 33-1008.
Arizona provides for four types of lien waivers which can be grouped together in a couple different ways.
- Conditional Waiver and Release on Progress Payment,
- Unconditional Waiver and Release on Progress Payment,
- Conditional Waiver and Release on Final Payment; and
- Unconditional Waiver and Release on Final Payment
You can segregate these by whether they are progress waivers or whether they are conditional or unconditional. A good way to think about it is you think about a graph with four quadrants and you have the X-axis running horizontally. Everything above the x-axis is progress waivers, everything below is final waivers. You have the Y-axis and everything to the left of the y-axis is conditional and everything to the right is unconditional.
There is some overlap in these various waivers and this will be spoken about in this blog. One important thing to note and to be very mindful of is that waivers in Arizona have to substantially follow the statutory forms within A.R.S § 33-1008 to be enforceable.
They do not have to exactly comply but there may be circumstances where you want to deviate from the form in a small way but you have to bear in mind that they need to substantially comply with the statute or else they will not be enforceable.
a. Progress Waivers vs. Final Waivers
The first way to group the different waivers together is as progress waivers and final waivers.
i. Progress waivers
Progress waivers are used when a lien claimant is required to execute a waiver and release in order to induce the payment of a progress payment. Generally, progress waivers only release lien rights for a specific time of time. The flip side to progress waivers would be final waivers, and these are used when a claimant is required to execute a waiver and release in exchange for or in order to induce a final payment.
ii. Final waivers
Generally, final waivers release all lien rights on a project except for disputed amounts that may be specifically listed. This will be discussed when we get to the statutory forms of final waivers.
b. Conditional Waivers vs. Unconditional Waivers
The next way that you can group the different types of waivers are as conditional waivers and unconditional waivers.
i. Conditional waivers
Conditional waivers are used when a lien claimant is “required to execute a waiver and release in exchange for or in order to induce payment and the claimant is not in fact paid in exchange for the waiver and release or a single payee check or joint payee check is given in exchange for the waiver and release.”
Conditional waivers are only effective if the construction payment identified in the waiver is made. A good and simple way to think about conditional waivers is that a conditional waiver plus payment equals an unconditional waiver to the extent of the payment made.
An unconditional waiver is not operative until you actually receive the payment specified therein or a portion of it and then it is only operative to the extent of the payment made. That is a good way to think about unconditional waivers. They can certainly become binding once the payment reflected therein is made.
ii. Unconditional waivers
The next category is unconditional waivers. These are used where a lien claimant is “required to execute a waiver and release in exchange for or in order induce payment and the claimant asserts in the waiver that is has been paid the payment.”
As you can see in the specific language that is contained in the statutory forms. Unconditional releases are effective generally speaking, even if the payment identifying the waiver is not made and the language in the waiver is clear that when you sign them you are saying that you have received the construction payment and so they can be operative even if the payment is not made. This can pose some real concerns for people in the construction industry.
Conditional Waiver and Release on Progress Payment
Below is the statutory form of the Conditional Waiver and Release on Progress Payment. So this is conditional and it relates to progress payments.
Notice:
This document waives rights unconditionally and states that you have been paid for giving up those rights. This document is enforceable against you if you sign it, even if you have not been paid. If you have not been paid, use a conditional release form.
The part that says “on receipt by the undersigned of the check,” there is some specific information that needs to be filled in about the maker of the check, the amount of the check, who is receiving the check.
And then it says “when the check has been properly endorsed and has been paid by the bank on which it is drawn,” this is the conditional part of this unconditional progress waiver. Basically, it says that once you receive the check and the check clears, then this legal document becomes effective to release any mechanic’s lien (release of lien), any state or statutory bond right, any private bond right, and so on.
This goes back to the equation we spoke about earlier about the conditional lien waiver plus the payment equaling an unconditional waiver to the extent of the payment.
The other section that is a little further down says, “This release covers a progress payment for all labor, services, equipment or materials furnished to the jobsite or to _____ (person with whom undersigned contracted), through _____ (Date) only and does not cover any retention, pending modifications and changes or items furnished after that date.”
Later in this blog will be the dos and don’ts for lien waivers and the importance of the dates that need to be filled in the above blanks. If you fill this out properly, you are waiving lien rights up to a certain point of time not including retention pending modifications and changes or items furnished after that date. But, if you do put an incorrect date, there is potential for problems to develop and potential unwitting waiver of lien rights.
