Jun 2014

What is a Conditional Lien Release?

At the Law Office of Randy L. Smith, we represent many developers and property owners in a variety of real estate construction projects. Although these projects are complex and usually involve multiple parties, knowing the law can help everyone involved avoid conflicts down the road. Liens are one area that pop up again and again as projects unfold – and when they do, people immediately want to know how to get them removed, work around them, and avoid them in the first place.

Construction Liens Explained

Contractors often perform a significant percentage of a job or project on the promise of future payment. When property owners delay or outright refuse payment, the law permits contractors to place liens on the property where the work was performed. Once the property owner pays, the contractor releases the lien.

Whether builders or contractors are constructing a single family home or a commercial structure, receiving prompt payment for completed work is crucial to their ability to pay subcontractors and finance other projects. Missouri law protects contractors from delayed and refused payments by allowing them to file construction liens, which are also known as mechanic’s liens and materialman’s liens. A construction lien gives a contractor a security interest in the property and prevents the owner from selling or transferring the property until the lien is satisfied.

Lien Releases

Because many construction projects depend on bank financing, property owners don’t always have funds readily available to pay contractors for work performed. As a result, many contractors sign lien releases or waivers in which they promise not to file a construction lien against the property. Because most contractors sign lien releases before they have received payment, lien releases can be risky. This risk is amplified by the fact that many title companies and financial institutions demand lien releases before they will release funds. In many cases, a contractor is left with an unpaid bill and no way to enforce it.

What Makes a Lien Release Valid?

An owner must be able to “justifiably rely” on a lien release for the release to effectively waive a contractor’s right to file a construction lien. Courts have ruled lien releases invalid when owners have failed to pay a contractor in full after requiring the contractor to sign a lien release. Problems can crop up, however, when subcontractors verify that they have been paid, as property owners can’t justifiably rely on that kind of verification.

Conditional Lien Releases

One solution is to make lien releases contingent upon payment. Conditional lien releases state that the waiver is not effective until the contractor or subcontractor receives payment. Lenders might not like conditional lien releases, by they ensure that contractors get paid for their work and that both sides are protected.

To discuss your commercial real estate matter with one of our experienced business attorneys, call our office today at 417-841-2775. You can also get in touch by using our online contact form.

This website has been prepared by The Law Office of Randy L. Smith, LLC for informational purposes only and does not, and is not intended to, constitute legal advice. The information is not provided in the course of an attorney-client relationship and is not intended to substitute for legal advice from an attorney licensed in your jurisdiction.