Construction lien waivers are an indispensable part of the traditional construction payment process. The downstream flow of payment from the owner down to the lowest tier of subcontractor depends upon them.

In the real world, the lien waiver is a ticket to payment. Owners and lenders rely upon lien waivers when making progress payments. No sophisticated owner or competent construction loan dispersing agent should make a progress payment without receiving a partial lien waiver from the prime contractor and from all of its subcontractors and material suppliers that are to receive any proceeds of the payment.

The prime contractor typically collects the appropriate partial waivers from its subcontractors and suppliers and submits them, together with its own partial waiver, as part of the prime’s payment application package. Prime contracts often require this as a precondition to payment. This same requirement is then imposed upon the subcontractors through flow-down clauses or other language in the subcontracts.

This process creates a conundrum for the lien claimants, especially for the subcontractors and suppliers. In order to get paid they typically must each sign and deliver a partial lien waiver in advance of payment. Having waived lien rights, lien claimants then face the risk of nonpayment and there are no guarantees that payment will actually be received. In an attempt to manage this risk, lien claimants often add language to the lien waiver conditioning the waiver’s validity upon receipt of payment. Typically, one simple sentence is added, such as: “This lien waiver shall not be valid and enforceable unless and until [lien claimant] actually receives payment.” Enter the “conditional” lien waiver.

Wis. Stat. section 779.05, however, raises a question whether such payment conditions are enforceable under Wisconsin law.

Point: The Payment Condition is Void and Unenforceable

The first sentence of Wis. Stat. section 779.05(1) states:

Any document signed by a lien claimant or potential claimant and purporting to be a waiver of construction lien rights under this subchapter, is valid and binding as a waiver whether or not consideration was paid therefor and whether the document was signed before or after the labor, services, materials, plans, or specifications were performed, furnished, or procured, or contracted for.

A lien waiver with express language conditioning its validity on the receipt of payment (“consideration”) seems to conflict with the express language of the statute. The express language of section 779.05(1) appears to trump the conditional language in a lien waiver rendering such language void. Further, section 779.05, does not expressly provide for nor recognize conditional lien waivers, as do the mechanics lien statutes of other states.¹

If the legislature had intended to allow conditional lien waivers the statutes would so state. Instead, the express language of section 779.05(1) states the opposite. Moreover, by expressly providing that a lien waiver is valid and binding with or without consideration, the Legislature intended to protect owners and lenders who rely upon lien waivers when dispersing payment. Conditional lien waivers undermine that protection.

While the use of conditional lien waivers in Wisconsin is not uncommon, there is no reported Wisconsin case law addressing this issue. Given the vast differences in mechanic’s lien statutes from state-to-state case law from other jurisdictions is of limited value.

Counterpoint: The Payment Condition is Enforceable

Wisconsin’s construction lien law is silent regarding conditional lien waivers and does not clearly prohibit them. The language of section 779.05(1) stating that a lien waiver “is valid and binding as a waiver whether or not consideration was paid therefor” simply means that, unlike contracts, enforceability of a lien waiver does not depend upon consideration, but nothing in section 779.05(1) specifically prohibits lien waivers being expressly conditioned upon the actual receipt of payment. If the legislature had intended to prohibit conditional lien waivers the statutes would plainly so state. The language of the express condition on the face of the lien waiver puts the recipient on notice of the condition. While there is no case law specifically addressing enforcement of “conditional” lien waivers, the Wisconsin Supreme Court has held that lien waivers are interpreted according to principles of contract law.² Accordingly, an express, unambiguous condition on the terms of the lien waiver would appear to establish the extent of its enforceability. Having notice of the condition, the recipient is free to decide whether or not to accept the conditional waiver and make payment or to reject it and refuse payment. There is no unfairness or deception, and therefore no prejudice to the recipient.

The Takeaway

Conditional lien waivers carry risk both for the lien claimant and for the recipient, and unless and until there is a reported opinion deciding this issue this risk will remain in Wisconsin. In the event of nonpayment to the lien claimant, the lien claimant cannot be certain that the condition protects it from a blanket waiver of lien rights. If a lien claimant has genuine concerns about receiving payment there are better and more reliable ways to protect itself, such as a simultaneous exchange of lien waiver for payment or an escrow arrangement where the escrowee holds the lien waiver in trust pending payment.

Owners and lenders often cannot be sure that a payment condition has been satisfied or that it would be deemed void and unenforceable if the claimant is not paid. Owners and lenders must therefore be on the lookout for conditional lien waivers and decide whether to refuse to accept them. Owners can further protect themselves by insisting on language in the prime contract expressly prohibiting conditional lien waivers.

Depending on the circumstances, the risks associated with conditional lien waivers may outweigh any potential benefit. The bottom line is that when it comes to conditional lien waivers in Wisconsin – proceed with caution.

This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.

Endnotes

¹ See, e.g., Mich. Compiled Laws § 570.1115(4).

² Great Lakes Excavating v. Dollar Tree, 2022 WI 44, 402 Wis.2d 311, 976 N.W.2d 506