Unconditional Waiver and Release on Progress Payment
The next construction lien waiver and statutory form is the Unconditional Waiver and Release on Progress Payment. Again, this is about progress payments, but different from the waiver and release above, because this is an unconditional waiver.
Notice:
This document waives rights unconditionally and states that you have been paid for giving up those rights. This document is enforceable against you if you sign it, even if you have not been paid. If you have not been paid, use a conditional release form.
You can see that in the first line in the form above, where it says, “The undersigned has been paid and has received a progress payment in the sum of..” whatever the amount is in the blank. When you sign this document, you are signifying that you have been paid.
But consistent with the language from the conditional progress payment, the second section only releases construction lien rights through a period of time that hopefully corresponds to the progress payment application that is submitted. It does not cover any retention, pending modification, changes, or items furnished after that date. So it is a release up to a specific period of time.
The last section says “This document waives rights unconditionally and states that you have been paid for giving up those rights. This document is enforceable against you if you sign it, even if you have not been paid. If you have not been paid, use a conditional release form.”
The above notice is required to go into unconditional waivers by statute and it is actually required to be in the same size as the largest font otherwise in the document. This notice says that this document waives rights unconditionally and states that you have been paid for giving up those rights.
This document is enforceable against you if you sign it even if you have not been paid. If you have not been paid, use a conditional release form. The notice again, is put on the form of an operative unconditional lien waiver and it should serve as a warning that you should not sign unconditional waivers unless you have been paid, and that payment has cleared. Otherwise you set yourself up for a potential pitfall.
Conditional Waiver and Release on Final Payment
The next statutory form of waiver is the Conditional Waiver and Release on Final Payment. Now we are back into the conditional section of the graph and now we are talking about progress payment as opposed to final payment.
Notice:
This document waives rights unconditionally and states that you have been paid for giving up those rights. This document is enforceable against you if you sign it, even if you have not been paid. If you have not been paid, use a conditional release form.
The first section says, “On receipt by the undersigned of a check from _____ (Maker of Check) in the sum of $______ (Amount of Check) payable to ______ (Payee or Payees of Check) and when the check has been properly endorsed and has been paid by the bank on which it is drawn,” and it is the same conditional language as the first statutory of waiver above which was the Conditional Waiver and Release on Progress Payment.
The next section is the final payment section. It says, “This release covers the final payment to the undersigned for all labor, services, equipment, or materials furnished to the jobsite or to ______ (Person with whom undersigned contracted), except for disputed claims in the amount of $_____.”
What you want to take away from this is that it is conditional and it is not operative until the check is received and the check clears the bank in which it is drawn. But once that happens, it releases mechanic's lien rights finally on the project except for disputed claims that are listed here.
So, to the extent when you get to the end of a project, there are disputed claims. You want to make sure those are reflected in your final waivers whether they be conditional or unconditional
Unconditional Waiver and Release on Final Payment
Now we move on to the Unconditional Waiver and Release on Final Payment. This is the last of the four statutory forms of waivers that will be discussed in this blog.
Notice:
This document waives rights unconditionally and states that you have been paid for giving up those rights. This document is enforceable against you if you sign it, even if you have not been paid. If you have not been paid, use a conditional lien waiver form.
The first highlighted section is the unconditional language of this release that says, “The undersigned has been paid in full for all labor, services, equipment, or material furnished to the jobsite or to..”
The next portion is the disputed language, “except for disputed claims for extra work in the amount of..” and what that talks about is that it is an unconditional final and the language calls for the lien claimant, potential lien claimant, bond claimant to include disputed amount for extra work.
Otherwise, this fully waives rights on the project and as we saw with the unconditional waiver and release on progress payment, this again includes the notice at the bottom of the form where it says that the document waives rights unconditionally and states that you have been paid for giving up those rights, this document is not enforceable against you if you sign it, even if you have not been paid.
Again, you do not want to sign an unconditional waiver and release on final payment unless you have been paid and you are sure that the payment has cleared.
So those are the four statutory forms, and again, for a waiver of lien to be operative in Arizona, it has to substantially comply with these forms.
