Mitigation of Risk in the Age of COVID-19: Ten Ways Owners Can Protect Themselves Against Lien Claims in Washington

Originally published as an Op-Ed by the Oregon Daily Journal of Commerce on October 15, 2020.

The COVID-19 pandemic has caused, and continues to cause, major impacts to many sectors of the economy, including the construction industry. Projects underway before the pandemic triggered suspensions in the work may have been slow to resume or abandoned altogether because of funding issues. A consequence of this unforeseen impact is that contractors, subcontractors, and suppliers feel immense pressure and anxiety to protect and preserve their rights to payment for work performed on their jobs.

The construction lien, as a security interest against the improved property, is one tool that contractors and suppliers routinely employ to ensure payment. But, since lien claims encumber title and can tie up construction financing or property transactions, owners and developers should, during – and preferably before – the project, implement strategies to mitigate the risk of lien claims. Fortunately, many options are available to help owners and developers deal with such risk, which may be heightened during these unsettled times.

In Washington, owners can first look to the state’s lien statute for guidance. The pre-claim notice required (in some cases) by RCW 60.04.031 contains “Important Information” for owners of property being improved. The statutory notice form references two commonly used methods to avoid liens: joint checks and lien releases. However, these suggestions may not be helpful in all cases. Even a project of modest size may have a dozen subcontractors and suppliers, and it is not practical to issue checks to 12 parties at once. Moreover, doing so will not protect the property from a lien by the prime contractor. Lien releases can provide useful information, but a reasonable form of release will allow subcontractors and suppliers to reserve pending claims that may later turn into liens.

For a broader array of lien risk mitigation strategies, the following may prove useful to owners:

1. The owner’s contracts with its contractor(s) and designer(s) can include a release of lien rights (in consideration of payment, but probably not in advance of the work).
2. The owner can obtain the consent of appropriate contractors and designers to subordinate their lien rights to the interest of the owner’s lender.
3. The owner’s contracts with its contractor(s) and designer(s) can minimize the likelihood of claims for additional compensation by clearly stating the scope of work and establishing strict deadlines for notice and submission of claims.
4. The owner can minimize the risk of multiple liens by requiring the prime contractor and lead designer to respond to liens from their subcontractors, suppliers, and subconsultants. Below is sample language that can be used in prime construction contracts:
   Upon learning that any lien has been recorded against the Project improvements or property by any person performing a portion of the Contract Work, Contractor shall, at its own expense and within __ calendar days, remove that lien from the Project by settling the claim underlying the lien, recording a lien release bond, providing other security to the lien claimant, or otherwise. If Contractor fails to act as provided in the previous sentence, Owner may record a bond and recover the cost of the bond from Contactor or deduct that cost from amounts otherwise coming due to Contractor.
5. If concerned about liens arising from work ordered by a person holding a leasehold interest in the property, the owner should ensure the lease clearly defines the extent to which the lessee is required to perform improvements.
6. The owner can require the prime contractor and lead designer to submit, with their periodic invoices, conditional or unconditional lien releases for at least their major subcontractors, suppliers, and subconsultants, or to give notice if any of them have asserted claims for additional compensation.
7. The owner can provide (or direct the prime contractor to provide) a bond or other security for payment of the contractor(s) or designer(s) and obtain agreements expressly accepting the alternative security in place of lien rights. This can be done at the outset of a project or after lien claims have been recorded.
8. If a lien claim is recorded by a subcontractor or supplier not in privity with the owner, the owner may under RCW 60.04.151 withhold amounts from the prime contractor sufficient to protect against the lien claim.
9. If a lien claim is recorded by a subcontractor or supplier not in privity with the owner, the owner can use joint checks made out to the prime contractor and the lien claimant.
10. Track recorded lien claims and determine whether there are grounds to challenge them as frivolous or clearly excessive in amount. If the lien claimant records an “unjust, excessive, or premature notice” of lien under the stop notice provisions, the owner may recover damages and attorneys’ fees.

The above strategies underscore the importance of advance planning to ensure the proper allocation of risks in a contract before the work commences. A comprehensive risk management plan developed early in the process, with proper terms reflected in the parties’ contract, will go a long way to ease concerns if or when problems arise later on the project.