Lien Releases: Look Before You Leap – Part 2

Last time I started to talk about the pitfalls that may arise from not reading lien releases more carefully. You can read it here: Lien Release – Part 1. This time I continue to expand on more issues that might arise from lien releases.

Prohibiting yourself from collecting on additional work performed was one of the concerns raised in the Addicks case disussed last time due to a release or waiver with broad language. Another concern can be other disputes that you may have regarding a project. For example, I represented a client who contracted to remove stone veneer from an apartment complex and install new stone veneer. Problems arose and my client was terminated from the project and believed that he was entitled to breach of contract damages including lost profits. However, in an effort to mitigate his damages, he sold the stone and installation materials to the subsequent contractor that was hired to perform such work. At the end of the job, the owner requested that the subsequent contractor obtain a waiver for final payment from my client and provided the subsequent contractor with the waiver. The waiver was presented to my client as simply a waiver of liens in exchange for final payment for the material my client had provided to the subsequent contractor. However, after reading the waiver closely, my client realized that such waiver stated that he was agreeing to release any and all claims that he had against the owner and the property. Such waiver may have barred my client’s claims for lost profits against the owner. It is likely that the owner intended to sneak this waiver by my client to protect itself from the claims which it expected my client to file.

It is also important to consider whether the waiver or release is conditional or unconditional. A conditional waiver or release means the waiver or release is conditioned upon some additional requirement being met before the waiver or release is effective to waive or release a contractor’s rights. Typically, the “condition” in a conditional release is payment. For instance, the waiver from the Addicks case, quoted above, is a conditional release because it states, “This waiver constitutes a representation by [Contractor] that the payment referenced above, once received, constitutes full and complete payment…”. The document does not constitute a representation of full payment until payment is received. This is an important distinction. An unconditional release does not contain a condition and, therefore, is effective upon execution. If a contractor were to execute an unconditional release with a payment application and then never receive payment (or the payment bounced), the contractor may be stopped from later trying to collect on the payment because he unconditionally released his or her rights. Another scenario in which an unconditional release can create problems is when additional work, not contemplated by the original contract, has not been billed or paid. However, this can also be a problem with a conditional lien as discussed above.

It is extremely important that you understand any waivers or releases that you execute. Make sure that that you understand exactly what is being waived or released. The best rule of thumb is that if there is any work which has been performed or goods which have been provided which are not a part of a particular payment, make sure that you specify in writing on the same document (and on each and every waiver that you subsequently sign) that the waiver or release does not cover such goods or services. If you are in doubt, consult an attorney regarding the language of the waiver or release. The short time that it takes to discuss the waiver or release may pale in comparison to the costs of claims you may inadvertently waive or release.

Lien Releases: Look Before You Leap – Part 1

In the construction industry, acknowledging payment for goods and services is common. Such acknowledgments come in many forms. They may be referred to as a waiver of lien, release of lien, or they may refer to a release or waiver of claims. They may be conditional or unconditional. They may be partial or final. Many contractors sign them in exchange for payment without really taking the time to read or understand the language contained in such documents. This can be a costly mistake. Be wary of what you are agreeing to in signing any type of waiver or release.

Pay attention to what it is that you are waiving or releasing. Some waivers or releases state that you are only waiving or releasing your right to claim a lien or file a bond to the extent that you are being paid a certain amount in connection with such release or waiver. This is what many contractors assume they are agreeing to in executing a release or waiver in connection with payment. However, some language in waivers or releases go further. They may specify that you are waiving or releasing any and all claims for payment for work performed or goods provided through a certain date. Some final releases go even farther by specifying that you are waiving or releasing any and all claims of every kind against the owner, the project, the property and other contractors. Note the differences between what is being released and/or waived.

