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Strong contracts can minimize the risk of subcontractor liens

On Behalf of | Jul 4, 2024 | Construction Law

Professionals and businesses in the construction sector often need to outsource certain project elements. Hiring subcontractors is a popular way to fill the gaps in an employee roster and meet the expectations of clients. However, working with subcontractors comes with a degree of risk for an established professional or a construction company. Specifically, there may be reason to worry about the subcontractor using the client’s property as leverage for pay.

In scenarios where subcontractors don’t finish their work or provide substandard services, companies may be forced to withhold some of their pay to push them into contract compliance. The subcontractors could then record a notice of lien against the client’s property. Litigation related to liens can upset clients and damage the business’s reputation. Thankfully, it is possible to address that risk in a contract signed with a subcontractor.

Lien waivers can protect properties in Tennessee

Tennessee statutes allow businesses and individuals who provide labor, services or materials for a construction project the right to record a notice of lien if they don’t receive payment in full. The law protects that right and any contract language attempting to limit that right is void under the law.

It is possible to require a waiver of lien for payment in a subcontractor or independent contractor’s agreement with a company. The waiver applies to money paid but not the balance due under the agreement.  Lien waivers have to contain very clear language and meet certain standards for them to be enforceable in Tennessee. When properly drafted and executed, lien waivers can be valuable additions to business agreements in the construction sector.

If a subcontractor attempts to take legal action despite a lien waiver, the construction professional or company that hired the subcontractor can submit the lien waiver to the courts as part of the response to the lawsuit. Where a notice of lien can be recorded by subcontractors and vendors not in privity with the owner on non-residential properties, the rules are different for homeowners. For residential property, only those in a direct contract relationship (“privity”) with the residential homeowner can record a lien.

While the business can take action to protect the ownership rights of the client who hired them by obtaining waivers for money paid, the Register of Deeds will record any properly formatted notice of lien whether the claim is legitimate or disputed.  Without proper contractual protection coupled with experienced representation to help deal with unscrupulous liens, clients might blame the organization for the unethical conduct of the contractor that the business hired.

Learning more about ways to mitigate risk is valuable for those operating in the construction sector. Businesses and professionals with the right terms in their contracts and a plan to react to liens have less reason for worry during construction-related disputes.