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Liens and Release of Liens
A release of lien form removes the lien claim from the property in question, whether it's real estate, a vehicle, or something else. In the case of subcontractors, once they've received all payments for work completed, they must file a release of lien with the governmental office holding the lien paperwork canceling their claim to it. In most cases, liens eventually expire on their own, but it's required in some states to file a release of lien within a specific time frame following the last payment related to the property in question.
Liens are commonly used legal contracts to ensure payment in a variety of industries and situations. Individuals often use liens to purchase high-cost items like homes or vehicles. For example, the dealership from which the driver purchased their car holds a lien on the vehicle until the driver makes all payments. This way, if the driver stops making payments, the dealership has legal recourse and can repossess the vehicle.
Other industries use liens as well. Large construction projects that employ contractors and subcontractors often use special lien waivers and release of liens to ensure all workers get paid appropriately. In this situation, the subcontractor would file a lien waiver, or a claim against the real property, which uses the property as a security. Should the contractor not pay the subcontractors what they're owed, the subcontractors have a claim on the property, and they can go to court to seek foreclosure in order to collect their missing wages.
You must file a lien with your county's record office or courthouse for the lien to be official and legally binding.
Lien Waiver vs. Lien Release
Some people use the terms "lien waiver" and "lien release" interchangeably, but they're very different documents . Particularly if you're a contractor or subcontractor, it's vital to understand the difference between these two items and use them appropriately.
A lien waiver is a document that the contractor gives to the subcontractor along with payment. It's essentially a lien receipt, tracking the amount of money paid to the subcontractor, which they should then discount from the total of the lien. Depending on the length of the job and payment structure, some contractors present a lien waiver with each paycheck, which the subcontractor signs and returns. Others provide a single lien waiver with the last paycheck, indicating they have paid the subcontractor in full.
A lien release, by contrast, is the legal document described above, which the subcontractor files with the county, stating they have received their full payment and no longer lay a claim to the property.
Types of Lien Releases
Lien releases might look different and require specific information and supplementary materials depending on the industry and type of property it represents. Consider these four common types of lien releases:
- Contractor's or mechanic's lien release: This lien is for vehicle mechanics or members of the construction industry awaiting payment on a project or repair.
- IRS lien release form 12277: This form asks the IRS to release property debt upon the owner's final payment.
- Mortgage lien release: Once all mortgage payments are complete, the homeowner can file a release of lien.
- Partial release of lien: A partial release is filed after small payments towards the full amount have been paid. This is often used in the contractor/subcontractor situation.
Conditional vs. Unconditional
Most release of lien forms are drafted before the start of the project and then filed once work has finished and payment has been made. Release of lien forms can be either conditional or unconditional, which significantly impacts their value.
- Conditional: Lien rights won't waive until full payment is made. Conditional release of lien forms are advisable since they're not effective until all conditions outlined in the contract are met.
- Unconditional: These contracts are effective upon signing regardless of payment status. Unconditional forms release the signer of their lien claim even if they haven't received their full payment yet.
Contractors and subcontractors usually agree on one of four standard payment schemes, lien waivers, and lien release forms:
- Conditional Waiver and Release Upon Progress Payment: This form is only valid once all the conditions of payment have been met. The form is provided with each payment, so the recipient will often sign more than one as they receive regular payouts.
- Unconditional Waiver and Release Upon Progress Payment: This form becomes valid as soon as it's signed, whether or not the recipient has received payment. It's also provided with each pay cycle, so the subcontractor will usually sign more than one throughout the project.
- Conditional Waiver and Release Upon Final Payment: This form is valid once all the listed conditions are met. It's only provided once, along with the final payment for the project.
- Unconditional Waiver and Release Upon Final Payment: This form is automatically valid upon signature. It's offered at the conclusion of the project with the last payment.
If you're subcontracting on a construction job, ensure your lien appropriately protects you by taking these precautions:
- Negotiate the form of release in the initial contract. You're bound by what the contract states once the contractor provides final payment.
- Sign a conditional waiver. Conditional waivers are almost always the safest contract choice since you maintain your lien rights until you have cash in hand. With an unconditional waiver, it's valid the moment you sign regardless of payment status.
- Establish an accurate through date. Make sure the through date in the contract matches what you anticipate earning overall. You could lose money even with a lien if you miscalculate your earnings.
- Add exceptions to the release. Ensure you receive appropriate compensation in the case of delays, change in materials cost, or other wage-impacting situations by excluding these situations from your release of lien document.
Image via Unsplash by jessedo81
How to Get a Release of Lien
The process for obtaining a release of lien varies from state to state or county to county. Most record offices, though, follow a similar set of procedures. Check with your local recorder's office or courthouse to ensure you know exactly what you need for your specific situation. The general steps include:
- Preparing the appropriate form. In the case of subcontractors, this is the form you agreed on in your initial contract. For vehicle owners, your county might supply a specific template or form for you. Usually, you'll need information like claimant name, property in question, total amount paid, and date paid along with other related details.
- Obtaining signatures. The release of lien form usually needs to be signed by all vested parties for validity, along with the date.
- Notarizing the form. Some states require notarization, so check to see if that's necessary for your situation.
- Filing the release of lien. File the release of lien with your county recorder to ensure the property records are up to date.
Release of lien documents are highly important for both property owners and those who work on that property. Take the time to ensure your release of lien documents are accurate, account for any exceptions, and meet your expected wages before agreeing to it. Consider using the services of a contract lawyer to help you create an effective release of lien document.
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