By Stanley P. Santire, JD
House Bill H.B. 629, passed by the Texas Legislature in 2005 impacts the statutory lien process in Texas . H.B. 629 was codified as an addition to Section 53.107 and amendments to Section 53.103 of the Texas Property Code. (i) Chapter 53 was already notable for the State’s complex process for perfecting mechanic’s and materialman’s liens.(ii) Before H.B. 629, owners had no obligation to provide notices to anyone regarding lien rights. Now, some owners must provide notices that an original contractor has been terminated or has abandoned a project.(iii) To what degree H.B. 629 adds to the complexity is a matter of perspective. Certainly, it is a significant change for many owners. An owner’s failure to send a notice in compliance with this provision can reduce a contractor’s obligation in filing a lien for retainage. From the view of some contractors, the owner’s failure could simplify the lien procedure by reducing the pressure of a very demanding notice process. Texas provides contractors with different types of possible liens including contractual, constitutional, and statutory. H.B. 629 impacts the most important of these, the statutory lien process.
Contractual Lien
A contractor can obtain a lien by contract or by operation of law.(iv) An example of a contract for creating a lien is a deed of trust. For most contractors, particularly subcontractors, this is not viable. In the vast majority of construction situations, contractors rely on liens that come into being through the operation of law. In Texas, the sources of such liens are the State Constitution and the Texas Property Code.
Constitutional Lien
Lien law in Texas began when Texas was still a Republic. The Constitution of the Republic provided a lien to anyone who improved real property. The doctrine was carried over to the Constitution of the State of Texas . (v) The constitutional lien is self- executing and available regardless of what notices and affidavits a contractor may send or file.(vi) Texas is alone among the states in providing this self-executing. It benefits only a contractor in privity of contract with the owner; i.e. an original contractor. Even for them the constitutional lien protection is very narrow.(vii) Later came a more powerful, and complex, statutory procedure for all contractors.
Statutory Lien
Unlike the constitutional lien, the statutory lien is a powerful tool for subcontractors as well as original contractors. However, the statutory lien is not automatic. Contractors must carefully follow the steps specified in Chapter 53. These steps differ depending on the role of the contractor and the type of work done. Every contractor doing business in the State must understand this statutory process.(viii)
Contractor Chain
The first thing to remember about the Texas statutory filing requirements is that they depend on a contractor’s position in the contract chain. The original contractor, often referred to as a general contractor, has a direct relationship with the owner and is therefore first in the chain, followed by first tier subcontractors.(ix) Subcontractors who have a relationship only with a subcontractor are even further down the chain.(x) These are second and third tier contractors, cumulatively referred to as derivative contractors.
The obligations of derivative contractors differ considerably from first tier subcontractors. For example, to perfect a lien the derivative contractor must provide a notice not required of first tier subcontractors.(xi) In other states, the deadline for a notice is determined by the last date a subcontractor provides equipment or material.(xii) Texas law mandates a notice for each month that equipment or material was supplied or for which payment was not made. In other words, the Texas procedure progresses through time rather than being keyed to completion. Texas law also specifies extensive minimum content requirements for notices and affidavits.(xiii)
Notices
In addition to filing the affidavits, subcontractors must send two different notices.(xiv) The first notice must be sent by the 15th of the 2nd month in which all or part of the labor is performed or material is delivered.(xv) This notice describes any unpaid balance. A distinction between a first tier subcontractor and a derivative subcontractor is the parties to whom the first notice must be sent. A first tier subcontractor must send the first notice to both the original contractor and the owner.(xvi) A derivative subcontractor must send this notice only to the original contractor.(xvii) All types of subcontractor must send a second notice that has the same information as the first notice by the 15th of the 3rd month to the original contractor and the owner.(xviii)
Affidavits
Unlike subcontractors, an original contractor does not need to send any notices to the owner to perfect a lien. However, both the original contractor and the subcontractors must file affidavits with the county clerk and send a copy to the owner.(xix) These affidavits must be filed by the 15th of the 4th month the debt accrues.(xx) Though the deadlines for both original contractors and subcontractors are tied to debt accrual, an original contractor’s debt accrues at a different time than a subcontractor. For the original contractor, debt accrues on the last day of the month following declaration of termination of the contract or completion, settlement or abandonment of the contract.(xxi)
Except for specially fabricated material, indebtedness to subcontractors accrues on the last day of the month in which the subcontractor’s labor was performed or material was furnished.(xxii)
Indebtedness to subcontractors for specially fabricated material by both first tier and derivative contractors accrues (1) on the last day of the last month in which materials were delivered, (2) on the last day of the last month in which delivery of the last of the material would normally have been required at the job site; or (3) on the last day of the month of any material breach or termination of the original contract by the owner or contractor or of the subcontract under which the specially fabricated material was furnished.(xxiii)
A copy of the affidavit must be sent to the owner by the 5th day after the filing.(xxiv) A subcontractor must also send a copy of the affidavit to the original contractor.(xxv)
Homesteads
For a contractor working on a homestead, the requirements for a lien increase dramatically. The term homestead refers to the special protection given to a place that is a home or both a home and a place of business.(xxvi) Texas law is very protective of a homestead. H.B. 629 expanded this special treatment in that it does not apply to residential projects.(xxvii) A major consideration in perfecting a lien against a homestead is the requirement for a written contract with the owner and spouse.(xxviii) This contract must be executed before labor or material is furnished.(xxix) It must then be filed with the county clerk.(xxx) Furthermore, in addition to notice requirements as required in any construction situation, before construction begins the owner of a homestead is entitled to a disclosure agreement as well as a list of subcontractors from the original contractor.(xxxi) The disclosure must include statutory notice language regarding the rights and responsibilities of the owner.(xxxii) Furthermore, lien affidavits for a homestead must be filed one month earlier than the deadline specified for other types of projects.(xxxiii)
Retainage
In addition to the steps necessary to have a lien directly against the property for unpaid funds, Texas law specifies a process for trapping funds to cover those same unpaid monies. Up until H.B. 629, the only responsibility owners had was to withhold funds as retainage.(xxxiv) To trap funds, subcontractors must give notice of unpaid funds to the owner and the original contractor.(xxxv) The deadline for this notice is the fifteenth of the third month following each month in which the claimant provided labor or delivered material.(xxxvi) When a trapping notice is received, the owner is obligated to withhold payment to the original contractor in an amount equal to the claimed funds.(xxxvii)
If the trapping notice is sent after the deadline of the fifteenth of the third month, the funds are not trapped. This is where H.B. 629 can make a difference. Pursuant to H.B. 629, a nonresidential property owner must provide notice that the original contractor has been terminated or abandoned the project.(xxxviii) H.B. 629 also specifies the content of the notice.(xxxix) This notice must be sent to any subcontractor that, before abandonment or termination by the original contractor, requests it and to anyone that provided notice of specially fabricated materials or notice of an unpaid account.(xl) Failure by the owner to respond by sending the requested notice provides a lien to a requesting subcontractor even thought the subcontractor does not file an affidavit if such subcontractor meets the notice requirements.(xli)
Residential projects are exempted from H.B. 629.(xlii) Therefore, owners of residential projects do not have an obligation to send the notice required of other owners pursuant to H.B. 629.
