Co-authored by: Kevin Pressley, Rising 2L at Texas A&M Law School
This blog is not to be considered legal advice. It refers specifically to issues regarding the law of the State of Texas at the time it was written and it is not guaranteed to be an exhaustive update of all construction or business related law. Feel free to give my office a call at (817) 475-5522 for more information.
As the citizens of Texas continue to ride the COVID-19 rollercoaster, the owners of some of our most essential, and often overlooked, businesses are facing extraordinary adversity. Many people have been working from home and taking care of kids that have been out of school. During this time at the house, many have decided to undertake home improvement projects from interior design, to landscaping, to pool installation. This has been somewhat of an interesting phenomena given the effects of COVID-19.
It seems that, as residents and businesses tighten their budgets to weather shutdowns and other COVID-19 orders, there will be potential for some of these projects to fail to pay out. When that happens, oftentimes, the appropriate course of action is to file a lien on the subject property. Contractors and materialmen who contribute to the improvement of real property should be paid for their work and a lien can help to achieve that.
For contractors, dealing with clients unable or unwilling to pay-up is by no means a new phenomenon. But, with the current pandemic extending into the late summer and possibly the upcoming winter, it is now especially important for contractors and materialmen to know what to do to help get paid if and when a client doesn’t pay.
So what can a Texas contractor do when clients cannot or will not pay for completed work or delivered materials? There are a few options. He or she can (1) do nothing, (2) file a lawsuit, and / or (3) file a lien against the property involved to secure later payment. This article focuses on the third option, one that is often the most practical, but unutilized, means of recovery, known commonly in Texas as a “Mechanic’s Lien.” The scope of this article is limited to statutory Mechanic’s Liens described in Chapter 53 of the Texas Property Code and does not pertain to constitutional mechanic’s liens described in Article XVI, Section 37 of the Texas Constitution.
This article will not specifically address retainage practices or recovery of retained funds, but if you have questions about retainage, feel free to contact our office.
Basic Terms
Before exploring contractors’ options, a few terms must be defined because different remedies are available depending on a party’s relationship to the project. The important terms here are “original contractor,” “subcontractor,” “materialman,” and “original contract.”
A quick note, in this context, the term “contractor” does not refer to the term “Independent Contractor” which concerns an individual’s employment status and labor laws.
An “original contractor” is a party who enters into an agreement with a property owner to provide labor or materials for development, repair, etc. of a property. The original contractor may be a “general contractor,” but may also be any party who furnishes labor or materials or fabricates specialized materials in an agreement made directly with the property owner. There may be more than one original contactor for a given project.
A “subcontractor” is a party who enters into an agreement with an original contractor or other subcontractor (not the property owner) to provide labor or materials for development, repair, etc. of a property. There may be subcontractors, sub-subcontractors, sub-sub-subcontractors, etc., but they are all referred to as subcontractors for the purpose of this article.
A “materialman” is a party who delivers or specially fabricates materials for the development, repair, etc. of a property. A materialman may be an original contractor or a subcontractor.
The “original contract” is the project agreement made between the original contractor and the property owner.
Most contractors are familiar with project contractor hierarchy, but here is a quick breakdown of a pretty standard arrangement for readers who are unfamiliar or need a refresher: a property owner has a vision for a project and hires a general contractor, who may contract out some of the work necessary to complete the project to other individuals or companies, often with specialized equipment or skills. For example, a property owner buys an empty lot and hires a general contractor to build a home; the general contractor may be able to build the home from start to finish without any outside help, but more likely is that the general contractor will subcontract out the plumbing, electrical, finishing, or other parts of the home-building project.
In this case, since the general contractor made an agreement directly with the owner, the general contractor is known as the “original contractor.” The secondary contractors, those who enter agreements directly with the general contractor, rather than directly with the property owner, are “subcontractors.” The subcontractors themselves may contract out some of their own work to “sub-subcontractors,” who may in turn sub-sub-subcontract out some of their work, etc. This article will refer to any subcontractor, however far removed from the original contractor, as a “subcontractor.”
Generally, for the purposes of Texas Mechanic’s liens, the most important distinction is whether a given party is an original contractor or a subcontractor on the project under the original contract.
Who can file?
So who may file mechanic’s liens? The Texas Property Code provides a great deal of guidance here and relief is available to nearly anyone who might expend labor or materials in improving a property under an agreement with the property owner. Eligible contractors include builders, architects, landscapers, laborers, demolition crews, and material suppliers to name just a few.