Lien Waiver Dos and Don’ts
Now we will talk about some lien waiver dos and don’ts.
a. Lien Waiver Dos
i. Do exercise extreme caution when executing any lien waiver
Waivers can potentially have catastrophic consequences if they are filled out incorrectly or if the wrong type of form is used. So you want to make sure that you are being very diligent when you are reviewing lien waivers.
ii. Do be sure you are using the right type of waiver
You want to make sure that they comply with the statutory form and you want to make sure you are signing the right form.
iii. Do be mindful of the time period covered by prospective progress waivers
You will see this happen on occasion where a contractor or supplier is asked to sign a progress waiver up to a certain period of time. Typically, provided that the payment schedule remains on an ordinary course and is consistent with the payment obligations set forth in the party’s construction contract or Arizona’s Prompt Pay Act, depending on what governs most cases (which is usually the Prompt Pay Act).
That should not be an issue. Where you will run into an issue is where you have a disputed payment application. So a contractor will submit something like ‘Pay App 2,’ there will be a dispute on that and the parties will go back and forth. While that is being ironed out, the contractor will submit a ‘Pay App 3.’ In connection with Payout 3, they may submit or asked to fill out and resubmit a conditional progress waiver up through the point in time with the third pay app.
Well, if the second pay app has not been squared away and that is not delineated somewhere in the waiver and the contractor is signing a conditional waiver, saying if they get paid ‘x’ number of dollars for Payout 3, that they are giving up all lien rights up until the period of time covered by Pay App 3, the contractor or supplier could find themselves in a difficult situation. They may have unwittingly waived lien rights or bond rights for the disputed pay app 2 that has not been resolved.
So be very mindful of the time periods covered by progress waivers and be mindful of potential disputes and amount that have remained unpaid on previous waivers. Think about those as you are approaching and contemplating lien waivers for subsequent payments.
iv. Do seek legal assistance before you sign a lien waiver if you are uncertain
If you are at all unsure about whether or not to sign a waiver and the potential consequences it may have, it is suggested to seek legal assistance and to talk to an attorney about these things. Hopefully you can then sort through the issues you are facing.
b. Lien Waiver Don’ts
i. Don’t sign an unconditional lien waiver unless payment has cleared
Do not sign an unconditional lien waiver until you know that the payment you have received has cleared. Make sure that you have the payment and then make sure it has cleared. A lot of times when things are going smoothly on a construction project and there is a good relationship, sometimes people will be asked to sign unconditional waivers in exchange for a check.
But that is not the role of an unconditional waiver. Unconditional waivers should be signed after that check is cleared. If you are being asked to submit a construction lien waiver in exchange for receiving a check, it should be an unconditional waiver.
That way the person upstream – the property owner – will be protected because they will have the waiver that once combined with the payment will be operative as an unconditional waiver. And you as a contractor or supplier have not unwittingly signed away lien rights before a check has cleared and before you receive payment.
Unconditional waivers should only be signed after the payment is in your hand and after you are sure that the payment is good now. Some people will say that if the party upstream issues a bad check, you can certainly have a breach of contract or bad check remedies, but signing that unconditional waiver can limit your ability to recover against different parties.
For instance, say you are a subcontractor, you are working on a project, and you have a general contractor who may be going through some rough financial times. You sign an unconditional waiver before you receive or before you confirm that a check clears and the check bounces.
You may have claims against the general contractor for the bad check or for breach of contract, but arguably in that instance you would have waived your lien rights on the project and that can preclude you from potentially pursuing the property owner and your lien claim on the property which would have been an alternative source of recovery if in fact the general contractor is experiencing financial difficulties and is maybe not able to satisfy the amounts they owe you.
So you will still have potential recourse but this may not be the recourse you would otherwise have.
ii. Don’t neglect to include disputed amounts in final waivers
The last point is to not neglect disputed amounts in final waivers. Above, disputed amounts in final waivers and final waiver forms were looked at in detail. In both forms, there is one spot at the end where it says you are giving up all rights on the projects except for some disputed amounts.
So make sure that if you get to the end of a project and you are asked to submit a conditional final or an unconditional final, and there is a dispute over certain amounts that that dispute is reflected in that waiver. Because you do not list it, you may and likely have waived the rights to those amounts.
