Monday, June 19, 2017

Texas Mechanic's Liens: What You Should Know

By Steven Moses

In the residential construction business, like many other industries, payment is sometimes made too slowly, or often not at all.  If this describes your accounts receivable history, welcome to the wonderful world of mechanic's and materialman's liens:  a world full of strictly interpreted arbitrary deadlines and devoid of compassion for those who dare to make a single mistake.

In Texas, Article XVI, Section 37 of the Texas Constitution grants to mechanics, artisans, and materialmen a claim or interest upon the property on or for which labor or materials were provided for value. Chapter 53 of the Texas Property Code further governs mechanic’s liens by promulgating a specific procedure by which any assertion and enforcement of a mechanic’s lien claim must adhere. While the Constitution and Property Code provide similar protections, the two procedures function separately and distinctly and should be familiar to both contractors and homeowners alike.

Liens are very powerful tools. A valid, enforceable lien that has been timely and appropriately filed with the county records clerk serves as public notice to all potential buyers of the property that a claim for money pertaining to work performed on or materials provided to the property exists and must be satisfied prior to transfer of title. As can be imagined, very few, if any, purchasers are interested in purchasing a property and taking title subject to a lien.

The process set forth in Chapter 53 of the Texas Property Code is very complicated. It is therefore strongly advised that contractors seek guidance from an attorney experienced with the specific requirements of Chapter 53. Having a lien released or declared invalid by a judge is a substantial blow to a supplier who was hoping to use the lien as leverage to secure payment.

Accordingly, the following are steps must be followed when asserting a lien:

1.  Gather Information as Soon as Possible

The first step is to gather information as soon as possible. At the time you execute your contract, or very soon after, you should request in writing from the property owner and all parties above you in the contracting chain: (a) a legal description of the real property being improved; (b) a copy of any contracts executed for the project; (c) a copy of the surety bond, if any, including the name and last known address of the surety; and (d) information as to whether the real property is encumbered by any prior recorded liens or security interests, and if so, the name and last known address of any persons having such lien or security interest. Items (a) and (d) can be obtained from the central appraisal district’s website. Items (b) and (c) may be obtained from the original/general contractor.

2.  Send Out Notices Early

The second step is to send out necessary notices early in the project. To protect your rights, there are two types of notices that should be sent shortly after you commence work on the project. A Notice of Contractual Retainage Agreement should be sent to all parties above you in the contractual hierarchy and the property owner. The notice informs the parties that the property owner must withhold a certain amount of money to ensure you, as a contractor or subcontractor who does not have a contract with the property owner, are paid. This notice must be sent no later than the 15th day of the second month following the date you first provide labor or materials for the project.

The other early notice is called a Notice of Specially Fabricated Materials. As the name implies, this notice only applies to those contractors that will be furnishing specially fabricated materials for the project. “Specially fabricated” materials are those that cannot be easily reused on other projects. This notice provides protection to a contractor’s lien rights on specially fabricated materials even if those materials are not delivered to or installed into the project. This notice must be sent to the property owner and general contractor. It must be sent no later than the 15th day of the second month following receipt and acceptance of the order for specially fabricated materials.

3.  Send Notices as Potential Claims Arise

Third, all contractors – other than original contractors – are required to provide certain notices to the owner and the original contractor. Subcontractors are required to send a Notice to Original Contractor of Unpaid Account to the original contractor. This notice must be sent no later than the 15th day of the second month following each month in which the subcontractor provided labor and material but was not paid for them and must be sent for each month the subcontractor was not paid. Any and all notices referenced in this article should be sent to all contractors above the subcontractor in the contractual hierarchy and to the property owner by certified mail, return receipt requested and first class mail.

4.  File Lien Affidavit

After the necessary notices have been provided, a person entitled to the protections afforded under Chapter 53, must file an Affidavit of Mechanic’s Lien. The lien affidavit is the actual document that asserts a lien on the owner’s property. The affidavit must be recorded in the real property records of the County Clerk’s office in the county in which the property is located.

For commercial construction projects, original contractors on commercial projects must record the lien affidavit no later than the 15th day of the fourth month following written termination, abandonment, settlement, or completion of the contract. For residential construction projects, original contractors must record the lien affidavit no later than the 15th day of the third month following written termination, abandonment, settlement, or completion of the contract.

Subcontractors that want their lien to attach to the retained fund so that they are paid from the retained funds in preference to the general contractor must record the lien affidavit within 30 days of completion of the work. Subcontractors on commercial projects who make a claim for a lien that does not include retained funds, must record the affidavit not later than the 15th day of the fourth month following the last month in which labor was performed.  This same deadline applies for those who have provided specially fabricated material. For residential construction subcontractors, the lien affidavit must be recorded no later than the 15th day of the third month following the last month in which labor was performed or materials furnished.

Last, a copy of the recorded lien affidavit must be sent to the owner and the original contractor within five days of the recordation of the lien with the county clerk.

5.  Enforcement

A mechanic’s lien may be foreclosed only upon judgment of a court ordering the sale of the property. A suit to foreclose upon a mechanic’s lien must be filed within 4 years of the accrual of the claim.

6.  Liability for Invalid Lien

Failure to strictly comply with the requirements set forth in Chapter 53 may result in waiver of a lien claim and potential civil liability for actual damages and attorney’s fees incurred for prosecuting a claim to have the lien released and statutory penalties.

7.  Liens Against a Homestead

Chapter 53 sets forth additional requirements for the assertion of a lien against a property that has been designated as the owner’s homestead. Those requirements may be found in Chapter 53 of the Texas Property Code and will be the subject of a later article.
 

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