Whether a party is the original contractor or a subcontractor affects the process required to perfect a lien on the property, but both original contractors and subcontractors alike may file liens against the property.
For a homestead, a claimant must have a written agreement with the owner in order to affix a lien on the property.
What is a Mechanic’s Lien and what does it do?
A Mechanic’s Lien is a statutory claim made against a property and its owner. Physically, a mechanic’s lien on is just a document or two filed in the county records, but the existence of the lien secures the payment owed to the filer. How does it do that? A Mechanic’s Lien, if valid and filed properly, may allow the unpaid contractor to demand a foreclosure and sale of the property to satisfy the payments due to the contractor.
In short, Mechanic’s Liens serve many purposes at the same time: (1) they serve as official notice of the claim to the property owner and the public; (2) they “secure” the amount owed to a contractor, using property as collateral; (3) a property owner may perceive a lien as a threat and may issue payment faster; and (4) filing a lien is a step towards foreclosing upon and forcing the sale of the property to recover funds, thereby avoiding expensive, time consuming litigation where recovery of what is owed is not guaranteed, even to a prevailing contractor.
When can the lien be filed? Are there any deadlines to worry about?
A lien against property must be filed within three or four months of the date the indebtedness “accrues” depending on the specific circumstances. The date on which the indebtedness “accrues” varies for the different classes of contractors (that is, original contractors, subcontractors, or material fabricators). These deadlines must be strictly adhered to—even if all of the other requirements are met, failure to meet the statutory deadlines will invalidate subsequent attempts by the contractor to place a lien on the property regarding that debt.
Once the lien has been perfected upon the property, the lienholder then has a year or two, depending on whether the project was residential or commercial, to initiate foreclosure upon and forced sale of the property; if the lienholder does initiate the foreclosure within the two-year period, that right is lost and the Mechanic’s Lien is effectively released of record.
There are other additional deadlines for notifying the property owner and / or other contractor(s) of the claim. Generally, these deadlines are hard deadlines, and failure to provide timely notice may render an otherwise legitimate claim of lien ineffective.
What needs to be filed?
Filing requirements vary based on the aggrieved party’s status as either an original contractor or a subcontractor.
An original contractor or subcontractor must file an affidavit to perfect a Mechanic’s Lien. The affidavit must be carefully crafted to comply with statutory requirements—slight deviations from these requirements can be disastrous and render the affidavit and lien invalid and unenforceable.
What notices should be sent?
Original contractors may file the lien without first notifying the owner; however, the contractor must notify the owner within five days of recording the lien affidavit.
Subcontractors must notify the owner and the original contractor of the claim.
Material fabricators must notify the owner if the claim is for unpaid money owed by the original contractor to the fabricator; they must notify the owner and the original contractor if the money is owed by a subcontractor.
What happens after the lien is filed?
The owner may choose either to pay or not to pay the claim amount. If the owner pays the lien in full, or otherwise settles with the lienholder, then the owner may request and record a release of the lien.
If instead the owner chooses not to pay, then the lienholder may foreclose upon the property. The lienholder must initiate foreclosure on the property within one or two years, depending on whether the project was residential or commercial, of the lien affidavit filing deadline; failure to do so acts as a release of record.
If the foreclosure is successful and the sale of the property is forced, the lienholder may collect the amount of the claim from the proceeds of the sale. The lienholder may also recover its costs and fees at the discretion of the court.
Alternatively, an owner may want the lien removed because the owner believes the lien is invalid or unenforceable. In this case, the owner may initiate a suit to declare the lien invalid and unenforceable. Alternatively, the owner may request the lien be declared invalid and unenforceable by a summary motion in response to a suit to foreclose upon the lien.
The Texas Property Code also allows claimants and owners to file bonds for various purposes relating to a given lien. The bond processes and requirements can be complex, but they offer both claimants and owners additional methods of removing, contesting, or enforcing liens. These bonds are not discussed further in this series, but feel free to contact our office if you have any questions about them.
Summary
Texas statutory Mechanic’s Liens are a useful tool contractors can use to secure the payments owed to them. But they can be intricate, and a seemingly trivial failure to adhere strictly to the Texas Property Code rules may invalidate a lien. Because of this, it is important to know your rights and responsibilities as a contractor working in Texas.
Business and construction law issues can be tricky to navigate in the best of times. If you are interested in more information on this topic, do not hesitate to give my office a call at (817) 475-5522.
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