Chapter 7 

Creation and Enforcement of Liens

I.  Property Code Liens

§ 7.1Farm, Factory, or Store Worker’s Lien

§ 7.1:1Scope of Lien

A worker has a statutory lien on property of his employer created or used by the worker or necessarily connected with the work to secure payment of the amount due for work or services performed under a contract for certain types of work. Tex. Prop. Code §§ 58.001–.003. This lien is independent of the constitutional lien, discussed at section 7.14 below.

§ 7.1:2Who May Claim Lien

A worker claiming the lien can be a clerk, accountant, bookkeeper, waiter, waitress, cook, maid, porter, servant, employee, artisan, craftsman, factory operator, mill operator, mechanic, quarry worker, common laborer, or farmhand. Tex. Prop. Code § 58.001(2).

Courts generally deny the lien to anyone who could be classified as a manager or supervisor under the terms of employment. The lien is available only to those who labor for wages, not to their employers who contract with others to render services. Cotton Belt State Bank v. Roy H. Hatcheries, Inc., 351 S.W.2d 325, 326 (Tex. Civ. App.—Waco 1961, no writ); see also Ferrell-Michael Abstract & Title Co. v. McCormac, 184 S.W. 1081, 1086 (Tex. Civ. App.—Fort Worth 1916), aff’d on other grounds, 215 S.W. 559 (Tex. Comm’n App. 1919, judgm’t adopted) (distinguishing between supervisors who also do manual labor by choice, not entitled to lien, and those who perform both functions by agreement, entitled to lien).

Corporations and employers may not claim the worker’s lien. Texas International Products v. Mustex, Inc., 368 S.W.2d 27, 30 (Tex. Civ. App.—Fort Worth 1963, no writ). The labor or service must be accomplished in an office, store, hotel, rooming house or boardinghouse, restaurant, shop, factory, mine, quarry, mill, farm, or in certain logging or timber operations. Tex. Prop. Code § 58.002(a).

§ 7.1:3Property Subject to Lien

Each thing of value owned by or in the possession or control of the employer or the employer’s agent, receiver, or trustee is subject to the lien if it is—

1.created in whole or part by the lien claimant’s work;

2.used by or useful to the lien claimant in the performance of the work; or

3.necessarily connected with the performance of the work.

Tex. Prop. Code § 58.003.

Also, the amount of the lien is limited to the amount owed the worker under the employment contract. Tex. Prop. Code § 58.002(b).

§ 7.1:4Claim, Perfection, and Enforcement of Lien

To claim and perfect a worker’s lien, the claimant must, within thirty days after the debt has accrued, serve duplicate copies of an account stating the service performed and the amount owed for the service. One copy is delivered to the employer or the employer’s agent, receiver, or trustee, and the other is filed with the clerk of the county in which the service was rendered; the account must be supported by the claimant’s affidavit verifying the contents of the account. Tex. Prop. Code § 58.004. For calculating the date when the debt accrues, wages are due weekly for work performed by the day or week and monthly for work performed by the month. Tex. Prop. Code § 58.009. If the worker claims a lien against a fixture, the affidavit should describe the realty to which the fixture is attached. See Security Trust Co. v. Roberts, 208 S.W. 892 (Tex. Comm’n App. 1919, holding approved). See form 7-1 in this chapter for an affidavit.

The claimant must file a foreclosure suit within six months after the lien is secured; otherwise, the lien expires. Tex. Prop. Code § 58.006. See form 7-2 for a foreclosure petition.

§ 7.1:5Lien Priority

Competing worker’s liens take priority in the order that the accounts are filed with the county clerk. All worker’s liens are first liens, except for farmhand’s liens, which are subordinate to a landlord’s lien provided by law. Tex. Prop. Code § 58.005.

A person who purchases from its owner property to which the worker’s lien has attached and who has no actual or construc­tive notice of the lien takes the property free from the lien. The claimant gives constructive notice of the lien by filing an account with the county clerk or by filing a foreclosure suit. Tex. Prop. Code § 58.007. As further protection against a bona fide purchaser the claimant should try to have the property sequestered. Sequestration is discussed at sections 8.16 through 8.24 in this manual, and sequestration forms are found at form 7-3 and forms 8-8 through 8-16.

§ 7.1:6Attorney’s Fees

Attorney’s fees are not authorized by the worker’s lien statutes, but Tex. Civ. Prac. & Rem. Code § 38.001 provides for rea­sonable attorney’s fees in a suit for services rendered or labor performed or a suit on a contract. For a discussion of attorney’s fees, see chapter 31 in this manual.

§ 7.2Worker’s Possessory Liens

§ 7.2:1Scope of Worker’s Possessory Lien

A worker who repairs an article may retain it until the amount specified by the repair contract is paid or, if no amount is spec­ified by contract, until the reasonable and usual compensation is paid. Tex. Prop. Code § 70.001(a). Chapter 70 of the Property Code provides similar liens for stable keepers, garagemen, pasturers, and cotton ginners (Tex. Prop. Code § 70.003) and liens on garments (Tex. Prop. Code § 70.002).

§ 7.2:2Availability of Worker’s Possessory Lien

The lien is available to any worker in Texas “who by labor repairs an article.” Tex. Prop. Code § 70.001(a). Presumably, this broad category includes corporations. See Miller & Freeman Ford, Inc. v. Greater Houston Bank, 544 S.W.2d 925 (Tex. 1976). The lien applies to the repaired article while it is in the worker’s possession, and in limited circumstances the lien may continue if the worker has released the article in return for a check that is subsequently not honored. Possession of the article as a condition for the lien is discussed at section 7.2:4 below.

The lien arises only if the article’s owner authorizes the repairs. If property has been stolen, a person without title cannot make repairs and accessions to the property and then demand payment when the true owner recovers the property. Drake Insurance Co. v. King, 606 S.W.2d 812, 818 (Tex. 1980), superseded by rule on other grounds as stated in Bay Area Healthcare Group, Ltd. v. McShane, 239 S.W.3d 231 (Tex. 2007). Similarly, the courts scrutinize carefully any worker’s claim that repairs were authorized by the owner’s agent; the lien does not attach in the absence of any express, implied, or apparent agency. See Hydra-Rig, Inc. v. ETF Corp., 707 S.W.2d 288, 291–92 (Tex. App.—Fort Worth 1986, writ ref’d n.r.e.).

§ 7.2:3Distinction between Statutory Worker’s Possessory Lien and Constitutional Mechanic’s Lien

The possessory lien created by Tex. Prop. Code § 70.001 differs in important respects from the nonpossessory constitutional lien deriving from Tex. Const. art. XVI, § 37. The constitutional lien is discussed at section 7.14 below.

Possession of the article is an essential element of the statutory worker’s lien but is irrelevant to the constitutional lien. The constitutional lien survives the worker’s relinquishment of the article to the owner, but ordinarily the statutory lien does not. The constitutional lien does not authorize the worker to retain a repaired article pending payment for the repairs, but the stat­ute creating a worker’s lien for repairs provides this specific right. The constitutional lien can serve as a basis for a suit for recovery of payment, but will not serve as a defense to an action for conversion. See generally Garcia v. Rutledge, 649 S.W.2d 307, 311 (Tex. App.—Amarillo 1982, no writ) (discussing the difference between the constitutional and statutory liens); River Oaks Chrysler-Plymouth, Inc. v. Barfield, 482 S.W.2d 925, 927–8 (Tex. Civ. App.—Houston [14th Dist.] 1972, writ dism’d) (discussing the fact that the constitutional lien does not require possession, gives no possessory rights, and is not a defense to conversion).

§ 7.2:4Requirement of Possession Generally

Generally, if the worker voluntarily returns possession of the article to the owner, he loses his statutory lien on it. Clifton v. Jones, 634 S.W.2d 883, 886 (Tex. App.—El Paso 1982, no writ); Atlas Amalgamated, Inc. v. Castillo, 601 S.W.2d 728, 730 (Tex. Civ. App.—Waco 1980, writ ref’d n.r.e.).

§ 7.2:5Ability to Repossess If Repairs Paid for by Bad Check

If the worker relinquishes a motor vehicle, motorboat, vessel, or outboard motor in reliance on a check not honored after acceptance, the lien continues to exist, and the worker is entitled to regain possession of the item. Tex. Prop. Code § 70.001(b). A worker who wants to regain possession under these circumstances must do so in accordance with the reposses­sion provisions of Tex. Bus. & Com. Code § 9.609. See generally part III. in chapter 5 of this manual. For the worker to have a perfected right to repossess the repaired property, the person obligated for the repairs must sign a notice stating that the arti­cle may be subject to repossession under Property Code section 70.001(c). The notice must be separate from the written con­tract, or, if printed on the written contract, it must be in bold-faced type, capitalized, underlined, or otherwise set off so as to be conspicuous, with a separate signature line. Tex. Prop. Code § 70.001(c).

The worker repossessing an article under the repair statute may charge for the costs of repossessing the article to the extent of the reasonable fair market value of the services required to take possession of the article. The reasonable fair market value is defined as the actual cost of the repossession. Tex. Prop. Code § 70.001(d).

A repossessed motor vehicle must be promptly delivered either to the place where the repairs were made or to a vehicle stor­age facility licensed under the Vehicle Storage Facility Act, chapter 2303 of the Texas Occupations Code. The vehicle must remain there until lawfully returned to the owner or lienholder or disposed of by foreclosure of the lien. Tex. Prop. Code § 70.001(g).

The possessory lien under Tex. Prop. Code § 70.001 survives the death of the owner of the repaired chattel if the repairer retains possession. See Lithgow v. Sweedberg, 78 S.W. 246 (Tex. Civ. App. 1904, no writ).

§ 7.2:6Priority of Worker’s Possessory Lien

If an automobile is in the possession of a mechanic who has repaired it and who claims a worker’s possessory lien on it, the mechanic’s lien has priority over a competing lien of a secured party who previously perfected a security interest by noting it on the vehicle’s certificate of title. Gulf Coast State Bank v. Nelms, 525 S.W.2d 866, 869–70 (Tex. 1975). See also Tex. Bus. & Com. Code § 9.333.

§ 7.2:7Enforcement of Worker’s Possessory Lien

Sale of property subject to a worker’s possessory lien is controlled by two overlapping and confusing sections of the Texas Property Code, sections 70.005 and 70.006. The confusion is caused because Tex. Prop. Code § 70.005 excludes lienholders of vehicles subject to the Certificate of Title Act (Tex. Transp. Code §§ 501.001–.179) whereas Tex. Prop. Code § 70.006 includes not only those lienholders but also lienholders of motorboats, vessels, or outboard motors to which chapter 31 of the Texas Parks and Wildlife Code applies. Procedures for selling property are outlined clearly, but provisions specifying which types of property are subject to each of the two Property Code sections are not clear.

This discussion assumes that section 70.006 applies to motor vehicles subject to the Certificate of Title Act and to vessels and outboard motors requiring a certificate of title under Tex. Parks & Wild. Code §§ 31.045–.056. It also assumes that Property Code section 70.005 applies to all other types of property subject to a worker’s possessory lien.

Under Property Code section 70.005, a lienholder possessing designated property for sixty days after the repair charges accrue must send a first notice of sale, requesting the owner to pay the unpaid charges, if the owner’s Texas residence is known. See form 7-4 in this chapter. If the charges are not paid before the eleventh day after the date of the request, a second notice must be sent to the owner, stating that, after twenty days, the lienholder may sell the property at a public sale. See form 7-5. If the request for payment and notice of sale under section 70.005 is premature, however, this will not invalidate a public sale, if the public sale takes place more than twenty days after the notice. Cranetex, Inc. v. Precision Crane & Rigging of Houston, Inc., 760 S.W.2d 298, 304 (Tex. App.—Texarkana 1988, writ denied). If the property owner’s residence is outside Texas or is unknown, the lienholder may sell the property without notice at a public sale after the sixtieth day after the unpaid charges accrued. Proceeds of the sale are applied to the repair charges and, if the repaired property is a garment, to the reasonable costs of the sale. Excess proceeds are paid to the person entitled to them, as discussed at section 7.2:9 below.

Under Property Code section 70.006, a lienholder possessing designated property must give written notice to the owner and each holder of a lien recorded on the certificate of title, and must file a copy of the notice and other required information with the county tax assessor-collector’s office in the county in which the repairs were made, not later than the thirtieth day after the charges accrue. Tex. Prop. Code § 70.006(a). The notice must state the amount of the charges and request payment and must be sent by certified mail, return receipt requested. If the charges are not paid before the thirty-first day after the notice is mailed, the lienholder may sell the property at a public sale and apply the proceeds to the charges. See Dob’s Tire & Auto Cen­ter v. Safeway Insurance Agency, 923 S.W.2d 715, 720 (Tex. App.—Houston [1st Dist.] 1996, writ dism’d w.o.j.). Excess pro­ceeds are paid to the person entitled to them, as discussed at section 7.2:9 below. On the other hand, a proper tender of the amount claimed in the notice will discharge the worker’s possessory lien. Refusal of the worker to surrender a vehicle after proper tender has been made constitutes conversion. Collision Center Paint & Body, Inc. v. Campbell, 773 S.W.2d 354, 355 (Tex. App.—Dallas 1989, no writ).

