Lien waivers in Colorado: How effective are they?
This article was published in September 2-Sept. 15, 2015 issue of the Colorado Real Estate Journal.
Contractors, owners and banks use lien waivers to control the risks associated with mechanic's liens. A mechanic's lien is a statutory interest that someone can assert in another person's property to secure the payment for improving that property.
A lien waiver abandons the right to claim a lien, either in whole or in part, on a particular piece of property. A partial lien waiver, for example, could waive the right to lien for work performed on a past month's invoice. This would not waive the right to assert a lien for other unpaid work in the future, or since the time the invoice was generated. A full or final lien waiver, on the other hand, waives all rights to assert a mechanic's lien for any work performed.
Colorado's mechanic's lien law exists to secure payment of those who improve real property. (Seracuse Lawler & Partners Inc. v. Copper Mountain, 654 P.2d 1328, 1330 [Colo. App. 1982]). Even so, Colorado court will enforce lien waivers if the waivers meet minimum criteria.
First, a lien waiver must be clear and unambiguous.
(Bishop v. Moore, 323 P.2d 897 (Colo. 1958); Ragsdale Bros. Roofing, Inc. v. United Bank of Denver, 744 P.2d 750 [Colo. Ct. App. 1987].) The lien waiver must show the clear and specific intent to waive lien rights. (See Bishop, supra.) If the lien waiver can reasonably be interpreted in more than one way the waiver is ambiguous. (See Hecla Min. Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1091 [Colo. 1991; see also Bishop, supra.]) A lien waiver that is ambiguous will be interpreted to waive only the rights associated with the payment actually made in return for the waiver, but all other lien rights remain preserved. (Ragsdale Bros. Roofing, Inc. v. United Bank of Denver, 744 P.2d 750 [Colo. Ct. App. 1987].) Second, a lien waiver must be supported by consideration. (Western Fed. Sav. & Loan Ass'n v. National Homes Corp., 445 P.2d 892, 897-898 [Colo. 1968]; see also In re Woodcrest Homes, Inc., 15 B.R. 886, 888 [D. Colo. 1981].) This typically means the person or party signing the lien waiver must be receiving a bargained-for benefit in return. (See Western Fed. Sav. & Loan, supra at 897.) Some might think that payment of a contractor's or subcontractor's invoice will suffice as consideration for a lien waiver, but that is not always the case.
For example, lien waivers printed on the backs of checks given to pay subcontractor invoices may not be enforceable if those lien waivers are not otherwise supported by consideration. (See generally, In re Woodcrest Homes, supra [held that the lien waivers in that case were supported by consideration].) If a contractor already has a contractual obligation to pay it subcontractor, the making of that payment is considered a pre-existing obligation and does not constitute consideration for the lien waiver, except as to the amount of the payment actually received. (See Ragsdale Bros. Roofing, Inc. v. United Bank of Denver, 744 P.2d 750 [Colo. Ct. App. 1987]; see generally Lucht's Concrete Pumping, Inc. v. Horner, 255 P.3d 1058, 1062 [Colo. 2011][recognizing that performance of pre-existing obligation does not constitute consideration]; see also 3 Williston on Contracts § 7:36 [4th. Ed.][2015.]) If, however, the contract with the subcontractor states that the subcontractor must sign lien waivers to receive payment, then this constitutes a reciprocal bargain (the contractor has bargained for the lien waiver and the subcontractor has bargained for the payments and the award of the subcontract itself) and the lien waivers are therefore supported by consideration.
(See Western Fed. Sav. & Loan Ass'n of Denver v. Nat'l Homes Corp., 445 P.2d 892, 897-98 [Consideration is measured as of the time of making the contract and need not be of equal value to the right given up in exchange]; see e.g., Steveco, Inc. v. C&G Inv. Assoc., 1977 WL 200326 [Ohio case stating that lien waiver provision in original contract was supported by the consideration for the contract itself and required no independent consideration.]) As another example, if a lender agrees to lend further money to complete a job that has gone over budget due to change order, and the lender requires lien waivers with each pay application as part of its agreement to lend the extra money, the agreement to lend more money suffices as consideration to enforce those lien waivers. (See Western Fed. Sav. & Loan, supra.) Risks exist beyond the issues of ambiguity and consideration.
Signing a lien waiver still can have serious consequences that may prevent you from successfully asserting a lien claim. For example, an owner who relies on the lien waiver of a subcontractor in making payment to the general can prevent the subcontractor from successfully asserting a lien.
The legal concept behind this is called estoppel, and it basically binds the subcontractor to the lien waiver to prevent an unfair surprise to a third party who relies upon that lien waiver. Lenders or higher-tier contractors also can assert estoppel defenses based upon a signed lien waiver from a third party if they rely to their detriment on that lien waiver.
(See Mountain Stone Co. v. H.W. Hammond Co., 564 P.2d 958 [Colo. 1977].) Another potential risk of signing a lien waiver is that it may contain additional provisions, such as waivers of other claims. Signing a claim waiver like this could prevent you from seeking a change order for delays or other impacts. The waiver form might also include a warranty that you have paid all of subcontractors or suppliers in full and might require you to indemnify the owner if your suppliers or subcontractors make claims. In short, read what you are signing and call your attorney if you have doubts.
Finally, understand that your lien rights belong to you. No one can waive them on your behalf and you cannot waiver the lien rights of others without their consent. (Aste v. Wilson, 59 P. 846 (Colo. Ct. App. 1900).)