Lien releases are prevalent in the construction industry and are extremely helpful in mitigating liability. But what is a lien release? Lien notices are the only safeguards a contractor can use to ensure payment on a completed job, and a lien release is the only tool to remove that liability. For instance, a subcontractor will place a lien on the general contractor and on the job site owner to ensure that the subcontractor is paid for the services rendered. Once the job is complete, the general contractor will request a final release (discussed below) to relieve them of any payment liability. Companies should obtain releases from their vendors for each specific job and/or invoice.
There are four types of releases and they are referred to by number and description. Release form 1 is a conditional waiver and release upon progress payment. Release form 2 is an unconditional waiver and release upon progress payment. Release form 3 is a conditional waiver and release upon final payment. Release form 4 unconditional waiver and release upon final payment.
Typically, Form 1 is used at the start of the project if a progress payment is expected to be paid. Form 2 is used after we have made a progress payment. Form 3 is used when we are ready to release the funds, but require Form 3 to be returned before issuing a final payment. Form 4 should be used at the end of the job when all services are performed and the job is considered closed.
Form 1 states that after a vendor receives a progress payment of a specified amount, they will no longer be able to lien you or your customer and any existing liens are void for the progress payment amount. Form 2 states that the vendor has received a progress payment of a specified amount and releases you and your customer from the amount paid to date. Form 3 states that upon receiving a check for the entire specified contract amount (or amount outstanding if progress payments were made), the vendor will be considered paid in full; unless an amount is in dispute and is specifically stated. Form 4 states that the vendor has been paid in full and releases you from any future payments and liability; unless a disputed amount is specifically listed.
It is important to note that each of these releases should be dated according to the period being released. For example, if there is a year long contract, we can request Form 2 releases (unconditional progress payments) for each month that we work. In the event of a lawsuit, a Form 2 release will provide documented evidence that progress payments were made and received during the life of the contract.
This paperwork can get out of hand very quickly and handling it incorrectly can have major cash and liability implications. TGG can set up best practice or maintain the discipline to ensure your company correctly manages this process. Call one of our experts today.Written by: Jake Cavanagh TGG Accounting