No Lien Contract: Everything You Need to Know
A no-lien contract contains a clause that allows a party to waive its right to file a mechanics lien on a project in the future.3 min read
A no-lien contract contains a clause that allows a party to waive its right to file a mechanics lien on a project in the future. It's commonly used in construction contracts and is signed before work begins.
Legality of No Lien Contracts
Generally, most people do not like the use of no-lien contracts. Because of this, some states have even prohibited parties from using these types of contracts through various court decisions or statutes. However, this is not a universal guideline, so it's always important to see how your state has ruled on no-lien contracts in the past.
In many cases, a no-lien clause in a contract is similar to a preemptive lien waiver. There's really no practical difference between the two, as both types of waivers give the potential claimant no-lien rights.
Waiving lien rights before work begins is legal in some states, but the process might be subject to specific regulations. If you do face legal pushback on a contract between you and another party, realize that it might not be the contract that is causing the problem but the subsequent lien waiver.
What Kinds of Projects Can Use a No-Lien Contract?
There are two main kinds of projects that can utilize no-lien contracts. These include:
- Class 2 structures, which Indiana code section 22-12-1-5 defines as single- and double-unit structures residential in nature.
- Construction owned by specific groups, such as rural membership utilities, municipal utilities, and public utilities. This is further defined by Indiana Code 32-28-3-1(3).
How to Make Your No-Lien Agreement Valid
Keeping a no-lien agreement valid means you won't be able to make liens against the owner's property. However, you will need to fully and accurately describe the property in question. Other requirements include:
- Meeting the same requirements for acknowledgment as deeds.
- Recording the no-lien contract in the office of the recorder in the county where the property sits.
- Getting this record entered no more than five days after it is signed.
If you take these steps, you should gain protection against laborers, journeymen, mechanics, subcontractors, and any other party that is not specifically subject to the no-lien agreement directly.
Because a record of all construction being undertaken could be quite lofty and long, you don't need to include all of this in your no-lien contract. Instead, the principal and the owner simply need to sign an ancillary no-lien agreement separate from the main construction agreement. In most cases, this meets statutory requirements for no-lien contracts.
Contract Stipulations to Watch Out For
In some cases, those at the higher end of the payment chain, such as prime contractors, owners, and lenders, will use no-lien contracts to push risk onto subcontractors and suppliers. To keep yourself safe, you also need to read each contract fully. Be on the lookout for some of the following problematic clauses:
- Contingent payment clauses, which specify that payment is contingent on work being completed. Over the past 20 years, these clauses have become increasingly complicated in an effort to shift financial risk onto the parties lower in the payment chain. There are two main types of these clauses:
- Pay-when-paid, which sets a timeline for payment. For example, the contractor may have the right to give the subcontractor their wages after being paid by the owner themselves. While this gives the contractor more time to pay subcontractors, it does not release them from these debts if the owner never pays him.
- Pay-if-paid allows a contractor to never pay subcontractors if he doesn't receive payment from the owner. Because this is unfair, courts often view these clauses unfavorably, which lowers their odds of being enforced. However, if wording in the contract is clear, the contract may be enforced.
- Lien subordination clauses, which move a mechanics lien from a priority spot in a contract to a lower position behind items that otherwise wouldn't have been high priorities. In many cases, lien subordination clauses are used in lending agreements, so lenders can claim priority for their deeds of trust instead of mechanics lien claims.
These are the two main unfair provisions to watch out for, but also keep an eye out for other issues like:
- No-damages-for-delay clause.
- Unfair lien waivers.
- Over-the-top payment bond requirements.
- Over-the-top indemnification requirements.
- Over-the-top use of retainage.
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