If the property subject to the lien is a motor vehicle, and the lienholder determines that the vehicle’s only residual value is as a source of parts or scrap metal, or that it is not economical to dispose of the vehicle at a public sale, the lienholder may sell, give, or otherwise dispose of the vehicle to a motor vehicle demolisher under Tex. Transp. Code ch. 683. Tex. Prop. Code § 70.006(f–1), (f–2).

See form 7-6 for a notice of sale for a motor vehicle, motorboat, vessel, or outboard motor under a worker’s possessory lien.

§ 7.2:8Judicial Supervision of Sale

Tex. Prop. Code §§ 70.005–.006 do not require judicial supervision or public notice of the sale. If the attorney believes that a sale would create constitutional problems (see section 7.2:10 below), the lienholder should probably obtain a court judgment and then sell the chattel pursuant to a writ of execution and order of sale, rather than proceeding with a public sale as pre­scribed under sections 70.005 and 70.006. See Adams v. Department of Motor Vehicles, 520 P.2d 961, 965 (Cal. 1974); Gary Spivey, Annotation, Garagemen’s Lien: Modern View as to Validity of Statute Permitting Sale of Vehicle without Hearing, 64 A.L.R. 3d Art. 814 (1975).

§ 7.2:9Excess after Sale

If there are excess proceeds after sale, the lienholder must pay them to “the person entitled to them.” Tex. Prop. Code §§ 70.005(d), 70.006(f).

If a person entitled to excess proceeds is unknown or has moved from Texas or from the county in which the lien accrued, the excess must be paid to the treasurer of the county in which the lien accrued. Tex. Prop. Code § 70.007(a).

§ 7.2:10Constitutionality

Because the enforcement procedures described in section 7.2:7 above do not require a hearing, they may violate constitutional due-process requirements. A similar statutory scheme in California was held unconstitutional because, unless the owner brought suit, the lienholder could sell the property without a hearing and thus deprive the owner of due process of law. Adams v. Department of Motor Vehicles, 520 P.2d 961 (Cal. 1974). Courts in several other states have reached the same conclusion and have declared their statutes unconstitutional. The California court suggested that lienholders might retain the chattel, file a suit on the merits, and then proceed with a judicial sale under a writ of execution.

§ 7.3Landlord’s Liens

For a discussion of landlord’s liens, see chapter 28 in this manual.

§ 7.4Other Property Code Liens

§ 7.4:1Types of Liens

Texas Property Code chapter 70 provides for possessory (subchapter A), stock breeder’s (subchapter C), aircraft repair and maintenance (subchapter D), and agricultural (subchapter E) liens as well as liens on certain vessels (subchapter B). The sub­chapter A liens include worker’s liens on vehicles and boats (section 70.001), liens on garments (section 70.002), stable keeper’s and pasturer’s liens (section 70.003), garagemen’s liens (section 70.003), plastic fabricator’s liens (section 70.009), and liens for cotton ginners (section 70.003). These provisions generally provide a remedy for those who have provided repair or maintenance on personal property or who have provided storage or care for personal property such as vehicles, livestock, garments, and agricultural crops. See Tex. Prop. Code ch. 70.

Chapter 59 of the Property Code creates a lien over property in a self-service storage facility. Under chapter 59, the owner, les­sor, sublessor, or managing agent of a self-service storage facility may foreclose a lien on all property in the facility for the payment of unpaid charges under a rental agreement. See Tex. Prop. Code §§ 59.001(1), 59.021, 59.042.

Chapter 56 of the Property Code provides for a statutory scheme to perfect liens against mineral properties. The chapter has unique notice and filing requirements somewhat similar to the mechanic’s and materialman’s lien process. The Property Code also addresses hospital/emergency medical services liens at chapter 55, railroad worker’s liens at chapter 57, newspaper employee’s liens at chapter 60, motor vehicle mortgages at chapter 61, broker’s and appraiser’s liens at chapter 62, and man­ufactured home liens at chapter 63.

§ 7.4:2Enforcement Provisions

Property subject to a lien under subchapter A of chapter 70 of the Texas Property Code may be sold at a public sale or, in the case of garments, a private sale. Tex. Prop. Code § 70.003(d)(1) (cotton under a cotton ginner’s lien), § 70.005 (property other than cotton or motor vehicles), § 70.006 (motor vehicles, motorboats, vessels, and outboard motors). Notice of the charges due the lienholder and notice of the sale are generally required; however, the specific notice requirements vary between the liens. See, e.g., Tex. Prop. Code § 70.003(d)(1) (sale of cotton), § 70.005(a), (b) (sale of property other than cotton or motor vehicles), § 70.006(a)–(h) (sale of motor vehicles).

The sale of property subject to a self-service storage facility lien must be sold at public sale at the facility itself or at a reason­ably near public place. Tex. Prop. Code § 59.045. The lessor’s notice of the sale and notice to the owner and lienholders are discussed in sections 59.044 and 59.0445 of the Texas Property Code.

Mineral liens are enforced in a similar manner as a mechanic’s or materialman’s lien, although the timing requirements differ. Tex. Prop. Code § 56.041 et seq.

 

 

 

 

 

 

[Sections 7.5 through 7.10 are reserved for expansion.]

II.  Private Mechanic’s and Materialman’s Liens

§ 7.11Overview

Contractors, subcontractors, and others who provide material or labor for a construction project but who are not paid for that material or labor may normally bring suit for payment against the party that contracted for the material and labor. However, economic factors such as the cost of a lawsuit or the financial viability of the defendant may make a lawsuit either impractical or pointless. Both state and federal governments have attempted to address this problem by adopting statutes that give unpaid contractors, subcontractors, and others additional recourse for the recovery of at least partial payment for their material and labor.

Under chapter 53 of the Texas Property Code, the owner of real property being improved under a private construction contract is required to withhold from construction payments earned by the general contractor (called an “original contractor” by the Property Code) a statutory retainage equal to 10 percent of the payments earned by the general contractor. In addition, the owner may be required to pay subcontractors funds earned by but not yet paid to the general contractor that are “trapped” in the owner’s possession by the receipt from subcontractors of claims of unpaid amounts owing on the project. The Property Code establishes procedures whereby the unpaid claimant can assert a mechanic’s lien on the property being improved to secure the owner’s obligation to use the retainage and “trapped funds” to pay the claim. If the owner does not make the required payments to the lien claimant out of the retainage, the claimant can seek judicial foreclosure of the lien for the pur­pose of selling the property to obtain proceeds to pay the claim. The statute governing the perfection of claims on private proj­ects is discussed at section 7.12 below.

The “prompt pay” statute sets forth a statutory time frame that governs how quickly owners, contractors, and subcontractors must assent to or make payment of undisputed claims of late or incomplete payments to a contractor on a private construction project. The “prompt payment” statute is discussed at section 7.12:24 below.

In addition to the state statutes providing for a system of mechanic’s lien claims on private construction projects, the Texas Constitution grants general contractors a mechanic’s lien claim that is independent of the statutory mechanic’s lien system. These constitutional provisions are discussed at sections 7.13 and 7.14 below.

Mechanic’s lien claims may also arise in the context of public works projects. Public works projects, however, generally involve public lands, and public lands owned by the state, a county, a city, a school district, or the federal government are not subject to lien foreclosure in favor of private individuals. To provide an alternative remedy to contractors on public work proj­ects, both state and federal law have established systems whereby payment bonds are issued by third-party sureties, and the unpaid claimant is required by statute to pursue recovery against the bond rather than against the public lands. These public works statutes are discussed at sections 7.21 and 7.22 below.

Finally, chapter 162 of the Property Code provides an additional mechanism for the claimant who fails to properly perfect a mechanic’s lien claim under the applicable law. The “construction trust fund” statute makes certain construction payments “trust funds” payable to the claimant as “beneficiary” of the “trust” and allows the claimant to pursue the individual officers and directors who received payments owing to the claimant if they diverted the funds for impermissible purposes. The “con­struction trust fund” statute is discussed at section 7.23 below.

§ 7.12Statutory Mechanic’s Lien

§ 7.12:1Mechanic’s Liens Generally

Private construction projects are governed by chapter 53 of the Texas Property Code. (This portion of the Property Code was formerly referred to as the “Hardeman Act” because that was the name of the predecessor statute that was codified by the Property Code.) An original contractor is granted mechanic’s lien rights under both chapter 53 of the Property Code and arti­cle XVI, section 37, of the Texas Constitution. A subcontractor’s mechanic’s lien rights, however, are totally dependent on the subcontractor’s compliance with chapter 53 of the Property Code. First National Bank v. Sledge, 653 S.W.2d 283, 285 (Tex. 1983).

Chapter 53 establishes a procedure whereby mechanic’s lien claimants owed money for their labor or materials may “perfect” a claim against retainage and trapped construction payments in the owner’s possession. By following the requirements of chapter 53, the claimant also obtains a lien against the owner’s property, and this lien can be judicially foreclosed to generate funds to pay the claimant in the event the owner has not withheld or refuses to pay the statutorily mandated amounts. To accomplish this, the lien claimant must give notices and file a lien affidavit that meets the requirements of chapter 53 within the statutorily defined time frames. However, even if the claimant follows the procedures set forth in chapter 53, the amount the property owner is required to pay the claimant may prove to be less than the unpaid amount owing to the claimant. The lien may also be subject to prior mortgages or encumbrances.

§ 7.12:2Scope and Utility of Lien

A mechanic’s lien may be established by any person who (1) labors, specially fabricates material, or furnishes labor or mate­rials for construction or repair in Texas of (a) a house, building, or improvement; (b) a levee or embankment to be erected for the reclamation of overflow land along a river or creek; or (c) a railroad; and (2) does so under or by virtue of a contract with the owner or the owner’s agent, trustee, receiver, contractor, or subcontractor. Tex. Prop. Code § 53.021(a). Because the stat­ute (Tex. Prop. Code § 53.001(3)) requires that labor be used in the “direct prosecution of the work” to qualify for the lien, it is difficult to qualify off-site labor unless the Texas Property Code expressly provides otherwise, as with the manufacture of specially fabricated materials. Tex. Prop. Code § 53.001(12). The statute defines “materials” to include (1) material, machin­ery, fixtures, or tools incorporated or consumed in the work or that are ordered and delivered for incorporation or consumma­tion; (2) reasonable rent and costs of actual running repairs for construction equipment used or reasonably required and delivered for use in the direct prosecution of the work at the site of the construction or repair; or (3) power, water, fuel, and lubricants consumed or ordered and delivered for consumption in the direct prosecution of the work. Tex. Prop. Code § 53.001(4). For material suppliers, it is sufficient to show either delivery of the materials to the construction site or that the materials were furnished to a contractor for the specific project. It is not necessary to show how the contractor ultimately used the materials. W.L. MacAtee & Sons, Inc. v. House, 153 S.W.2d 460 (Tex. 1941). See also Addison Urban Development Part­ners, LLC v. Alan Ritchey Materials Co., LC, 437 S.W.3d 597, 606 (Tex. App.—Dallas 2014, no pet) (finding that lien pro­vided by Tex. Prop. Code § 53.021 does not require showing of how contractor used delivered materials, only that materials were delivered for specific project); Lexcom, Inc. v. Gray, 740 S.W.2d 83, 85 (Tex. App.—Dallas 1987, no writ) (“In order to establish a lien, the materialman need not prove that the materials furnished actually went into the construction.”).

Architects, Engineers, and Surveyors:      The Property Code grants mechanic’s lien rights to architects, engineers, and sur­veyors who, by virtue of a written contract with the owner or the owner’s agent, trustee, or receiver, prepare a plan or plat in connection with the actual or proposed design, construction, or repair of improvements on real property or the location of the boundaries of the real property. Tex. Prop. Code § 53.021(c). The right to a lien can now be established for plans that were intended for a project even if they are not actually used. However, the work must be done pursuant to written contract; an oral contract will not suffice. See Centurion Planning Corp., Inc. v. Seabrook Venture II, 176 S.W.3d 498, 507 (Tex. App.—Hous­ton [1st Dist.] 2004, no pet.) (noting that Tex. Prop. Code § 53.021(c)’s use of word “written” precludes basing lien on oral contract).

Landscapers:      The Property Code grants mechanic’s lien rights to a person who provides labor, plant material, or other sup­plies for the installation of landscaping for a house, building, or improvement, including the construction of a retention pond, retaining wall, berm, irrigation system, fountain, or other similar installation under or by virtue of a written contract with the owner or the owner’s agent, contractor, subcontractor, trustee, or receiver. Tex. Prop. Code § 53.021(d).

Demolition Services:      The Property Code grants mechanic’s lien rights to a person who performs labor or furnishes labor or materials for demolition of a structure on real property under or by virtue of a written contract with the owner or the owner’s agent, trustee, receiver, contractor, or subcontractor. Tex. Prop. Code § 53.021(e).

Lending Services:      Creditors advancing money to contractors are not entitled to a mechanic’s lien, even if the funds are used to pay for labor and materials for a specific construction project. Verschoyle v. Holifield, 123 S.W.2d 878, 883 (Tex. 1939); F.&C. Engineering Co. v. Moore, 300 S.W.2d 323, 325 (Tex. Civ. App.—San Antonio 1957, writ ref’d n.r.e.).

