50 Shades of Confused...Taking the Grey Out of Lien Waivers, Joint Checks and Other Instruments of Profit
Contributing Author: Thea Dudley, VP Financial Services - SRS Distribution, Inc.
Joint checks, contracts, mechanics liens and the infamous lien waiver, all supposed to make business more efficient, easier and straight forward have become so complex you need a law degree and three hours to get through one of them. If you joined me this past summer, you spent time at the seminar of the same name at the Expo, you already know these are all pet peeves and hot buttons for me.
The very forms and tools that are there to grease the wheels of your business and make your life less complicated, have basically taken over your day. Sadly, most contractors do not take the necessary time to insure those tools are not working against them…until it is too late and they are faced with countless hours trying to figure out how to undo the damage inflicted by their lack of attention to detail.
Let’s take the torture out of some of the tools and make them profitable to your business again.
The definition of a check joint is: A check issued by one party (Payor) and made payable to two parties as co-payees. That is the technical side of the joint check. Funny thing about joint checks that rarely get mentioned at the beginning, they only work if the check gets issued and there is not standard joint check form to keep the playing field level. There are no specific statutory laws regarding how a joint check has to read or what is required. Since they are contractual in nature they are subject to contract law.
So what exactly is a joint check?
1. It is an enforceable contract
2. It is a creature of contract
3. It creates a tri-party relationship
4. It identifies all the players (parties involved)
5. It defines the relationship of all the parties
Which leads us to what it is not:
1. It is not a security interest
2. It Is not a guarantee for payment
3. Not governed by statute
4. Not effective if the check isn’t written
How so you make sure it is profitable and not painful?
With joint checks, it is all in the wording. How the items are phrased. Does the wording obligate the payor to one of the payees or merely give permission (to be used if the payor decides to). What’s left out? What is not addressed in the document? What is the enforcement of it (what do you need to do to get paid), how is the check issued/delivered? What happens to your payment in the case of a dispute between the payor and your customer? Is there a clause regarding a limited power of attorney for you to use to process your payment. What are you giving up? Lien rights, bond rights, suit rights What are they asking you to include? Blanket indemnity clause, warranty beyond your scope of work, asking you to have an obligation to a larger contact.
What are the three biggest joint check mistakes I commonly see?
1. Not reading the agreement before signing it. Everyone always seems surprised at this one but if I had a dollar for every customer who asked me for help with a joint check agreement after the fact-who had to admit they did not read it, I would be working on a tan in Belize.
2. Trusting others to follow through. Your money is your responsibility. Hold people accountable, be able to state what their obligations are if you need to.
3. Not having a relationship with the check cutter. You should know who you are dealing with, have had at least one conversation with them. Not an email or text but a verbal conversation. Know someone by name who you can reach out to for help if you need to. Make friends with where your money is coming from.
To avoid mistakes, keep these tips in mind:
1. Watch the wording of the agreement. If you don’t understand something or it’s not clear in the wording, ask for clarification, or cross it out & rewrite it. My rule of thumb in reading any document is this: If I don’t understand it & you can’t explain it, it doesn’t need to be in there. Cross it out.
2. Read the agreement. The whole agreement. All the way. Don’t skim it. It is not War & Peace. It should be a simple, one pager. Understand what you are agreeing to.
3. Don’t give up stuff you don’t want to give up like lien, bond and remedy rights.
4. Don’t agree to crazy add on’s. This is a simple document on how payment is going to be executed & to whom. It is not an extension of your contract.
I want to point out one really important thing about any document. The company/person presenting the document is usually who it is in favor of. It is the nature of the beast.
It starts out as a simple form then people start getting creative and before you know it, it is crazy long and has all kinds of weird stuff in it.
Everyone in this industry uses the phrase “lien rights”, but the majority don’t know exactly what that means or how to approach it to really capitalize on it. Just so everyone is on the same page a mechanics lien is a security interest in the property for the benefit of those who have supplied materials or labor that improve that property. A mechanics lien basically clouds the title so the lien has to be dealt with in some fashion before the property can change hands.
I am a HUGE advocate of securing lien rights whenever possible. Yes, I know, you don’t want to have a supplier secure them because you are afraid of what your customer will think. Yep, it is much better to give up a way to get paid then have someone think ill of you.
Without securing your lien rights, you can only sue the company you're contracted with (your customer). But if I secure lien rights, I can bless everyone with my attention. For all intents and purposes, it locks up the property, your lien has to be dealt with in some fashion, whether it is bonded around, paid, sold subject to, or foreclosed. A lien gives you security in the property. Suddenly, you’re important!
Moral is: If Mama ain’t happy, ain’t nobody gonna be happy. My issue of non-payment is now everyone’s issue. I have just significantly increased my odds of getting paid.
Let’s get the definition out of the way: A lien waiver is a legally binding document from contractor, sub-contractor, material supplier or other party to the construction process stating they have received payment and waive any future lien rights to the property reference therein.
