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Virginia Code Amendment Protects General Contractors from Contract Lien Waivers

The Virginia Code has been amended to protect general contractors from waiving their mechanic’s lien rights in a contract signed in advance of furnishing any labor, services, or materials.  The Virginia Code had been similarly amended in 2015 to protect subcontractors, lower tiered sub-subcontractors and material suppliers from waiving their lien and bond rights.  That 2015 amendment conspicuously failed to list general contractors as a protected party. 

Now, Virginia Code §43-3(C) prevents owners, general contractors, or higher tier subcontractors from obtaining waivers of lien rights in a contract signed in advance of furnishing any labor, services, or materials.  The protections only exist in contracts signed in advance of furnishing any labor, services, or materials. 

It is still possible to waive lien and bond rights for past or even future deliveries in any other document signed after the claimant begins work.  This includes progress payment waivers.  General contractors, subcontractors and suppliers always have to be careful reviewing progress payment waivers to make sure they are not waiving rights for future deliveries, for change orders, or for retention.  See a newsletter on this subject here: http://www.fullertonlaw.com/newsletters/mechanics-lien-a-bond-waivers.html

It is significant that Virginia Code §43-21 was also amended to say: 

Notwithstanding the provisions of subsection C of §43-3, a general contractor may, prior to or after providing any labor, services, or materials, contract to subordinate his lien rights to prior recorded and later recorded deeds of trust, provided that such contract is (i) in writing and (ii) signed by any general contractor whose lien rights are subordinated pursuant to such contract.

Accordingly, a general contractor cannot waive its lien rights in a contract, but can subordinate (make the lien lower priority) to the construction lender or other liens on the property. This could effectively eliminate mechanic’s lien protection, depending on the value of the property and the dollar amounts of other liens.  This amendment to §43-21seems to take away what the amendment to §43-3 granted.  However, it is respectfully submitted that this amendment to §43-21 was not necessary to make it possible for a general contractor to subordinate liens rights in a contract.  A subcontractor could do the same thing in a contract, even without such a statute.  All contractors should carefully notice any “subordination of lien rights” in a contract, as that may effectively eliminate mechanic’s lien protection.

The new amendment to Virginia Code §43-3(C) protecting general contractors became effective July 1, 2018. This certainly means the protections exist for any contract signed after this date.

It is significant that the 2015 Virginia Code amendments void contract provisions that waive or diminish lien or bond rights.  A “pay when paid” or “pay if paid” clause may diminish lien or bond rights of subcontractors. Are “pay if paid” clauses now null and void in Virginia? We will need some court opinions to know the answer to this, but we should expect these arguments regularly until case law provides clarity.  Other common contract terms such as those requiring written signed change orders or immediate written notice of any delay or other additional costs could similarly “diminish lien rights.” .  Signed change orders are required by the Virginia Contractor Board Regulations. But are these contract terms void because they diminish lien rights?

The 2015 Virginia Code amendments also voided any pre-work subcontract provision that waives or diminishes a subcontractor or supplier’s right to assert claims for demonstrated additional costs. Virginia Code §11-4.1:1, with the 2015 amendments, reads as follows:

Waiver of payment bond claims and contract claims; construction contracts

A subcontractor as defined in §43-1, lower-tier subcontractor, or material supplier may not waive or diminish his right to assert payment bond claims or his right to assert claims for demonstrated additional costs in a contract in advance of furnishing any labor, services, or materials. A provision that waives or diminishes a subcontractor's, lower-tier subcontractor's, or material supplier's right to assert payment bond claims or his right to assert claims for demonstrated additional costs in a contract executed prior to providing any labor, services, or materials is null and void. 

Just like it is difficult to say what contract terms would be void because they diminish lien or bond rights, it is hard to say what common contract terms would be void for diminishing the right to make claims. The conduit relationship and notice and claim requirements in a subcontract may do exactly this. These seem like reasonable contract terms.  But the most common defense to a subcontractor’s claim for extras is that the subcontractor failed to give notice of the claim within the time and in the manner required in either the subcontract or the general contract. A “pay when paid” or “pay if paid” clause diminish the right to make claims. So do contract terms requiring written signed change orders or immediate written notice of any delay or other additional costs. 

Note, however, that Virginia Code §11-4.1:1 was NOT amended to extend these claim protections to general contractors as was Virginia Code §43-3.  The words “general contractor” are still conspicuously absent.  The protection flows only to subcontractors and material suppliers.  This may be in part, because general contractors do not need the protection of payment bonds. General contractors are providing payment bonds.  However, the failure to extend to general contractors the protection of the right to assert claims for demonstrated additional costs in a contract can put a general contractor in a significant disadvantage compared to a subcontractor. 

These conduit, notice and claim provisions may now be void in subcontracts, at least in diminishing subcontractor rights to assert claims. A general contractor may be barred by the general contract from passing on to an owner a late claim on behalf of a subcontractor, while the subcontractor still has a claim against the general contractor. This would significantly alter the relationship of subcontractors and general contractors and add greater risk to general contractors.

What if the subcontractor signs a waiver in a contract amendment or a separate document after the subcontract is signed and after work begins? What if a subcontract is simply not executed until after work begins?  The new Virginia Code does not seem to void such waivers, as long as work has begun. General contractors may start to employ these techniques to reduce their risk. 

As many of you know, mechanic’s lien and bond claim waivers can appear in waiver forms for both progress and final payments.  These waivers can permanently eliminate lien or bond rights under Virginia law, for retention and even for future work. General contractors, subcontractors and suppliers must still be careful to identify and eliminate waivers for future work in progress payment waivers. However, general contractors may no longer be able to require such progress payment waivers in advance by adding them as an exhibit to a subcontract. If the progress payment waiver attached to the subcontract diminishes the subcontractor or supplier lien rights for future work or retention, for example, then the subcontract provision requiring that waiver is now null and void.

The amendments to Virginia Code §43-3(C) are shown in italics below:

Any right to file or enforce any mechanics' lien granted hereunder may be waived in whole or in part at any time by any person entitled to such lien except that a general contractor, subcontractor, lower-tier subcontractor, or material supplier may not waive or diminish his lien right in a contract in advance of furnishing any labor, services, or materials. A provision that waives or diminishes a general contractor’s, subcontractor's, lower-tier subcontractor's, or material supplier's lien rights in a contract executed prior to providing any labor, services, or materials is null and void. 

 

Virginia is now in line with Maryland, which prohibits lien and bond waivers in contracts.  Maryland is actually more protective, since such waivers are prohibited until work under the contract is complete. In other words, it does not matter whether the contract is signed after work begins. However, the Maryland provisions do not protect waivers of change orders or claims.  The amendment also brings Virginia more in line with the federal Miller Act, which states that a payment bond waiver is void unless executed after the claimant has furnished labor or material.

 

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