Employment Services:      Only those who labor for wages are entitled to a mechanic’s lien and not the employer who con­tracts to furnish the employees for the labor. Cotton Belt State Bank v. Roy H. Hatcheries, Inc., 351 S.W.2d 325, 326 (Tex. Civ. App.—Waco 1961, no writ). But see Advance’d Temporaries, Inc. v. Reliance Surety Co., 165 S.W.3d 1 (Tex. App.—Corpus Christi 2004).

Preparatory Services:      Preparatory activities conducted before the commencement of construction of improvements, such as erecting stakes and batterboards, do not qualify for liens. Diversified Mortgage Investors v. Lloyd D. Blaylock General Contractor, Inc., 576 S.W.2d 794, 802 (Tex. 1978).

Cost-Plus Fees:      The mechanic’s lien statutes will secure the contractor’s fee on a “cost-plus” contract. Stricklin v. South­west Reserve Life Insurance Co., 234 S.W.2d 439 (Tex. 1950).

Sales Tax:      The mechanic’s lien statutes will secure sales tax owed to a claimant. First National Bank in Dallas v. Whirlpool Corp., 517 S.W.2d 262 (Tex. 1974).

Attorney’s Fees:      Statutory mechanic’s liens do not secure attorney’s fees incurred in filing the lien, although attorney’s fees are recoverable in litigation to enforce and foreclose the lien. See Tex. Prop. Code § 53.156; Palomita Inc. v. Medley, 747 S.W.2d 575, 577 (Tex. App.—Corpus Christi 1988, no writ) (holding that section 53.156 does not support attachment of attor­ney’s fees to mechanic’s liens); Dossman v. National Loan Investors, L.P., 845 S.W.2d 384, 386–87 (Tex. App.—Houston [1st Dist.] 1992, writ denied) (affirming Palomita). But see In re Bigler L.P., 458 B.R. 345, 385–388 (Bankr. S.D. Tex. 2011) (disagreeing with “Palomita and its progeny” and attaching attorney’s fees to mechanic’s lien that arose after, but was supe­rior to, deed of trust lien).

Prejudgment Interest:      Statutory mechanic’s liens do not secure prejudgment interest or unearned or lost profits. Ambassa­dor Development Corp. v. Valdez, 791 S.W.2d 612, 622–24 (Tex. App.—Fort Worth 1990, no writ).

Lost Profits:      Statutory mechanic’s liens do not secure lost profits. Nixon Construction Co. v. Downs, 441 S.W.2d 284 (Tex. Civ. App.—Houston 1969, no writ). But see San Antonio Credit Union v. O’Connor, 115 S.W.3d 82 (Tex. App.—San Antonio 2003, pet. denied), in which the court granted a constitutional lien to secure a builder’s damages arising from the owner’s breach of contract.

§ 7.12:3Property Subject to Lien

A valid mechanic’s lien attaches to “the house, building, fixtures, or improvements, the land reclaimed from overflow, or the railroad and all of its properties, and to each lot of land necessarily connected or reclaimed.” Tex. Prop. Code § 53.022(a). “The lien does not extend to abutting sidewalks, streets, and utilities that are public property.” Tex. Prop. Code § 53.022(b). A single lien will not attach to two noncontiguous tracts. Centex Materials, Inc. v. Dalton, 574 S.W.2d 621, 623–24 (Tex. Civ. App.—Tyler 1978, no writ); see also Houston Electrical Distributing Co. v. MBB Enterprises, 703 S.W.2d 206, 208 (Tex. App.—Houston [14th Dist.] 1985, no writ).

Urban Tracts:      “A lien against land in a city, town, or village extends to each lot on which the house, building, or improve­ment is situated or on which the labor was performed.” Tex. Prop. Code § 53.022(c).

Rural Tracts:      “A lien against land not in a city, town, or village extends to not more than 50 acres on which the house, building, or improvement is situated or on which the labor was performed.” Tex. Prop. Code § 53.022(d).

Lien Attaches to Original Tract Configuration:      The mechanic’s lien attaches to the tract as configured at the start of con­struction under the original contract. The subsequent conveyance of portions of the tract, even if before the filing of the actual lien affidavit, does not prevent the lien’s attachment to the conveyed portions. Valdez v. Diamond Shamrock, 842 S.W.2d 273 (Tex. 1992).

Leasehold Estate:      The general rule is that a mechanic’s lien will attach only to the interest that the party contracting for the construction project has in the real property that is the subject of the improvements. This means that contractors working for tenants will normally be able to place a lien only on the tenant’s leasehold estate. In such instances, the termination of the leasehold estate will extinguish the mechanic’s lien claim against the property. See Diversified Mortgage Investors v. Lloyd D. Blaylock General Contractor, Inc., 576 S.W.2d 794, 805 (Tex. 1978). The only exception to this general rule is that, if the tenant is acting as the landlord’s agent for the work, the lien claim will attach to the fee title of the fee owner. Rosen v. Peck, 445 S.W.2d 241 (Tex. Civ. App.—Waco 1969, no writ). However, landlords rarely agree to authorize a lien for work by a tenant, and Texas courts have held that a tenant who does leasehold finish-out pursuant to the terms of a typical lease agree­ment is generally not the landlord’s agent for purposes of authorizing a mechanic’s lien against the landlord’s fee interest. See Diversified Mortgage Investors, 576 S.W.2d at 805; 2811 Associates v. Metroplex Lighting & Electric, 765 S.W.2d 851 (Tex. App.—Dallas 1989, writ denied). But see Bond v. Kagan-Edelman Enterprises, 985 S.W.2d 253 (Tex. App.—Houston [1st Dist.] 1999), rev’d in part, 20 S.W.3d 706 (Tex. 2000) (finding that fee owner of commercial property, where lessee of prop­erty contracted with subcontractor to finish out premises, was liable as owner to subcontractor claimant on statutory retainage and fund trapping claims).

Practice Note:      The effectiveness of enforcing a mechanic’s lien claim against a leasehold estate to collect payment of the lien generally depends on the financial circumstances of the tenant. Under most modern commercial leases, it is an event of default for a tenant to allow a mechanic’s lien to be filed against the leasehold property. See, for example, 4 State Bar of Tex., Texas Real Estate Forms Manual ch. 25, forms 25-2, 25-3, 25-6 (3d ed. 2017). Since the landlord will almost certainly termi­nate the lease rather than allow a stranger to the lease to take possession of the leasehold as a purchaser at a mechanic’s lien foreclosure sale, the mechanic’s lien claimant has little chance of realizing a significant monetary recovery through a foreclo­sure sale of the leasehold. Nonetheless, if the tenant’s business is more or less viable, the threat of disrupting that business operation through either prompting action under the lease by the landlord or foreclosing the mechanic’s lien against the lease­hold estate may be effective leverage to collect payment from the tenant. However, if the tenant is insolvent or otherwise financially unstable, the threat of losing the leasehold may not be effective leverage to collect from the tenant. Thus, whenever possible, the contractor would prefer to contract directly with the owner to do “landlord’s finish-out work” rather than with the tenant for “tenant’s finish-out work.”

§ 7.12:4Payment Bonds

The claimant’s right to seek judicial foreclosure of a statutory mechanic’s lien against the real property is cut off if a bond of proper form is filed of record. The two types of bonds provided for in the Texas Property Code that relate to a claimant’s pay­ment rights are statutory payment bonds and lien release bonds. See Tex. Prop. Code §§ 53.171(c), 53.201(b).

Statutory Payment Bond:      The payment bond or “Property Code payment bond” (also called “statutory bond”) is a pay­ment bond posted by an original contractor that meets the requirements set out in Tex. Prop. Code §§ 53.202–.203. Bonds posted by subcontractors are not Property Code payment bonds. They are generally referred to as common law bonds. If a statutory payment bond in the requisite form and substance is filed in the public records, the lien claimant cannot file a mechanic’s lien against the owner’s property or file a suit against the owner, but instead must pursue payment on the payment bond. Tex. Prop. Code § 53.201(b). The filing of the payment bond also relieves the owner of any obligation to withhold stat­utory retainage, observe fund trapping notices, or pay undisputed claims. Industrial Indemnity Co. v. Zack Burkett Co., 677 S.W.2d 493, 495 (Tex. 1984) (construing article 5472d, section 7, of Texas Revised Civil Statutes, now codified in Tex. Prop. Code § 53.201). In other words, the property is protected from liens filed by subcontractors and suppliers. Sentry Insurance Co. v. Radcliff Materials of Texas, Inc., 687 S.W.2d 437 (Tex. Civ. App.—Houston [14th Dist.] 1985, no writ); Fondren Con­struction Co. v. Briarcliff Housing Development Associates, Inc., 196 S.W.3d 210, 216 (Tex. App.—Houston [1st Dist.] 2006, no pet.).

The bond must be in a penal sum at least equal to the total of the original contract amount, be written in favor of the owner, and have the written approval of the owner endorsed on the bond. The bond must also be executed by both the original con­tractor as principal and a corporate surety authorized and admitted to do business in the state of Texas and licensed by the state to execute bonds as a surety. Tex. Prop. Code § 53.202.

The bond and the contract between the original contractor and the owner (or a memorandum of contract) must be filed in the county where the owner’s property is located on which the construction is being performed. Tex. Prop. Code § 53.203. The bond must be approved by the owner, and that approval must be endorsed across the face of the bond. Once filed in the real property records as required under section 53.203, a purchaser, lender, or other person acquiring an interest in the property is entitled to rely on the record of the bond and the contract as constituting payment of all claims as if each claimant had filed a complete release and relinquishment of lien rights. Tex. Prop. Code § 53.204.

Claims against the payment bond are perfected by giving the notices required under section 53.206 within the specified time periods. Tex. Prop. Code § 53.206. If the claim remains unpaid for sixty days after the claimant perfects the claim, the claim­ant may bring a lawsuit against the principal and surety on the bond. Tex. Prop. Code § 53.208(a). The claimant must sue on the bond within twelve months after the claim is perfected if the bond is recorded at the time the lien is filed or within two years if the bond was not recorded at the time the lien was filed; otherwise, the claim is barred by limitations. Tex. Prop. Code § 53.208.

Advantage of Bond Claim:      A claimant on a bonded job has the important advantage of not having to worry about “fund trapping” and statutory retainage. As long as the statutory requirements are met for perfecting the bond claim, a claimant’s valid claim should be paid by the surety. This advantage is particularly significant to those subcontractors who provide work (or deliver material) toward the end of the project. On an unbonded job, the funds available may be insufficient to pay such claimants, and the statutory retainage may likewise not be sufficient to cover all of the claims. With a payment bond, the claimants do not have to worry about the amount of contract funds remaining or the amount of the other claims (as long as the total amount of claims does not exceed the penal limits of the bond).

Requirements for Perfecting Bond Claim:
The best way to perfect a bond claim is to satisfy the requirements for a lien claim. The lien, if properly perfected, is also a perfected claim against the bond. Tex. Prop. Code § 53.206(b). Claimants should elect to perfect the claim as if a lien is being sought because, if the bond claim is defective in some way, the claimant will be able to fall back on its lien claim.

The alternate method for perfecting the claim against a payment bond is to furnish the surety with the same notices that were required to be sent to the owner for a lien claim. Again, it is highly recommended that a claimant meet the requirements for perfecting a lien claim even if the claimant knows that a payment bond has been provided to the owner. However, if a claimant is unable or unwilling for some reason to comply with the lien perfection procedures, the notice to owner can be modified so that it is addressed and sent to the surety. A copy should be sent to the original contractor and the owner. The claimant must send a written notice to the surety giving it fair notice of the amount and nature of the claim asserted no later than the fifteenth day of the third month following the month in which the work was performed or material delivered. The claimant must also send the required notices to the original contractor (including the “second month notice”). See Tex. Prop. Code § 53.206.

If the owner receives any notices for a lien affixed under subchapter C, the owner must mail the surety a copy of all notices received. However, failure of the owner to send copies of the notices to the surety does not relieve the surety of any liability under the bond if the claimant has complied with the requirements for perfecting a claim. Tex. Prop. Code § 53.207.

Practice Note:      The attorney should perfect the claim both ways. When there is a bond on a private project, a claimant may perfect the claim as a lien claim by sending the owner and original contractor the proper notice letters and by filing the mechanic’s lien affidavit. To perfect the claim as a bond claim as well, the claimant need only send the surety a copy of every­thing the claimant sends to the owner. By sending the surety all the notices, the claim is perfected against the bond in the event that there is some technical defect in the mechanic’s lien affidavit. On the other hand, if the claim is properly perfected as a lien claim, the claimant has the lien on the property if there is a problem with the validity of the bond.

Lien Release Bond or Bond to Indemnify:      A “lien release bond” or “bond to indemnify” is a bond established after the start of construction with respect to a specific mechanic’s lien claim. Tex. Prop. Code § 53.171. The filing of a bond to indem­nify in the proper form and amount (as established by Tex. Prop. Code § 53.172) requires that the lien claimant pursue pay­ment against the bond surety rather than through the perfection and foreclosure of a lien claim against the owner’s interest in the real property. Sheldon Pollack Corp. v. Pioneer Concrete of Texas, Inc., 765 S.W.2d 843, 846 (Tex. App.—Dallas 1989, writ denied). Property Code sections 53.171 through 53.176 provide the statutory procedure for filing the lien release bond.