These releases can be become a problem when the person making the payment and the person signing the waiver have different ideas about what is being paid and one of the parties isn’t paying attention to the specific language in the waiver or release. As an example, consider Addicks Services, Inc. v. GGP-Bridgeland, L.P., 596 F.3d 286 (5th Cir. 2010). In such case, the contractor found after starting the project, that numerous issues arose including requests for additional work, delays due to inclement weather, and site accessibility problems. In accordance with the contract for the project, the contractor made written requests for information regarding the work, extensions of time, and change orders. However, while the requests were pending, the contractor submitted applications for payment and with such payments executed waivers for each payment received which stated:

This waiver constitutes a representation by [Contractor] that the payment referenced above, once received, constitutes full and complete payment for all work performed, and all costs or expenses incurred (including by not limited to costs for supervision, field office overhead, home office overhead, interest on capital, profit, and general conditions costs) relative to the work or improvements at the Project as of the date of this waiver, except payment of retainage. [Contractor] specifically waives, quitclaims and releases any claim for damages due to delay, hindrance,

 

Despite the blank space for exclusions, the contractor merely signed the waivers in exchange for payment without identifying any of the pending change orders. After the project ended the contractor sued the owner for payment of additional unpaid costs. The court found the unambiguous language of the waiver barred not only the contractor’s right to lien the project, but also the contractor’s right to sue for breach of contract!!

Here is Part 2: Lien Releases: Look Before You Leap – Part 2

Didn’t foreclose on your Mechanic’s Lien? What should you do now?

Last time we talked about the step one takes to foreclose on their Mechanic’s Lien and the foreclosure deadlines.  This month I wanted talk about what happens if you fail to foreclose on your mechanic’s lien within the time provided by law.   As luck would have it, I was in the process of finishing up this post, when I get a call about one of my clients two+ year old Mechanic’s Lien.  Now hopefully they will be receiving  full payment for the money they are owed.

In order to answer this question and how it was able to work out for my client, you have to know something about the recording process in Texas.  All deeds, liens, releases, and property records are filed in the records department of the county in which your property is located.  Most counties try to cross reference all document recordings through a Grantor, Grantee, and Property index.  What this means is that the document has a filer (which is the Grantor), a person to whom the record is being filed against (which is the Grantee), and attaches to a particular property through legal description and/or address.  In the mechanic’s lien context, the person filing the lien is the Grantor and the person or company to whom the lien attaches (who owns the property) is the Grantee.

Next, it is important to know how documents that have been filed are removed.  First of all, they are never really “removed.”  You can always see what was filed throughout the history of the property.  However, there are various instruments that can be filed to “release” a lien, “waive” rights to a claim, “cancel” a deed of trust, or “order” a lien to be invalid.  So, the question remains “What happens when you file a lien on a property which is not resolved through payment or release and which was never foreclosed upon?”

Throughout time, many people have given their legal opinion on this.  Legally, you have a deadline to file for foreclosure of your lien.  If you fail to foreclose, your lien is oftentimes considered “invalid.”  But is it truly “invalid?”  What happens if a first lien holder forecloses before you?  The law says that your lien is “foreclosed” out.  But does the lien go away?

The answer is that the only way to clear the title and “remove” the lien is to file a document removing such lien.  If you fail to timely foreclose on your lien, your lien document is still on file and is still attached to that property.  If a bank forecloses its’ superior lien, your lien technically is supposed to be foreclosed out, yet it is still on file in the county records and attached to that property.

So, as you can see, this is very complicated in practice.  What the law says is not necessarily what happens in reality.  The county clerk’s office does not have someone pulling liens that are no longer considered valid or that have been foreclosed out.

So, where does this leave you?  Many times, it leaves you with some bargaining power down the line.  Often times, I will have a title company contact me asking for a payoff amount for a lien I filed years before.  In this situation, there is rarely an argument as to whether the lien is still valid just how much my client will accept to release its lien.  This was the situation for the client I mentioned earlier in the post.

Other times, a bank will call us.  They foreclosed on their lien but there is still a cloud on the title which they need to remove (i.e. my client’s lien).  At that point, we enter into negotiations on how much it will take for my client to release the lien.

There are also those times where a demand is made upon you to remove your lien because you have failed to foreclose and the statute of limitations have passed.  In those situations, the lien claimant often times removes their lien without being paid.

Every situation is different.  There are some wins and some losses.  However, by understanding the filing process it helps mechanic’s lien holders understand that there are options past foreclosure.