Opinion: Mechanic’s lien waivers are a useful tool in uncertain economic conditions

Ben Shantz

Nobody likes to talk about mechanic’s liens. Whether you’ve had to file a mechanic’s lien or have had one filed against you, it generally means that you’ve found yourself in a dispute with a contractor, property owner or lender. As economic conditions continue to put a strain on consumers – who are feeling the effects of stubbornly high inflation, the corresponding high interest rates and slowing economic growth – this combination of economic data often foreshadows an impending economic downturn. And, unfortunately, with economic downturn comes an increased risk of defaults and bankruptcies, which, in turn, usually means a sharp uptick in the filing of mechanic’s liens.

Mechanic’s liens are powerful tools that essentially allow a contractor who was not paid for his labor or materials to claim an interest in the real property and buildings themselves to secure the right to payment. A valid lien, in turn, allows a contractor to file a lawsuit to foreclose on the mechanic’s lien and force the sale of property in order to generate funds to pay the balance of the lien. This can be especially important because these liens are given special status by Missouri statutes which can often mean that a mechanic’s lien has priority over previously filed mortgages or deeds of trust. Missouri follows what is called the first spade rule, which means that a mechanic’s lien’s priority on a project is measured from the first moment that work began on the project and not the date the lien was filed. In other words, a mechanic’s lien filer gets to measure the priority of their lien from the date the contractor first began work on the project. This dynamic often has important implications for prior encumbrances such as mortgages or deeds of trust.

Construction lenders must be especially wary of mechanic’s liens. Even where a lender has a previously recorded deed of trust that is superior to prior-recorded mechanic’s liens, courts have often found that construction lenders waived the priority of their prior deeds of trust where the lender’s deed of trust secured payment of the construction loan and the lender knew the loaned funds were to be used to finance the construction of the project. In these instances, it’s important to make sure that the owner and the lender minimize their potential risks.

While mechanic’s liens are powerful tools in a builder’s toolkit, there are a number of ways for an owner or lender to protect against mechanic’s liens during the course of a construction project and the most helpful of those tools are lien waivers.

A lien waiver is a written agreement or promise made by a person who performs work or provides materials to a construction project. While lien waivers can come in all shapes and sizes, each lien waiver usually has at least the following elements: a description of the real property or construction project, a promise or agreement that the person who performed work or provided materials to the project has been paid or has given up his or her right to place a lien on the property, and the signature of the person giving up their lien rights. In addition to these common characteristics, lien waivers can also have additional useful terms such as representations by the contractor that all people supplying materials or labor to the project have been paid.

An owner or lender can help protect themselves on a construction project by insisting that contractors or subcontractors provide lien waivers prior to being paid. The timely collection of signed lien waivers can give an owner or lender confidence that there are not unknown potential liens hanging around on a project.

Owners and lenders need to be diligent to ensure they know exactly how their money is being utilized on a construction project. Lien waivers are perhaps the best tool to ensure that owners and lenders have certainty surrounding the risk of future mechanic’s liens on a project. Consulting with an attorney before the start of a construction project can help owners and lenders avoid the negative consequences of a default by limiting their exposure to potential lien claimants and provide peace of mind that they are protected both during and after the work on the project is complete.

Ben Shantz is an attorney with Spencer Fane LLP in Springfield. He can be reached at bshantz@spencerfane.com.