There is one case that holds that the lien release bond does not release the owner from personal liability for failing to withhold trapped funds or statutory retainage. See Stolz v. Honeycutt, 42 S.W.3d 305, 312 (Tex. App.—Houston [14th Dist.] 2001, no writ) (relying, in part, on the notice language from Property Code section 53.056(d) that “if the claim remains unpaid, the owner may be personally liable”).

If a lien is filed by a subcontractor or supplier and the general contractor disputes the claim, the general contractor may choose (or may be required by contract) to file a bond to indemnify. This will “rid” the owner’s property of the lien while the claim is disputed. This process is also referred to as “bonding around a lien.”

Requirements for a bond to indemnify are as follows:

1.The bond must be filed with the county clerk in the county in which the property subject to the lien is located. Tex. Prop. Code § 53.171(b).

2.The bond must—

a.describe the property on which the liens are claimed;

b.refer to each lien claimed in a manner sufficient to identify it;

c.be in an amount that is double the amount of the liens referred to in the bond unless the total amount of the lien exceeds $40,000, in which case the bond must be in an amount that is the greater of 1-1/2 times the amount of the lien or the sum of $40,000 and the amount of the lien;

d.be payable to the party claiming the lien;

e.be executed by—

i.the party filing the bond as principal; and

ii.a corporate surety authorized and admitted to do business under the law in this state and licensed by this state to execute the bond as surety; and

a.be conditioned substantially that the principal and surety will pay to the named obligees or to their assignees the amount that the named obligees would have been entitled to recover if their claim had been proved to be a valid and enforceable lien on the property. Tex. Prop. Code § 53.172.

3.After the bond is filed, the county clerk shall issue notice of the bond to all named obligees. Tex. Prop. Code § 53.173(a).

a.A copy of the bond must be attached to the notice. Tex. Prop. Code § 53.173(b).

b.The notice must be served on each obligee by having a copy delivered to the obligee by certified mail, return receipt requested, to the address of the claimant as listed in the lien affidavit. Tex. Prop. Code § 53.173(c).

4.If the claimant’s lien affidavit does not state the claimant’s address, the notice is not required to be mailed to the claimant. Tex. Prop. Code § 53.173(d).

5.A party making or holding a lien claim may not sue on the bond later than one year after the date on which the notice is served or after the date on which the underlying lien claim becomes unenforcable under section 53.158 (statute of limitations for lien claims). Tex. Prop. Code § 53.175(a).

6.The bond is not exhausted by one action against it. Each named obligee or assignee of an obligee may maintain a separate suit on the bond in any court of jurisdiction in the county in which the real property is located. Tex. Prop. Code § 53.175(b).

§ 7.12:5Waiver and Release of Lien or Payment Bond Claim

A waiver and release of a lien or payment bond claim is enforceable only if the waiver and release is executed and delivered according to chapter 53, subchapter L, of the Texas Property Code. Tex. Prop. Code § 53.281(a). The waiver and release may release the owner, owner’s property, contractor, and surety on a payment bond from claims and liens only if the waiver and release substantially complies with one of the forms in Property Code section 53.284 and is signed by the claimant or his authorized agent and notarized. Tex. Prop. Code § 53.281(b)(1), (2). In the case of a conditional release, evidence of payment to the claimant must also exist. Tex. Prop. Code § 53.281(b)(1), (3).

A statement purporting to waive, release, or otherwise adversely affect a lien or payment bond claim is enforceable and cre­ates an estoppel or impairment of a lien or payment bond only if—

1.   the statement is in writing and substantially complies with a form in Property Code section 53.284;

2.the claimant has actually received payment in good and sufficient funds in full for the lien or payment bond claim; or

3.   the statement is in a written original contract or subcontract for the construction, remodel, repair, or land develop­ment related to a single-family house, townhouse, or duplex and the statement is made before labor or materials are provided under the original contract or subcontract. (Note that this subsection does not apply to a person who sup­plies only material and not labor. See Tex. Prop. Code § 53.282(c).)

Tex. Prop. Code § 53.282(a).

If an owner or original contractor sends an explanation, in writing, of the basis for nonpayment, evidence of a contractual waiver of lien rights, and a notice or request for release of the lien to the claimant at his address stated in the lien affidavit, and the claimant does not release the filed lien affidavit on or before the fourteenth day after the date the owner or original subcon­tractor sends such explanation, evidence, and notice, the filing of a lien rendered unenforceable by a lien waiver under Prop­erty Code section 53.282(a)(3) will violate Texas Civil Practices and Remedies Code section 12.002. Tex. Prop. Code § 53.282(b).

A person may not require a claimant or potential claimant to execute an unconditional waiver and release for a progress pay­ment or final payment amount unless the claimant or potential claimant received payment in that amount in good and suffi­cient funds. Tex. Prop. Code § 53.283. For conditional and unconditional waivers and releases on progress payment and final payment, see forms 7-24, 7-25, 7-26, and 7-27 in this chapter. See also Tex. Prop. Code § 53.284.

Subchapter L applies to contracts executed on or after January 1, 2012. Subchapter L does not apply to written agreements to subordinate, release, waive, or satisfy all or part of a lien or bond claim in (1) an accord and satisfaction of an identified dis­pute, (2) an agreement concerning an action pending in a court or arbitration proceeding, or (3) an agreement that is executed after an affidavit claiming the lien has been filed or the bond claim has been made. Tex. Prop. Code § 53.287.

§ 7.12:6Perfecting Statutory Lien Generally

The process of perfecting a statutory mechanic’s lien consists of giving notice of the payment claim in proper form to the proper parties within the applicable statutory time frames and, if the claim is not paid, thereafter timely filing a lien affidavit in proper form in the official real property records of the county in which the property is located. If all the requirements are met, the claimant then gets a perfected lien against the owner’s interest in the real property improved by the labor or materials to secure payment of the claim from retainage and trapped funds in the owner’s possession, but only in the amount authorized under the Texas Property Code, which may ultimately prove to be less than the actual amount of the payment claim. See sec­tion 7.12:20 below. The statutory mechanic’s lien can be foreclosed only by judicial foreclosure.

Practice Note:      By agreement between the owner and the original contractor before the start of construction, a deed-of-trust lien may be created against the owner’s property to secure payment to the original contractor of the construction contract price. This allows the original contractor to nonjudicially foreclose the deed of trust rather than proceed through the judicial foreclosure process required under the mechanic’s lien statutes.

Even though Texas courts have consistently held that chapter 53 of the Property Code is to be “liberally construed for pur­poses of protecting laborers and materialmen” (see Republic Bank Dallas, N.A. v. Interkal, Inc., 691 S.W.2d 605, 607 (Tex. 1985)), lien claimants are strongly urged to strictly comply with the statutory requirements. The so-called liberal construction policy has historically been applied to the wording and content of notices and affidavits—but not to the statutory deadlines. See Suretec Insurance Co. v. Myrex Industries, 232 S.W.3d 811, 815–816 (Tex. App.—Beaumont 2007, pet. denied) (finding notice mailed on a Monday the 16th to be insufficient, when the deadline for mailing was defined by statute as the 15th of the same month); Wesco Distribution, Inc. v. Westport Group, Inc., 150 S.W.3d 553, 561 (Tex. App.—Austin 2004, no pet.) (find­ing that notice was insufficient when timely mailed but without sufficient postage, then remailed late with correct postage); Bunch Electric Co. v. Tex-Craft Builders, Inc., 480 S.W.2d 42, 45–46 (Tex. Civ. App.—Tyler 1972) (finding that subcontrac­tor had no cause of action on bond claim when neither actual notice nor notice by certified mail could be proved); Hunt Devel­opers, Inc. v. Western Steel Co., 409 S.W.2d 443, 449 (Tex. Civ. App.—Corpus Christi 1966, no writ) (“The Legislature did not intend that the materialman should lose his lien through the technicalities of a warning, where the owner was not misled to his prejudice.”); Day v. Van Horn Trading Co., 183 S.W. 85 (Tex. Civ. App.—Austin 1916, no writ).

§ 7.12:7Relationship of Claimant to Owner

The filing and notice requirements applicable to perfecting statutory mechanic’s lien claims differ according to the status of the party that contracted for the labor or materials.

It is essential to determine whether the claimant contracted to provide the labor or materials to an “owner,” an “original con­tractor,” or a “subcontractor” to make an accurate determination of the proper parties and time frames for notice.

Owner:      Although used repeatedly in chapter 53 of the Texas Property Code, “owner” is not expressly defined in the Code. The actual use of “owner” in the Code clearly indicates, however, that an owner is the person holding title to the real property interest that is being improved by the construction. See, e.g., Tex. Prop. Code § 53.021(e). Generally, the owner is either a fee owner or a tenant holding a leasehold estate.

Original Contractor:      An original contractor is defined as “a person contracting with an owner either directly or through the owner’s agent.” Tex. Prop. Code § 53.001(7). On large projects, it is not uncommon to have more than one original contractor. For example, if the mechanical and electrical contractors on a project contract directly with the owner, both contractors will be considered original contractors under the lien statute. Tex. Prop. Code § 53.002.

Practice Note:      An original contractor is usually called a “general contractor” or “prime contractor” by people in the con­struction industry, but the Property Code uses the term original contractor.

Subcontractor:      A subcontractor is a person who does not contract directly with the owner but instead contracts to provide labor or material to either an original contractor or another subcontractor to fulfill all or part of the work required by contract between the owner and the original contractor. Tex. Prop. Code § 51.001(13). Because subcontractors cannot claim to be third-party beneficiaries of the contract between the owner and the original contractor without specific terms to that effect in the original contract, subcontractors can claim against the owner only through the perfection of a statutory mechanic’s lien. Raymond v. Rahme, 78 S.W.3d 552, 559–62 (Tex. App.—Austin 2002, no pet.).

Practice Note:      In the construction industry, a subcontractor is often referred to as a “second-tier” contractor, “third-tier” contractor, and so forth, depending on how far down the chain of contracts the subcontractor is from the original contractor. These are not terms used by the Property Code, however, and for purposes of the mechanic’s lien statutes found in the Code the only meaningful distinction is whether the subcontractor contracted with an original contractor or another subcontractor. The major difference between the first-tier and second-tier subcontractors (and all lower tiers) is an additional preliminary notice that only second-tier subcontractors/suppliers must give to the original contractor to perfect their lien rights. Texas has no limit on the number of tiers down the food chain a claimant can be and still be eligible to perfect a claim. First tier subcon­tractors/suppliers and second tier subcontractors/suppliers are also referred to by the statute as “derivative claimants.”

§ 7.12:8Proper Parties for Statutory Lien Notices

The proper parties for notice of the payment claim are determined by whether the claimant is an original contractor or a sub­contractor. See Tex. Prop. Code §§ 53.055–.056.

Original Contractor:      An original contractor does not have to give notice of nonpayment to the owner. Tex. Prop. Code § 53.056(a). The only statutory notice requirement applicable to the original contractor is that notice of the filing of the mechanic’s lien affidavit must be given to the owner at the owner’s last known business or residence address by the fifth busi­ness day after the lien affidavit is filed. Tex. Prop. Code § 53.055. See form 7-7 in this chapter for a notice to owner of filing lien affidavit.

Practice Note:      If time permits, the original contractor should consider giving the owner written demand for payment of the debt and notice of intent to file a mechanic’s lien affidavit if the debt is not paid. The claimant’s goal is to obtain payment while avoiding the generally unrecoverable expenses of preparing and filing a lien, and a demand or warning letter may accomplish that goal. Further, giving the owner prior notice before filing the lien may help maintain the lines of communica­tion with the owner necessary to complete the construction project. (The contractor’s filing a mechanic’s lien claim without prior notice is particularly objectionable to an owner who is financing the construction, as the filing of a mechanic’s lien claim puts the owner in default under most standard loan agreements.)

Subcontractor:      Before the subcontractor can file a mechanic’s lien affidavit, the subcontractor must first give statutorily prescribed notices of the unpaid amount of the claim to (1) the original contractor and the owner of unpaid amounts owing by a subcontractor and (2) the owner of unpaid amounts owing by the original contractor. Tex. Prop. Code § 53.056. The notice of claim must state the amount of the claim. Tex. Prop. Code § 53.056(b).

“A copy of the statement or billing in the usual and customary form is sufficient as notice.” Tex. Prop. Code § 53.056(f). The notice must be given by registered or certified mail to the owner or original contractor (as applicable) at the last known busi­ness address or residence. Tex. Prop. Code § 53.056(e). See form 7-8 for a notice of claim to owner and original contractor.

§ 7.12:9Deadlines for Notices of Unpaid Contract Amounts

The statutory deadlines for giving notice of the unpaid claim are always keyed to the month in which the unpaid labor or mate­rial was provided by the claimant. However, the deadlines and forms of the notices vary according to whether the construction project involves a residential construction contract or a nonresidential construction contract.