Through the statutory provision for retainage, Texas law places a responsibility on the owner to retain 10% of the original contract price for at least thirty days after project completion.(xliii) If an owner does not properly trap funds in response to a trapping notice or fails to meet the retainage requirement, the owner is responsible to the subcontractor regardless of what monies may have already been paid to the original contractor.(xliv) H.B. 629 did not change this for any owner.
Conclusion
For nonresidential projects, H.B. 629 added another step to the lien process in Texas and a new responsibility for many owners involved in a construction process. A complex situation has become more complex.
About the Author: Stanley P. Santire is managing principal of the Santire Law Firm in Houston , Texas . The firm deals primarily in corporate and commercial matters with an emphasis on construction and employment issues. A frequent public speaker on the law, he may be reached at 713-787-0405 or by email at stanley@santire.com. This article appears in ConstructionRisk.com Report, Vol. 8., No. 3.
Footnotes
i TEX. PROP. CODE ANN. §53.103 & §53.107
ii The Construction Law Briefing Paper, “We’re Not In Kansas (Or Minnesota) Anymore”, Scott A. Johnson, The Construction Law Briefing Paper, Oct. 2002.
iii TEX. PROP. CODE ANN. §53.107
iv Horton v. Gibson, 274 S.W. 292 (Tex. Civ. App. 1925, no writ)
v TEXAS CONSTITUTION Art.16 §37
vi In Re: A&M Operating Company, Inc., 182 B.R. 997 (E.D. Tex. 1995)
vii Infra
viii TEX. PROP. CODE ANN. CHAPT. 53.051
ix TEX. PROP. CODE ANN. §53.001(7)
x TEX. PROP. CODE ANN. §53.001(13)
xi TEX. PROP. CODE ANN. §53.056 (b)
xii Texas Mechanics’ Lien And Bond Claims, All Business, Jan. 2005.
xiii TEX. PROP. CODE ANN. §53.233
xiv TEX. PROP. CODE ANN. §53.056(a)
xv TEX. PROP. CODE ANN. §53.056(b)
xvi TEX. PROP. CODE ANN. §53.056(c)
xvii TEX. PROP. CODE ANN. §53.056(b)
xviii TEX. PROP. CODE ANN. §53.056(b) & (c)
xix TEX. PROP. CODE ANN. §53.051
xx TEX. PROP. CODE ANN. §53.051(a)
xxi TEX. PROP. CODE ANN. §53.053(b)
xxii TEX. PROP. CODE ANN. §53.053(c)
xxiii TEX. PROP. CODE ANN. §53.053(d)
xxiv TEX. PROP. CODE ANN. §53.055(a)
xxv TEX. PROP. CODE ANN. §53.055(b)
xxvi TEXAS PROP. CODE ANN. §41.002
xxvii TEX. PROP. CODE ANN. §53.107(e)
xxviii TEX. PROP. CODE ANN. §53.053(a)
xxix TEX. PROP. CODE ANN. §53.053(b)
xxx TEX. PROP. CODE ANN. §53.053(e)
xxxi TEX. PROP. CODE ANN. §53.055(a)
xxxii TEX. PROP. CODE ANN. §53.055(b)
xxxiii TEX. PROP. CODE ANN §53.052(b)
xxxiv TEX. PROP. CODE ANN. §53.001(11)
xxxv TEX. PROP. CODE ANN. §53.056(d)
xxxvi TEX. PROP. CODE ANN. §53.056(b)
xxxvii TEX. PROP. CODE ANN. §53.056(d)
xxxviii TEX. PROP. CODE ANN. §53.107(a)
xxxix TEX. PROP. CODE ANN. §53.107(b)
xl TEX. PROP. CODE ANN. §53.107(a)
xli TEX. PROP. CODE ANN. §53.107(d)
xlii TEX. PROP. CODE ANN. §53.107(e)
xliii TEX. PROP. CODE ANN. §53.101(a)
xliv TEX. PROP. CODE ANN. §53.105(a)