Subcontractors, don’t waive your right to a lien
In the course of reviewing construction subcontracts, I’ve recently seen provisions similar to the following (simplified for convenience and confidentiality):
- “The subcontractor shall reimburse the [contractor and/or owner] for any costs and expenses for any claim, obligation, or lien that arises from the performance of the work.”
- “The subcontractor shall remove and discharge any lien, claim, security interest, or other encumbrance related to the subcontractor’s performance of the work.”
The provisions are often followed with boilerplate requirements for paying the third-party claimant, bonding, reimbursement of attorneys’ fees, indemnification responsibilities, or other ways of providing security to the owner or general contractor.
The purpose of these types of provisions is clear: Owners want their projects completed free of liens, and they want the person responsible for the work to make sure that happens. This is an understandable position, and it is reasonable for any construction contract to require lien waivers. The problem is that these provisions do not require payment prior to the waiver.
Yes, if a subcontractor is paid, it should agree to keep the project clear of liens and remove any liens filed by its respective subcontractors or suppliers. But, until payment has occurred, retaining the powerful lien right is essential for any prudent subcontractor. Whether intentional by the drafting party or not, these provisions suggest the subcontractor is agreeing to waive its lien rights even when the owner or contactor fails to pay.
With these specific provisions, I find the solution is simple and relatively unobjectionable; I like to add “provided subcontractor has been paid for the work” at the beginning of the phrase.
Subcontractors should be on the lookout for these and other potential pitfalls, and make sure they do not unwittingly leave themselves unprotected by accepting provisions that are inherently unfair.
About the Author: Sam DeBaltzo has a wide variety of experience representing clients in real estate transactions and the purchase, sale and leasing of real property. He additionally provides counsel in several related industries, working routinely with construction, architect and engineering contracts. His business law experience includes general corporate matters and representation of both for-profit and non-profit businesses in mergers, acquisitions and dispositions. For more information, visit tonkon.com.