Payment Claim on Residential Construction Contract:      A “residential construction contract” is a contract between an owner and a contractor to construct or repair a new or existing residence or improvements appurtenant to the residence. Tex. Prop. Code § 53.001(9). A “residence” is—

a single-family house, duplex, triplex, or quadruplex or a unit in a multiunit structure used for residential purposes that is:

(A)owned by one or more adult persons; and

(B)used or intended to be used as a dwelling by one of the owners.

Tex. Prop. Code § 53.001(8).

Thus, residential construction contracts cover both homesteads and part-time, nonhomestead residences such as vacation homes. The requirements of Property Code sections 53.251–.260 pertaining to residential construction contracts are in addi­tion to the other requirements of chapter 53. Tex. Prop. Code § 53.251(b).

The time frames for mailing notices and filing lien affidavits under a residential construction contract are generally shorter than those for a nonresidential one. See Tex. Prop. Code §§ 53.052(b), 53.252. Fund-trapping notices work generally in the same manner for residential construction projects as for nonresidential projects. See Tex. Prop. Code §§ 53.056, 53.252. Notice must be sent for each month in which unpaid work is furnished; however, the deadline for filing lien affidavits runs from the last month in which work was furnished by the claimant. Tex. Prop. Code §§ 53.052–.053, 53.252.

The following chart shows the applicable time frames for giving notice of an unpaid claim on a residential construction proj­ect.

See section 7.12:10 below concerning notice of contractual retainage claims on residential construction projects.

See forms 7-8 and 7-9 in this chapter for a notice of claim against a homestead property. See form 7-10 for a contractor’s dis­closure statement for residential construction.

Payment Claim on Nonresidential Construction Contract:      A nonresidential construction contract is any construction contract other than a residential construction contract.

A subcontractor who contracted with the original contractor must give notice of the unpaid balance to the owner with a copy to the original contractor by the fifteenth day of the third month following each month for which the material or labor was pro­vided. Tex. Prop. Code § 53.056(b), (c). A subcontractor who contracted with a subcontractor must give notice of the unpaid balance to (1) the original contractor by the fifteenth day of the second month following each month for which the material or labor was provided and (2) the owner and the original contractor by the fifteenth day of the third month following the month for which the material or labor was provided. Tex. Prop. Code § 53.056(b). Notices of default in payment must be sent for each month in which unpaid labor or materials were furnished. Tex. Prop. Code § 53.056(b). The deadline for filing lien affi­davits runs from the last month in which work was furnished by the claimant. Tex. Prop. Code §§ 53.053, 53.056(b). All lien affidavits must be filed before thirty days after completion of the original contract between the owner and the original contrac­tors. See Tex. Prop. Code §§ 53.084, 53.101; see also “Filing Liens and Trapping Funds at Project’s End” in section 7.12:11 below.

The following chart shows the applicable time frames for giving notice of an unpaid claim on a nonresidential construction project.

See section 7.12:10 below for special notice requirements not included in this chart.

See form 7-12 for a notice to original contractor by second-tier claimant.

Practice Note:      As a practical matter, the third-month notice is not required if the second-month notice contains the statutory language required by section 53.056 and is sent to both the original contractor and the owner on or before the fifteenth day of the second month after all or part of the claimant’s labor or material was provided. See form 7-8. One consideration in favor of sending the notices sequentially rather than concurrently is to give the original contractor the opportunity to see that payment is made without putting the owner on notice of potential problems with the original contractor’s subcontractors and possibly creating friction between the owner and the original contractor that will affect the subcontractor. However, the delay in pre­senting the claim to the owner may adversely affect the amount of funds “trapped” in the owner’s hands by the notice, as dis­cussed in section 7.12:20 below.

Specially Fabricated Materials:      Sections 53.021 and 53.058 of the Property Code establish additional notice requirements for contractors who provide specially fabricated materials. In order for a claimant providing specially fabricated materials to fully protect his lien rights, the claimant must give the owner notice not later than the fifteenth day of the second month after the month in which the claimant receives and accepts the order for the specially fabricated materials. Tex. Prop. Code § 53.058(b). If the contract is with a person other than the original contractor, the claimant must also give notice within that same time to the original contractor. Tex. Prop. Code § 53.058(b). The notice must contain a statement that the order has been received and accepted and that includes the price of the order. Tex. Prop. Code § 53.058(c). This notice must be sent by regis­tered or certified mail, return receipt requested, to the last known business address or residence address of the owner or reputed owner and the original contractor as applicable. Tex. Prop. Code § 53.058(d). It is not necessary that the specially fab­ricated materials actually be delivered to the construction site for the claimant to perfect the lien claim. Tex. Prop. Code § 53.021(b). If the claimant actually delivers the specially fabricated materials to the job site, the claimant must also comply with the normal notice procedures for material suppliers. Tex. Prop. Code § 53.058(e). A claimant providing specially fabri­cated materials who fails to give the section 53.058 notice will still have a valid claim as to delivered items if the required notices are given under section 53.056 of the Property Code. Tex. Prop. Code § 53.058(f). See form 7-13 for a notice regard­ing specially fabricated materials.

§ 7.12:10Notice for Contractual Retainage Claims

Both original contracts and subcontracts may provide that a percentage of each payment earned by the contractor supplying material or labor will be held back or “retained” until final completion of work. This contractual “retainage” serves as a kind of reserve fund that can be used to address problems with the quality of the contractor’s work or defaults by the contractor in paying for labor or materials used in the contract.

If a subcontract provides for contractual retainage, the retainage could be construed as an unpaid amount owing under the con­tract subject to the regular notice and filing requirements of the mechanic’s lien statutes, notwithstanding that the funds were withheld pursuant to an agreement and not because of a payment default. To relieve that subcontractor of the burden of giving notices for each month’s contractual retainage, the Texas Property Code provides that by giving the project owner (and the original contractor, if the retainage pertains to a contract with a second-tier or lower subcontractor) early notice of the contrac­tual retainage agreement, the subcontractor is relieved of the burden of giving the default notices otherwise required. See Tex. Prop. Code § 53.057.

Retainage Claims on Nonresidential Projects:      A subcontractor on a nonresidential construction project may give the owner written notice of a subcontract containing a retainage agreement under section 53.057 instead of or in addition to the notice under section 53.056 (labor and materials) or section 53.252 (specially fabricated materials). Tex. Prop. Code § 53.057(a). Notice under section 53.057 must be given to the owner not later than the earlier of (1) the thirtieth day after the date the retainage agreement is completed, terminated, or abandoned; or (2) the thirtieth day after the date the original contract is terminated or abandoned. Tex. Prop. Code § 53.057(b). If the claimant’s retainage agreement is with a subcontractor and not with the original contractor, the claimant must also give notice within that time frame to the original contractor. Tex. Prop. Code § 53.057(b–1). If the claimant is a subcontractor, filing a notice for contractual retainage under section 53.057 and sec­tion 53.055 will relieve the subcontractor of the obligation to send monthly fund-trapping notices for the retainage under sec­tion 53.056. See Tex. Prop. Code § 53.057(e); see also Tex. Prop. Code § 53.056(b).

Retainage Claims on Residential Projects:       The claimant must give notice of the retainage agreement to the owner not later than the earlier of (1) the thirtieth day after the date the retainage agreement is completed, terminated, or abandoned; or (2) the thirtieth day after the date the original contract is terminated or abandoned. Tex. Prop. Code § 53.057(b). If the contract is a subcontract, the claimant must also give notice to the original contractor. Tex. Prop. Code § 53.057(b–1). No further notice of contractual retainage agreements is required on residential construction projects. Tex. Prop. Code § 53.057(e).

Form of Retainage Notice:      The notice must generally state the existence of a requirement for retainage and include the name and address of the claimant and the name and address of the subcontractor, if the retainage agreement is with a subcon­tractor. Tex. Prop. Code § 53.057(c). These notices must be sent to the last known business or residence address of the owner or reputed owner and the original contractor as applicable. Tex. Prop. Code § 53.057(d). See form 7-14 in this chapter for a notice of agreement providing for retainage.

Effect of Retainage Notice:      Although section 53.057(e) provides that a claimant who gives notice under section 53.057 is not required to give any other notices for retainage, the notice does not appear to authorize the owner to withhold any addi­tional funds as under the fund-trapping notice described in section 7.12:11 below.

A claimant has a lien on the retained funds, and the owner is personally liable to the claimant for such funds, if the claimant gives notice of the filed affidavit required by section 53.055 and gives notice in accordance with section 53.057 along with either complying with chapter 53, subchapter E, of the Texas Property Code or filing an affidavit claiming a lien. Tex. Prop. Code § 53.057(f). If the claimant files an affidavit claiming a lien, it must be filed not later than the earliest of—

1.the date required for filing an affidavit under section 53.052;

2.the fortieth day after the date stated in an affidavit of completion as the date of completion of the work under the original contract, if the owner sent the claimant notice of an affidavit of completion as required;

3.the fortieth day after the date of termination or abandonment of the original contract, if the owner sent the claimant notice of the termination or abandonment as required; or

4.the thirtieth day after the date the owner sent to the claimant a written notice of demand for the claimant to file the affidavit claiming the lien.

Tex. Prop. Code § 53.057(f)(1)(B).

An owner’s written demand for the claimant to file an affidavit claiming a lien must contain the owner’s name and address, a description of the real property on which the improvement is located that is legally sufficient for identification, and a state­ment that the claimant must file the lien affidavit not later than the thirtieth day after the date the demand is sent. Tex. Prop. Code § 53.057(g)(1)(2). The written demand is effective only for the amount of contractual retainage earned by the claimant as of the day the demand was sent. Tex. Prop. Code § 53.057(g)(3).

§ 7.12:11Funds Subject to Lien Claims

Statutory Retainage:      Section 53.101 of the Texas Property Code provides that—

(a)During the progress of work under an original contract for which a mechanic’s lien may be claimed and for 30 days after the work is completed, the owner shall retain:

(1)   10 percent of the contract price of the work to the owner; or

(2)   10 percent of the value of the work, measured by the proportion that the work done bears to the work to be done, using the contract price or, if there is no contract price, using the reasonable value of the com­pleted work.

Tex. Prop. Code § 53.101.

For purposes of chapter 53 of the Property Code, the work is not “completed” until actual completion; substantial completion will not suffice. Tex. Prop. Code § 53.001(15). The required retainage is computed separately for each original contract and not for the project as a whole. Page v. Structural Wood Components, Inc., 102 S.W.3d 720, 723–24 (Tex. 2003). If the owner fails to withhold such retainage, the owner is potentially liable to lien claimants for the payment of lien claims up to the amount of the retainage that should have been withheld. Tex. Prop. Code § 53.105(a); Hunt County Lumber, Inc. v. Hunt-Collin Electric Co-operative, Inc., 749 S.W.2d 179 (Tex. App.—Dallas 1988, writ denied). Retainage secures artisans and mechanics first and then the other lien claimants in proportion to their relative claims. Tex. Prop. Code §§ 53.102, 53.104.

The punchlist work required to complete the contract scope of work extends the date of completion and, therefore, the dead­line for filing mechanic’s liens. However, performing warranty work will generally not extend the completion date. In 1999, the definition of “completion” was modified to make it clear that replacement or repair of work performed under the contract will not extend the date.

Trapped Construction Payments:      In addition to meeting the minimum statutory retainage requirements, an owner is authorized to withhold from payments earned by the original contractor an amount sufficient to pay alleged claims if the owner is given written notice to the effect that, if the claim remains unpaid, the owner may be personally liable and the owner’s property subjected to a lien unless the owner withholds payments from the contractor for payment of the claim or the claim is otherwise paid or settled. Tex. Prop. Code §§ 53.056(d), 53.081, 53.082.

Practice Note:      The following statement is sufficient to comply with section 53.056(d): “If the claim remains unpaid, you may be personally liable and your property may be subjected to a lien unless you withhold payments from the contractor for payment of the claim or the claim is otherwise paid or settled.” See Tex. Prop. Code § 53.056(d). This notice is commonly referred to as a “fund trapping” notice and should be routinely included as part of the notice of unpaid claim sent to the owner and original contractor. Trapping funds is important to the claimant because the statutory 10 percent retainage may not in itself be sufficient to cover all the perfected claims under a contract.

Once the owner receives a notice of default with such a statement, the owner may withhold trapped funds from payments owing to the original contractor until the time for filing the affidavit of mechanic’s lien has passed or, if a lien affidavit has been filed, until the lien claim is satisfied or released. Tex. Prop. Code § 53.082. The amount trapped is the amount the owner owes the original contractor, over and above offsets and back charges. Lennox Industries v. Phi Kappa Sigma Educational & Building Ass’n, 430 S.W.2d 404 (Tex. Civ. App.—Austin 1968, no writ); accord Page, 102 S.W.3d at 720.

Fund Trapping for Specially Fabricated Materials:      An owner may withhold funds under a fund-trapping notice given with respect to specially fabricated materials under section 53.058 if the owner has also received notice of an unpaid claim under Property Code section 53.056.

