At its recently-concluded 2015 Regular Session, the Virginia General Assembly passed legislation which will significantly affect those persons who deal with potential mechanic’s lienors. The revision to section 43-3 of the Virginia Code declares that any attempt by a subcontractor or materialman to “waive” or “diminish” his lien rights prior to furnishing labor or materials is “null and void.” The full text of the revision to paragraph C of §43-3, which otherwise acknowledges the right to waive any mechanic’s lien, is as follows:

• [A] subcontractor, lower-tier subcontractor, or material supplier may not waive or diminish his lien rights 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 lien rights in a contract executed prior to providing any labor, services, or materials is null and void.

A revision to Virginia Code § 11-4.1:1 similarly provides that any attempt to waive subcontractors’ or material suppliers’ rights to assert payment bond claims or asserts claims for demonstrated additional costs is also null and void. See S.B. 891 (2015 Legislative Session).

The statutory revision is effective July 1, 2015. Given constitutional constraints, the new legislation is prospective only, and cannot impact contracts or waivers existing on its effective date.

The bill may be a reaction to the economic slow-down that began in 2008. With the down turn in construction activity, each party in the construction supply chain (except for those with the least bargaining power) found ways to decrease costs and risk, including insisting upon certain waivers as a condition for awarding work.
The legislative action may also simply codify the judicial view in other states where such waivers are held to be an unenforceable contractual provision contrary to public policy. The Fiscal Impact Statement for the bill generated by the Department of Planning And Budget declares that it “protects” a subcontractor. Whether that perceived protection is necessary may be open to question. The Supreme Court of Virginia has stated that in the absence of clear evidence to the contrary, it is presumed that one has not precluded himself from exercising the statutory mechanic’s lien remedies. In the past, any such waiver was also open to collateral attack on grounds of lack of consideration, although the Court, on the facts before it, has upheld a lien waiver against an attack based upon an argument of lack of consideration specific to the waiver.

The legislation may be notable for who and what it does not affect.

It presently applies only to subcontractors and materialmen. The website of the Virginia Association of General Contractors notes that “construction interests were successful in the House Courts of Justice Civil Subcommittee, and in the full committee, in amending the proposal to include similar protections for general contractors (with no opposition).” The article reports that “representatives from title companies and lenders convinced some of the Republican caucus leaders in the House to ignore the subcommittee and committee process and oppose the bill,” and as a result the general contractors were excluded. The Association declared it will work in the next General Assembly session “to correct this unfair action.” For the time being, the prohibition against lien waivers does not apply to general contractors.

By its terms, the revised statute applies only to the waiver of liens and other claims “executed prior to providing any labor, services, or materials.” Thus, the new legislation does not affect the customary practice of requesting lien waivers prior to payment or draws for work previously completed.

The new statute does not affect other statutory remedies presently available to subcontractors and materialmen. It does not alter the timing for recording and perfecting the traditional (statutory) mechanic’s lien against the owner’s realty for non-payment for labor completed or material furnished or the scope of the work that may be included in any one such filing. Nor does the legislation change the manner by which a subcontractor or materialman may fix personal liability upon the owner or a general contractor for work done or material furnished.

As foretold in the reported controversy surrounding the enactment of the legislation, the force of the new legislation may fall upon those entities who are not directly involved in the negotiation of the construction contract or performance of the work itself, but who routinely rely upon mechanic’s lien waivers:  lenders and title insurance companies. In the absence of a recitation on the face of a lien waiver which negates the waiver as one executed prior to the provision of material or performance of labor, one relying upon the document alone cannot know whether the instrument falls within the new statute’s proscription and is “null and void.” The banking and title insurance industry (and their counsel) will have to address this issue.

While the industry comes to grip with the statutory revision, counsel should focus on the date of the execution of a lien waiver, that is whether it was executed before or after the July 1 effective date. Additionally, counsel and members of the construction industry charged with negotiating and preparing construction contracts for projects commencing on or after July 1, 2015, should bear this revision is mind, as it is will likely have a large impact on the certain bargaining positions of the respective parties to construction contracts in the future. 

If you have any questions, please contact our Construction Law Practice Group.