Simple, straightforward? Let’s talk about the painful, the unbelievable and the pleasurable. There are four types of lien waivers:
1. Conditional Progress (Releases all claim rights to file a lien once payment has been made and cleared the bank)
2. Conditional Final (see above)
3. Unconditional Progress (see below)
4. Unconditional Final (Generally releases all rights to place a lien on the property.
It is immaterial if the payment check has been returned or stopped. Only use this release when you are positive all your work is done and the check has cleared the bank.)
The first two are safer for you, the second two are safer for the owner. So why do you care? You want to get paid! You don’t want to give up rights you didn’t intend to. If you sign a waiver without getting paid you most likely just gave up your right to any legal recourse.
DO NOT sign an unconditional waiver without having been paid and the payment has cleared the bank. Give a conditional if you have to give something. If you are being asked to sign an unconditional or the customer is stating they will take their business elsewhere, it will come down to a business decision.
To quote the words of the late Robin Williams, “Carpe Per Diem—Seize the check”!! What else do you need to know about the much asked for but seldom understood lien waiver? Plenty!
Did you know?
1. A nationwide standard lien waiver form does not exist.
2. Terms & conditions are often included in the waiver – things like indemnity, guarantees of work, liability, warranty, etc.
3. 12 of 50 states at this time has some sort of language/requirements in their statutes regarding waivers. Things that have to be on the form, right down to the font size.
How painful can it be? How many of you have received a lien waiver that you absolutely did not understand. It was like a Shakespeare play. Did you take time to read it? I have received tons of waivers over the years and what some companies stick in there is mindboggling. And frankly, entertaining. Waivers asking for certification of work being properly performed, indemnity, subordination of lien rights to a third party, personal liability for the signing party, waiving rights to retainage or change orders, demanding an unconditional before work is complete and payment is issued, waiving rights to make claims for change orders, extra work, disputed items or retainage.
There is a short list but it gives you an idea of what I am talking about. So a document that was supposed to be a simple straightforward “Yes, we got paid, I am not going to lien your property” has become a catch all liability wish list. Any language in the waiver that puts restraints and liability on your company is unacceptable. Limit the language to the amount of money received and the date it is through.
I promised you pleasure so where is it says you? Language on the wavier should be fair and reasonable. In other words, KISS—Keep it simple stupid. Keep in mind what the document is. It is simply a waiver for payment through a fixed date. Nothing more, nothing less. It doesn’t ask for the meaning of life and indemnification of the world. It only purpose is to acknowledge the receipt & clearance of payment through a set date on a specific project.
To tie it up:
1. Limit the number of people in your company with are authorized to sign off on a lien waiver.
2. Have a standard company lien waivers, approved by your attorney, you can use in place of what you receive.
3. Use conditional lien waivers until payment has cleared the bank.
If business was a game, contracts would be the rules of the game. It is another place where money leaks out of your profitability. Bottom line on contracts: read them – the whole thing - boring as they are. Make a highlighter pen your friend. I mark all kinds of stuff up. That contact is not an ancient sacred text. You will not remember what you saw that bugged you. High light it. Have an addendum if you would prefer, just like you would for lien waivers or joint checks, that outlines what you are agreeing to and make sure it supercedes any other contract.
What are you and your trusty highlighter pen looking for? Plenty. A quick rundown of the killer clauses:
1. Contingency payment: This provides that the GC is under no obligation to pay the sub any $$ until and unless the GC gets paid by the owner. Otherwise known as pay when or pay if clauses
2. No damages for disruption – basically means that while the sub is not entitled to a claim for delay damages, the sub can have an extension of time. They read something like this: Sub agrees to waive all claims & shall receive no compensation for delays, hindrances, disruption or interference with it’s’ work. So yes, everything is your fault.
3. Agree to work when not getting paid: If you can afford it awesome. If not, you will want progress payments. ALWAYS reserve the right to walk off the job and stop the work if you are not getting paid.
4. Indemnification: I hate this one. This is just a contractual method of dumping legal liability from one party to another. Under this jewel, one party agrees to step into another’s place and accept legal liability for that party’s actions- usually including that party’s negligence or wrongful acts. Nope, I am only responsible for my own company’s stupid, not yours and the entire jobs.
5. Additional insured: this is a sneaky little way to “back door” the indemnification by having the sub add the GC and other contractors as “additional insureds” on their liability insurance. If there is a claim, your insurance premiums go up.
6. No waivers by reference incorporation: Another sneaky way to tie you up. This would be lien waivers, payment waivers, or reference tying you to the original contract between the owner and GC.
7. Dispute resolution: Make sure you are not agreeing to something crazy. Like the architect being the arbitrator, judge and jury. Look for mediation vs. arbitration and how and who chooses the mediator or arbitrator. Binding or non-binding. You want it to be fair.
If you take away nothing else from this article remember these three things. READ everything you are asked to sign. Ask, if you don’t understand it, doesn’t make sense or you don’t agree. Men are terrible at this, ya’ll are always afraid people will think you are not smart. Be smart enough to know what you don’t know. Get your own forms so you have them when you need them. You can find tons of them on the internet, something for everyone. Get someone in your office to be the expert of these. Your profit is your responsibility so stop trusting other’s to be responsible for it.