Filing Liens and Trapping Funds at Project’s End:      Under Property Code sections 53.084 and 53.101, the owner has to hold statutory retainage funds for only thirty days past “completion of the work,” which the Texas Supreme Court has inter­preted to mean the completion or termination of the original contract under which a claimant is proceeding. See Tex. Prop. Code §§ 53.084, 53.101. See Page v. Marton Roofing, Inc., 102 S.W.3d 733, 735 (Tex. 2003) (fund-trapping liens); Page v. Structural Wood Components, Inc., 102 S.W.3d 720, 725 (Tex. 2003) (statutory liens). Moreover, all lien affidavits must be filed within thirty days of completion of the original contract. Accordingly, these statutes effectively shorten the time other­wise given a claimant for giving a fund-trapping notice. See, e.g., Bond v. Kagan-Edelman Enterprises, 985 S.W.2d 253 (Tex. App.—Houston [1st Dist.] 1999), rev’d in part, 20 S.W.3d 706 (Tex. 2000).

Practice Note:      Contractors providing labor and materials at the end of a project (those doing interior painting and carpet installation, for example) are more likely to be affected by the shorter effective deadlines than contractors working at the start of a project (those pouring the foundation, for example). However, any contractor could be caught by shorter deadlines if the owner terminates the original contract (for the original contractor’s default, for example) before the original anticipated com­pletion date. The only certain way for a claimant to protect his lien rights is to give all required notices and file the lien affida­vit within thirty days of the completion of the claimant’s work or delivery of materials.

§ 7.12:12Demands for Payment

Once a subcontractor has provided the owner with notice of a payment claim, the subcontractor may demand payment from the owner. The demand must state that all or part of the claim has accrued under Texas Property Code section 53.053 or is past due according to the agreement between the parties. Tex. Prop. Code § 53.083(a). A copy of the demand letter must be sent to the original contractor. Once this notice is given, the original contractor must notify the owner within thirty days if it intends to dispute the claim. Tex. Prop. Code § 53.083(d). If the original contractor does not provide timely notice to the owner that it disputes the claim, the original contractor is considered to have assented to the demand, and the owner is required to pay the claim. Tex. Prop. Code § 53.083(b). The claimant may incorporate a demand for payment into the original notice of claim. Tex. Prop. Code § 53.083(c). Notice and demand alone will not preserve a lien claim. If the owner does not pay the claim, a mechanic’s lien affidavit must still be filed within the time required by the statute, except as allowed by Property Code section 53.057(f). Tex. Prop. Code §§ 53.052(a), 53.103.

Practice Note:      All derivative claimants should include demand language to the owner in all second-month and third-month notices. In other words, while the derivative claimant is properly fulfilling the notice requirements of the Property Code, he is also able to make demand on the owner for the claim. If the original contractor fails to notify the owner that the claim is dis­puted, the owner is, at least by the terms of the statute, authorized to release the money to the claimant.

§ 7.12:13Mechanic’s Lien Affidavit

If the claimant does not receive payment after giving notice of its claim, the next step is to file the mechanic’s lien affidavit to perfect the lien claim against the owner’s interest in the real property to secure payment of the claimant’s interest in the statu­tory retainage and any trapped funds.

§ 7.12:14Form of Statutory Lien Affidavit

General Contents:      The lien affidavit must be signed by either the person claiming the lien or by an authorized representa­tive on the claimant’s behalf and must contain—

1.a sworn statement of the amount of the claim;

2.the name and last known address of the owner or reputed owner;

3.a general statement of the kind of work done and materials furnished by the claimant and, for a claimant other than an original contractor, a statement of each month in which the work was done or the materials were furnished;

4.the name and last known address of the person by whom the claimant was employed or to whom the claimant fur­nished the material or labor;

5.the name and last known address of the original contractor;

6.a description, legally sufficient for identification, of the property sought to be charged with a lien;

7.the claimant’s name, mailing address, and physical business address; and

8.for a claimant other than an original contractor, a statement identifying the date each notice of the claim was sent to the owner and the method by which the notice was sent.

Tex. Prop. Code § 53.054.

See forms 7-15 and 7-16 in this chapter for an affidavit and cover letter.

Homestead Lien Affidavit:      A lien affidavit against a homestead must contain the mandatory disclosure set out in Tex. Prop. Code § 53.254(g). It reads “Notice: This is not a lien. This is only an affidavit claiming a lien.” This notice must be con­spicuously printed, stamped, or typed at the top of the page in a type size equal to a least ten-point boldface or the computer equivalent. Tex. Prop. Code § 53.254(f).

Jurat Required:      The notary statement on the lien affidavit must state that the affidavit was “subscribed and sworn to” and not just “acknowledged”; otherwise, the lien affidavit is legally insufficient to perfect the claim. See Sugarland Business Cen­ter, Ltd. v. Norman, 624 S.W.2d 639, 641 (Tex. App.—Houston [14th Dist.] 1981, no writ); Perkins Construction Co. v. Ten-Fifteen Corp., 545 S.W.2d 494, 498 (Tex. Civ. App.—San Antonio 1976, no writ); Conn, Sherrod & Co. v. Tri-Electric Supply Co., 535 S.W.2d 31, 34 (Tex. Civ. App.—Tyler 1976, writ ref’d n.r.e.); Crockett v. Sampson, 439 S.W.2d 355, 359 (Tex. Civ. App.—Austin 1969, no writ).

Description of Work and Materials:      The affidavit must provide a meaningful description of the general type of work or material supplied, but it is not necessary to describe individual items of work done or material furnished. Tex. Prop. Code § 53.054(c). If there is a written contract for the work, it is often useful to attach a copy to the affidavit as an exhibit.

The affidavit may use abbreviations or symbols customarily used in the trade. Tex. Prop. Code § 53.054(c). But using abbre­viations and symbols that are not commonly recognized in the trade may render the lien invalid. See Haden Co. v. Mixers, Inc., 667 S.W.2d 316, 316 (Tex. App.—Dallas 1984, no writ) (holding that description “5—12'  2" x 14' 1" O.H.Std.M.G. $3,328.00” was “gibberish” and insufficient to perfect lien).

Multiple Contracts:      The better practice is not to file one lien claim for payments owing under multiple contracts, even if the different projects are located in a single tract or development. See H.B. Zachry Co. v. Waller Creek, Ltd. (In re Waller Creek, Ltd.), 867 F.2d 228 (5th Cir. 1989) (lien claim defeated on grounds that claims on two separate contracts combined into one lien affidavit).

§ 7.12:15Requests for Information

By statute, the mechanic’s lien affidavit must contain certain information that may not be known or easily learned by the claimant. See Tex. Prop. Code § 53.054. On written request, owners and contractors must furnish the mechanic’s lien claimant with information needed to perfect the claimant’s lien rights or evaluate the merits of the payment claims. Tex. Prop. Code § 53.159.

Request to Owner:      On written request from any person furnishing labor or materials for a project, an owner is required to furnish within a reasonable time not exceeding ten days from receipt of the request—

1.a description of the property being improved legally sufficient to identify it;

2.a statement of whether a bond is in place on the construction project and, if a bond does exist, the name of the bond­ing company and a copy of the bond;

3.a statement of whether there are any prior recorded liens or security interests against the real property and the name and address of any persons having lien or security interests; and

4.the date on which the original contract for the project was executed.

Tex. Prop. Code § 53.159(a).

See form 7-17 in this chapter for a request to an owner.

Request to Original Contractor:      On written request from any person furnishing labor or materials under the original con­tract, the original contractor is required to provide within a reasonable time not exceeding ten days from the receipt of the request—

1.the name and last known address of the person to whom the original contractor has furnished labor and materials for the project (usually the owner);

2.confirmation of whether the original contractor furnished or was furnished with a payment bond;

3.if a bond does exist, the name and address of the surety and a copy of the bond; and

4.the date on which the original contract for the project was executed.

Tex. Prop. Code § 53.159(b).

See form 7-18 for a request to an original contractor.

Request to Subcontractor:      On written request from an owner, original contractor, bond surety on the original contract, or any person furnishing work under a subcontract, a subcontractor is required to provide within a reasonable time not exceeding ten days from receipt of the request—

1.the name and last known address of each person from whom the subcontractor purchased labor or materials (other than materials furnished from the subcontractor’s inventory);

2.the name and last known address of each person to whom the subcontractor furnished labor or materials;

3.whether the subcontractor has furnished or been furnished a payment bond on the project; and

4.if a payment bond exists, the name and last known address of the surety and a copy of the bond.

Tex. Prop. Code § 53.159(c).

See form 7-19 for a request to a subcontractor.

Information from Claimant:      An owner, contractor, or bond surety may request that a claimant for a lien or under a bond furnish a copy of any applicable written agreement, purchase order, or contract and any billing statement or payment request reflecting the amount claimed and, if further requested, the estimated amount due for each calendar month in which the claim­ant performed labor or furnished materials. The claimant must provide the information within thirty days of receipt of the request. Tex. Prop. Code § 53.159(d).

Payment of Costs:      If the person from whom information is requested does not have a direct contractual relationship on the project with the person requesting the information, the person requesting the information may be required to pay for the actual costs, not to exceed $25, of furnishing the information. Tex. Prop. Code § 53.159(e).

Failure to Provide Information:      If a person other than a claimant requested to furnish information under Property Code section 53.159(e) fails to provide it, that person may be liable to the requesting person for the reasonable and necessary costs incurred in obtaining the requested information elsewhere. Tex. Prop. Code § 53.159(f).

No Tolling:      Chapter 53 does not allow requests for information necessary to prepare a notice letter or a lien affidavit under Code section 53.159 to toll the statutory time limits for sending a notice of claim or filing a mechanic’s lien affidavit. There­fore, the claimant should always allow enough time to obtain the required information elsewhere should the requested party fail to provide it in a timely manner.

§ 7.12:16Deadlines for Filing Statutory Lien Affidavit

The lien affidavit itself must be filed by the earlier of (1) the fifteenth day of the fourth calendar month after the month in which the indebtedness accrues on a nonresidential construction contract (Tex. Prop. Code § 53.052(a)); (2) the fifteenth day of the third month after the month in which the indebtedness accrues on a residential construction project (Tex. Prop. Code § 53.052(b)); or (3) the thirtieth day after completion or termination of the original contract under which the claim arises (Page v. Structural Wood Components, Inc., 102 S.W.3d 720, 723–24 (Tex. 2003)).

Original Contractor:      Indebtedness to an original contractor accrues—

1.on the last day of the month in which a written declaration by the original contractor or the owner is received by the other party to the original contract stating that the original contract has been terminated; or

2.on the last day of the month in which the original contract has been completed, finally settled, or abandoned.

Tex. Prop. Code § 53.053(b).

Subcontractor:      Indebtedness to a subcontractor accrues on the last day of the last month in which the labor was performed or the material furnished. Tex. Prop. Code § 53.053(c).

Specially Fabricated Materials:      Indebtedness for specially fabricated materials accrues on the last day of—

1.the last month in which materials were delivered;

2.the last month in which delivery of the last of the material would normally have been required at the job site; or

3.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.

Tex. Prop. Code § 53.053(d).

Retainage:      “A claim for retainage accrues on the last day of the month in which all work called for by the contract between the owner and the original contractor has been completed, finally settled, or abandoned.” Tex. Prop. Code § 53.053(e).

Architects, Engineers, and Surveyors:       Since an architect, engineer, or surveyor is considered to be an original contractor, the “accrual of indebtedness” for determining the lien filing deadline will run from the completion of services. See Tex. Prop. Code § 53.053(b). The indebtedness may accrue before the actual start of construction, if all the contract work is preparatory in nature. This means that the architect, engineer, or surveyor may have to file a lien before the start of construction.

§ 7.12:17Special Homestead Requirements

If labor or materials are provided for work on a homestead property, no mechanic’s lien can be created against the property unless the original contractor meets very specific statutory requirements before the start of construction on the project. If the original contractor does not meet these requirements, no subcontractor providing labor or materials for the project will be able to meet the statutory requirements to perfect a mechanic’s lien on the homestead property. Tex. Const. art. XVI, § 50; Tex. Prop. Code § 53.254.

Basic Requirements:      If a homestead is involved, to create a valid mechanic’s lien against the property—

1.the original contractor and the owner must execute a written agreement setting out the terms of the contract before work commences;

2.if the owner of the homestead is married, both spouses must sign the contract; and

3.the contract must be filed with the clerk of the county in which the homestead is located.

Tex. Prop. Code § 53.254. The contract inures to the benefit of all persons who labor or furnish material for the original con­tractor. Tex. Prop. Code § 53.254(d).

Texas Constitution article XVI, section 50(a), may provide further limitations on when a mechanic’s lien attaches to a home­stead property. If the work and material furnished by a contractor on a residential homestead property is for renovation or repair work on an existing homestead, the claimant must satisfy the specific requirements in subsections (a)(5)(A)–(D) of arti­cle XVI, § 50, of the Constitution in addition to the requirements of Tex. Prop. Code § 53.254. On the other hand, if the work and material furnished by an original contractor is for new construction of a residential homestead property, then a constitu­tional mechanic’s lien may arise simply if the contract is in writing. Cavazos v. Munoz, 305 B.R. 661, 678 (S.D. Tex. 2004) (citing Spradlin v. Jim Walter Homes, Inc., 34 S.W.3d 578, 581 (Tex. 2000)).

Practice Note:      While Code section 53.254 provides that the contract must be signed before construction starts, no particular time for the filing of the contract is specified. However, filing the contract before the start of construction will evidence that the contract was timely executed.

Extensions of Credit:      Any homestead construction project involving a loan has additional statutory requirements that must be met in connection with closing the construction contract with the owner. A contract for the improvement (as opposed to new construction) of homestead property cannot be signed before the fifth day after the owner has made written application for the extension of credit unless the owner must make immediate repairs to conditions that materially affect the health or safety of the people residing in the homestead. Tex. Const. art. XVI, § 50(a)(5)(B). Because the validity of the lien is in issue, lenders are reluctant to waive the five-day period. The construction contract cannot be executed except in the office of the lender, an attorney, or a title company. Tex. Const. art. XVI, § 50(a)(5)(D). (That is, there are no more “kitchen table closings” by home improvement salesmen that create liens on the property.) The owner can rescind a construction contract within three days after execution. Tex. Const. art. XVI, § 50(a)(5)(C).

Additional Notices:      Certain additional notices are required with respect to homestead construction projects.

Disclosure Statement.      The Texas Property Code provides that a mandatory disclosure statement must be provided to the owner—

1.by a third-party lender, before closing of the loan (Tex. Prop. Code § 53.257);

2.by the original contractor, before the residential construction contract is executed (Tex. Prop. Code § 53.255(a)); and

3.by any lien claimant, with the second-month notice letter to the owner (Tex. Prop. Code § 53.252(a), (b)).

See form 7-10 in this chapter for a disclosure statement.

Practice Note:      There are no statutory penalties for failing to give the notice, and the statute expressly provides that the fail­ure of an original contractor or a lender to provide the statement will not invalidate a lien. Tex. Prop. Code §§ 53.255(c), 53.257(c). However, some attorneys argue that the statute creates a new civil cause of action in favor of residential owners.

Notice of Proposed Subcontractors.      Before beginning construction, the original contractor must provide the owner with a list of the proposed subcontractors and suppliers for the project. Tex. Prop. Code § 53.256. This list must contain the notice set forth at Property Code section 53.256 and must be updated within fifteen days after each occasion in which a subcontractor or supplier is added or deleted. Tex. Prop. Code § 53.256(a)(2), (b). The owner may waive the right to receive the list by a writ­ten waiver that meets the requirements of Property Code section 53.256(d). The waiver may be included in the residential con­struction contract or may be separate. Tex. Prop. Code § 53.256(d). There is no express penalty for failure to provide the list, and the failure to provide the list does not invalidate a lien. Tex. Prop. Code § 53.256(c). See form 7-11 for a list of subcon­tractors and suppliers. The list of subcontractors can be an important tool for the owner and should not be waived without thoughtful consideration and legal guidance.

Disbursement of Funds.      Whenever the original contractor requests payment on a residential construction contract (whether from the owner or a third-party lender), the original contractor must provide a disbursement statement showing at minimum the name and address of every person contracting directly with the original contractor and whom the original contractor intends to pay with the requested funds. Tex. Prop. Code § 53.258. If the owner finances the construction through a third-party lender, the lender must obtain a signed disbursement statement from the original contractor for each advance and provide to the owner a statement of funds disbursed since the last disbursement statement. Tex. Prop. Code § 53.258(b). The original contractor’s or the lender’s failure to provide the statement does not invalidate a mechanic’s lien claim, but there are criminal penalties for the intentional, knowing, or reckless provision of false or misleading information in a disbursement statement. Tex. Prop. Code § 53.258(e), (f). See form 7-20 for a disbursement statement.

Final Payment Affidavit.      As a condition to final payment, the original contractor must execute and deliver to the owner an affidavit stating that the original contractor has paid each person in full for all labor and materials used in the construction of improvements on the real property (or, in the alternative, stating who has not been paid, and, if known, their address and tele­phone number and the amount owing). Tex. Prop. Code § 53.259(a). See form 7-21 for an affidavit of bills paid.

Practice Note:      The mechanic’s lien statutes pertaining to homesteads do not differentiate between the residential homestead and the business homestead. Accordingly, if a contractor intends to work on a business location owned by an individual rather than a corporate entity, the contractor should carefully evaluate whether a business homestead issue exists.

§ 7.12:18Owner’s Financial Liability

The owner is liable to an original contractor for any unpaid portion of the original construction contract that was earned by the original contractor. However, there are statutory limits on an owner’s liability to subcontractors. In general, the owner’s max­imum liability to the subcontractors as a group under any particular original contract is the sum of—

1.the 10 percent statutory retainage the owner is required to hold back from the original contractor for thirty days after final completion of the construction project; and

2.any funds “trapped” under a proper notice of nonpayment under Tex. Prop. Code §§ 53.081–.084.

However, the claimant traps only those funds owed by the owner to the contractor over and above offsets and back charges. Lennox Industries v. Phi Kappa Sigma Educational & Building Ass’n, 430 S.W.2d 404 (Tex. Civ. App.—Austin 1968, no writ), overruled in part by Hayek v. Western Steel Co., 478 S.W.2d 786 (Tex. 1972), but supported by Page v. Structural Wood Components, Inc., 102 S.W.3d 720 (Tex. 2003).

§ 7.12:19Priority of Lien Claims

The perfection of a mechanic’s and materialman’s lien does not guarantee a claimant payment. Instead, it improves the claim­ant’s chances of payment and gives him a right to a share of any funds available or that should be available to pay mechanic’s and materialman’s lien claimants. The priority of the various types of claims determines what funds, if any, should be or are available to pay claims and also the amount of any judgment the claimant is entitled to receive in a suit brought to foreclose his mechanic’s and materialman’s lien.

Except for the special preference to (1) individual artisans and mechanics as to statutory retainage under Tex. Prop. Code § 53.104 and (2) liens for preconstruction work by architects, engineers, and surveyors under Tex. Prop. Code §§ 53.021(c), 53.124(e), the priority date of a perfected mechanic’s lien claim relates back to the date of the start of construction or the delivery of materials for the project under the contract between the owner and the original contractor. Tex. Prop. Code § 53.124(a). For this purpose, a subcontractor’s claim priority will be determined by tracing back through the chain of subcon­tracts to the start of construction under the original contract with the owner. The effect is that (except for the statutory excep­tions referenced above) all lien claims of all subcontractors under the same original contract will have the same priority date, regardless of the actual dates of filing of the respective lien affidavits. As such, a properly recorded affidavit claiming a mechanic’s and materialman’s lien that is recorded, for example, in April has equal footing with one properly recorded in June. If the proceeds of a foreclosure sale of property are insufficient to discharge properly perfected mechanic’s and material­man’s liens that have equal footing in full, the various liens share pro rata in the proceeds. Tex. Prop. Code § 53.122(b).

In determining the priority of mechanic’s liens against other liens, Tex. Prop. Code §§ 53.123, 53.124, along with the “rela­tion back” doctrine, provide generally that a mechanic’s lien will be superior to other liens (except for the special preferences noted above) that come into existence after the inception of the mechanic’s lien, as well as prior liens that exist at the incep­tion of the mechanic’s lien as long as the contracting party had an equitable or legal interest in the property at the time of the mechanic’s lien’s inception. See Diversified Mortgage Investors v. Lloyd D. Blaylock General Contractor, Inc., 576 S.W.2d 794, 806–807 (Tex. 1978) (finding mechanic’s lien normally to be superior to deed of trust lien when mechanic’s lien’s incep­tion was prior to recording of deed of trust lien and during owner’s option to purchase period, but not if owner had no legal or equitable interest prior to purchasing property and mechanic’s lien’s inception was after recording of deed of trust). However, these statutory provisions and the “relation back” doctrine are somewhat limited by whether items supplied by contractors and subcontractors are “removable” or not. See “Priority of Claims for Removables” below for further discussion.

Multiple Original Contracts:      If there is more than one original contractor on a project and construction under the separate contracts with the different original contractors began on different dates, the date of relative lien priority for the claimant is determined by the start of construction under the particular original contract under which the claimant performed.

Priority with Respect to Third Parties:      All subcontractors with a perfected lien have preference over other creditors of the original contractor. Tex. Prop. Code § 53.121.

Priority of Claims for Removables:       Under the “relation back” doctrine and statutory provisions discussed above, mechanic’s lien claimants generally have a preferential first priority over all other liens on removable improvements, regard­less of the relative priority of filing. Tex. Prop. Code §§ 53.122, 53.124. This preference even extends under certain circum­stances to deeds of trust that are filed before the inception of the mechanic’s lien. See Diversified Mortgage Investors, 576 S.W.2d at 806–07; First National Bank in Dallas v. Whirlpool Corp., 517 S.W.2d 262, 269 (Tex. 1974) (giving priority to lien recorded after deed of trust when items were considered removable). The courts, however, have required claimants to be able to prove that they furnished the removable (i.e., to be able to identify the specific removable) in order to have the preference. See Kaspar v. Cockrell-Riggens Lighting Co., 511 S.W.2d 109, 111 (Tex. Civ. App.—Eastland 1974, no writ) (overruling trial court when it disregarded jury finding that items could not be separated and identified from similar items that were supplied for same project); In re Jamail, 609 F.2d 1387, 1390–91 (5th Cir. 1980) (declining to give priority to materialman’s lien for goods delivered that supplier could not separately identify from similar items supplied by others). Thus, for example, a lumber supplier could not remove an air handling unit because the lumber supplier did not provide the unit. The original contractor, however, is entitled to remove all removables provided by it and its subcontractors and suppliers since the entirety of the con­struction was provided pursuant to his contract with the owner. L&N Consultants, Inc. v. Sikes, 648 S.W.2d 368, 370–371 (Tex. Civ. App.—Dallas 1983, writ ref’d n. r. e.).

“Removable improvements” generally means items that can be removed without material injury to the land or other improve­ments. First National Bank in Dallas v. Whirlpool Corp., 517 S.W.2d 262, 269 (Tex. 1974). The question of “material injury” is usually one of fact. Postremoval damage to the remaining property might also be considered in determining whether an item was a “removable” under the mechanic’s lien statutes. Exchange Savings & Loan Ass’n v. Monocrete Pty. Ltd., 629 S.W.2d 34, 36–37 (Tex. 1982) (removal of roofing tiles would cause material injury to townhouse as matter of law because it would expose structure to postremoval damage by elements). Because the priority preference for removables defeats prior recorded liens (Whirlpool Corp., 517 S.W.2d at 269), the lien for removables can be a useful tool for extracting payment from the proj­ect owner or an existing lienholder, but it is not a self-help lien. The contractor must obtain judicial foreclosure of the lien before removal and cannot simply resort to self-help remedies. See Tex. Prop. Code § 53.154; P&T Manufacturing Co., Inc. v. Exchange Savings & Loan Ass’n, 633 S.W.2d 332, 333 (Tex. App.—Dallas 1982, writ ref’d n.r.e.).

Whether a particular item constitutes a “removable” is a question of fact for a jury to decide and will be decided on a case-by-case basis. The following questions must be asked to determine removability. Will the removal cause: (1) material damage to the land; (2) material damage to an improvement that was already in existence at the time the improvement in question was installed or affixed; (3) material detriment or material injury to the building or lot; or (4) material injury to the improvement itself? In determining whether an item is removable, the court will look to the manner of its attachment to the land or existing improvements, the extent to which the removal of the item would require repairs, modifications, or protection of the land or existing improvements, the status of the construction at the time the removal is sought, and the function of the improvements sought to be removed. Exchange Savings & Loan Ass’n, 629 S.W.2d 34, 37 (Tex. 1982).

The following is a list of some of the items that courts have treated as removables:

1.Garbage disposals and dishwashers. See Whirlpool Corp., 517 S.W.2d at 270;

2.Air-conditioning and heating system equipment such as furnaces, air-conditioning coils, compressors, thermostats, and condensing units. See Houck Air Conditioning, Inc. v. Mortgage & Trust, Inc., 517 S.W.2d 593, 596 (Tex. Civ. App.—Waco 1974, no writ);

3.Windows and doors that can be removed by temporarily taking out surrounding brick without causing ultimate dam­age to a residence. See First Continental Real Estate Investment Trust v. Continental Steel Co., 569 S.W.2d 42, 47 (Tex. Civ. App.—Fort Worth 1978, no writ);

4.Lighting fixtures, cabinets, chimes, buttons, mailboxes, and lamps. See Kaspar v. Cockrell-Riggens Lighting Co., 511 S.W.2d 109, 110–111 (Tex. Civ. App.—Eastland 1974, no writ);

5.Picture screen, ticket booth, neon sign, and speaker poles at drive-in movie theater. See Freed v. Rozman, 304 S.W.2d 235, 240–241 (Tex. Civ. App.—Texarkana 1951, writ ref’d n.r.e.);

6.Refinery pumps fastened to beds of concrete. See Mogul Production & Refining Co. v. Southern Engine & Pump Co., 244 S.W. 212, 213–214 (Tex. Civ. App.—Beaumont 1922, no writ);

7.Carpets, appliances, air-conditioning, and heating components, smoke detectors, burglar alarms, light fixtures, and door locks. See Richard H. Sikes, Inc. v. L&N Consultants, Inc., 586 S.W.2d 950, 954 (Tex. Civ. App.—Waco 1979, writ ref’d n.r.e.);

8.Mirrors. See Occidental Nebraska FSB v. East End Glass Co., 773 S.W.2d 687, 689 (Tex. App.—San Antonio 1989, no writ);

9.Pumps, compressors, fans for airconditioning and heat systems, toilets, basins, doors, windows, light fixtures, wall switches, electrical control panels, building hardware, and cabinets. See In re Orah Wall Financial Corp., 84 B.R. 442, 449–447 (Bankr. W.D. Tex. 1986);

10.Highway billboard signs. See Hoarel Sign Co. v. Dominion Equity Corp., 910 S.W.2d 140, 143 (Tex. App.—Ama­rillo 1995, writ denied);

11.Light fixtures, gears, electrical panels, lamps, wire, and electrical wire. See In re Demay International, LLC, 431 B.R. 164, 174 (Bankr. S.D. Tex. 2010);

12.Chiller to provide air-conditioning. See RDI Mechanical, Inc. v. WPVA, L.P., No. 01-06-00962-CV, 2008 WL 920315, at *3 (Tex. App.—Houston [1st Dist.] Apr. 3, 2008, no pet.) (mem. op.); and

13.Air-conditioning compressors, acoustic tiles and ceiling grid, air handling units, distribution air grills, doors, eleva­tor equipment and cab, and electric circuit breaker panels. See Cornerstone Bank. N.A. v. J.N. Kent Construction Co., No. 05-91-00499-CV, 1992 WL 86591, at *3–5 (Tex. App.—Dallas Apr. 17, 1992, no pet.) (not designated for publication).

The following is a list of some of the items that the courts have treated as nonremovable:

1.Concrete roof tiles. See Monocrete Pty. Ltd., 629 S.W.2d at 37;

2.Window frames. See McCallen v. Mogul Production & Refining Co., 257 S.W. 918, 923 (Tex. Civ. App.—Galves­ton 1923, no writ);

3.Certain types of cabinets. See Houck Air Conditioning, Inc., 517 S.W.2d at 596;

4.Lumber used in construction of a house. See Cameron County Lumber Co. v. Al & Lloyd Parker Inc., 62 S.W.2d 63, 64 (Tex. 1933);

5.Bricks used to construct a veneer for a house. See Chamberlain v. Dollar Savings Bank, 451 S.W.2d 518, 519–520 (Tex. Civ. App.—Amarillo 1970, no writ);

6.Shell homes. See Irving Lumber Co. v. Alltex Mortgage Co., 446 S.W.2d 64, 69 (Tex. Civ. App.—Dallas 1969), aff’d, 468 S.W.2d 341 (Tex. 1971);

7.Duct work for air-conditioning and heating systems, copper plumbing, piping, sheet rock, electrical wiring and con­duit, electromagnetic insulation, glass brick interior wall, and suspended ceiling. See In re Orah Wall Financial Corp., 84 B.R. at 446–448; and

8.Exterior glass, including gasket material and aluminum framing. See Cornerstone Bank. N.A., 1992 WL 86591, at *3.

§ 7.12:20Payment on Perfected Claims

The owner is to use the retainage and trapped funds to pay the perfected mechanic’s lien claimants on a priority class by prior­ity class basis. If the retainage and trapped funds held by the owner are insufficient to discharge all the perfected lien claims of a particular class, the available funds are to be divided pro rata among the claimants of the class in accordance with the rela­tive amount of their claims.

If the owner properly disburses among the perfected claimants the full amount of the retainage and trapped funds the owner was required to hold under the Texas Property Code, the claimants cannot pursue the owner or the owner’s property for the balance of their respective payment claims.

Practice Note:      It is not uncommon for the retainage and trapped funds held by the owner to be less than the perfected claims. This occurs, for example, when a particular lien claimant fails to trap funds in the owner’s hands but otherwise per­fects a lien claim.

Practice Note:      Because (1) claims of equal priority may accrue and be perfected throughout the entire construction period and for thirty days thereafter and (2) fact issues may exist as to the validity of the payment claims made by any one or more of the claimants (which will affect the calculation of the proper pro rata division of funds among claimants), the owner is typi­cally reluctant to make any payment on lien claims before thirty-one days after final completion of the construction project, and even then disbursement of funds carries great potential risks to the owner. Unless a global agreement can be reached among the claimants and the owner, the owner may be forced to interplead the funds or seek a judicial determination of the proper amounts owing to the respective claimants. The delay and cost of such litigation is, of course, a great incentive for the various parties to compromise and settle their claims.

Attorney’s Fees:      The court must award both original contractors and subcontractors equitable costs and attorney’s fees in a foreclosure action. However, with respect to a lien or claim arising out of a residential construction contract, the court is not required to order the property owner to pay costs and attorney’s fees. Tex. Prop. Code § 53.156.

§ 7.12:21Judicial Enforcement of Lien

Limitations for Filing Suit:      If the claimant has timely filed and perfected a mechanic’s lien affidavit but the owner refuses to pay the amount properly owing to the claimant, the claimant can seek payment through a judicial foreclosure sale of the property that was the subject of the mechanic’s lien affidavit. Statutory mechanic’s liens can be foreclosed only by judicial action. If the claim pertains to a nonresidential construction claim, suit to foreclose the lien must be filed within two years of the later of the last day a claimant may file the lien affidavit or one year after completion, termination, or abandonment of the work under the original contract under which the lien is claimed. Tex. Prop. Code § 53.158(a). If the claim pertains to a resi­dential construction contract, suit to foreclose the lien must be filed by the later of one year after the last day a claimant could file a lien affidavit under section 53.052 of the Texas Property Code or one year after completion, termination, or abandon­ment of the original contract. Tex. Prop. Code § 53.158(b).

Jurisdiction:      A suit to foreclose a lien on real property may be filed in district court in all counties. In addition, suits to fore­close liens on real property in Harris, Tarrant, El Paso, and Dallas counties may be filed in those counties’ statutory county courts at law. The amount in controversy must exceed $500 and be less than $100,000 for the suit to be filed in Harris County. Tex. Gov’t Code § 25.1032(c)(3) (Harris County), § 25.2222(b)(7) (Tarrant County), § 25.0592(a) (Dallas County), § 25.0372(a) (El Paso County). Lastly, suits to foreclose a lien on real property may not be filed in constitutional county courts. Tex. Gov’t Code § 26.043.

Venue:      There is no mandatory venue provision governing where a suit to foreclose on a lien must be brought. Section 53.154 of the Property Code requires only that the suit be heard by a “court of competent jurisdiction.” However, section 53.157 of the Code provides that a mechanic’s lien may be extinguished by “failing to institute suit to foreclose the lien in the county in which the property is located . . . .” Therefore, chapter 53 appears to require a claimant to file suit to foreclose a lien in the county where the project is located. While there is no case that decides the issue definitively, the best practice is to file suit in the county where the project is located.

Judicial Foreclosure Proceeds:      If the owner’s property goes to judicial foreclosure sale, the sales proceeds will be used to pay each class of claimant in accordance with its relative priority for as far as the sales proceeds will go. If the available sales proceeds are not sufficient to pay all the claims of a particular priority class, the available funds will be divided pro rata among the claimants in accordance with the relative amount of their claims, as determined by the court. Tex. Prop. Code §§ 53.104(b), 53.122(b).

Attorney’s Fees and Costs:      A court must award costs and reasonable attorney’s fees for a suit to foreclose on a lien, declare a lien claim invalid, or enforce a bond claim. However, with respect to a lien or claim arising out of a residential con­struction contract, the court is not required to order the property owner to pay costs and attorney’s fees. Tex. Prop. Code § 53.156.

§ 7.12:22Arbitration of Claim

While chapter 53 of the Texas Property Code establishes a statutory system for handling mechanic’s lien claims on construc­tion projects, the parties may execute contracts providing for mandatory binding arbitration of mechanic’s lien claims. Dalton Contractors v. Bryan Autumn Woods, 60 S.W.3d 351, 353–54 (Tex. App.—Houston [1st Dist.] 2001, no pet.), cited with approval in CVN Group, Inc. v. Delgado, 95 S.W.3d 234, 242 (Tex. 2002); Hearthshire Braeswood Plaza v. Bill Kelly Co., 849 S.W.2d 380, 390–91 (Tex. App.—Houston [14th Dist.] 1993, writ denied). Where no contractual provision exists, arbitra­tors will make rulings or findings regarding the validity of a lien, but the actual foreclosure of the lien will be handled by the district court. Tex. Prop. Code § 53.154.

§ 7.12:23Removing Invalid Mechanic’s Liens

Texas Property Code sections 53.160–.162 establish a summary motion procedure for removing invalid mechanic’s lien claims. See Tex. Prop. Code §§ 53.160–.162. A suit and a summary motion must be filed. A bond may be required in connec­tion with an order removing the lien, pending the final outcome in the litigation. Tex. Prop. Code § 53.161. The Code also establishes procedures for reviving the lien if the claimant should ultimately prevail in court. See Tex. Prop. Code § 53.162.

§ 7.12:24Prompt Pay Statute

While not part of the mechanic’s lien statutes in Texas Property Code chapter 53, Code chapter 28, on prompt payment to con­tractors and subcontractors, provides significant rights to the mechanic’s lien claimant. Chapter 28 provides that for private (not public) projects, on receipt from a contractor of a written request for payment of an invoiced amount, the owner has thirty-five days to make the payment (less statutory or contractual retainage) for work properly performed or materials deliv­ered. See Tex. Prop. Code § 28.002(a). Once the contractor receives payment he must pay his subcontractors their respective shares of the draw not less than seven days after receipt of payment from the owner. Tex. Prop. Code § 28.002(b). In turn, these subcontractors must pay their subcontractors their proportionate share within seven days thereafter. Tex. Prop. Code § 28.002(c).

If a good-faith dispute exists concerning the amount properly payable, the owner, contractor, or subcontractor may not with­hold more than (1) 110 percent of the amount in dispute on residential construction projects and (2) 100 percent of the amount in dispute on nonresidential construction projects. Tex. Prop. Code § 28.003.

Contractors and subcontractors have a statutory right to suspend work on private nonresidential construction projects if the owner does not make payment in accordance with the statute. The work cannot be suspended, however, until the tenth day after the claimant gives notice to the owner that payment has not been received and notifies the owner of the intent to suspend performance. Tex. Prop. Code § 28.009(a). If there is construction financing on the project, the same notices must be given to the lender. Tex. Prop. Code § 28.009(b). Once work is suspended, the claimant is not required to perform further work until the amount due is paid, plus the cost of shutting down and restarting work. Tex. Prop. Code § 28.009(c)(1). The claimant is not responsible for damages arising from the claimant’s suspension of work unless the claimant was notified in writing before suspension either that payment has been made or a good-faith dispute exists concerning the payment. Tex. Prop. Code § 28.009(c)(2). The notice of good faith must include a list of specific reasons for nonpayment. Tex. Prop. Code § 28.009(d). If a reason given for nonpayment is allegedly defective or incomplete work, the claimant must be given reasonable time to either adjust its payment claim or correct the defective work. Tex. Prop. Code § 28.009(d).

§ 7.13Constitutional Mechanic’s Lien on Real Property

§ 7.13:1Scope and Utility of Lien

In addition to the specific statutory procedures outlined above, the Texas Constitution provides a self-executing lien for improvements to property made by an original contractor who is in direct privity of contract with the owner. The original con­tractor need not comply with the requirements of chapter 53 of the Property Code to enforce such a constitutional lien. This right, however, is very limited. Article XVI, section 37, of the Texas Constitution provides:

Mechanics, artisans and material men, of every class, shall have a lien upon the buildings and articles made or repaired by them for the value of their labor done thereon, or material furnished therefor; and the Legislature shall provide by law for the speedy and efficient enforcement of said liens.

Tex. Const. art. XVI, § 37.

Benefits Only Original Contractors:      Only original contractors may claim a constitutional lien. “Original contractor” means only those in privity with the property owner. Da-Col Paint Manufacturing Co. v. American Indemnity Co., 517 S.W.2d 270, 273 (Tex. 1974). Subcontractors and suppliers not contracting directly with the owner do not have a constitutional lien and are relegated to statutory liens. First National Bank v. Sledge, 653 S.W.2d 283, 285 (Tex. 1983). See also First National Bank of Paris v. Lyon-Gray Lumber Co., 194 S.W. 1146, 1150 (Tex. App.—Texarkana 1917), aff’d, 217 S.W. 133 (1919); In re A&M Operating Co., 182 B.R. 997 (E.D. Tex. 1995). But see the discussion of “sham contracts” below. A materialman supplying materials to another materialman also will not qualify for a constitutional lien. Huddleston v. Nislar, 72 S.W.2d 959, 962 (Tex. App.—Amarillo 1934, writ ref’d).

Sham Contractors:      A person who labors, specially fabricates materials, or furnishes labor or materials under a direct con­tractual relationship with another person is deemed to be an original contractor in direct contractual relationship with the owner if the owner contracted with the other person for the construction or repair and (1) the owner can effectively control that person through the ownership of voting stock, interlocking directorships, or otherwise; (2) that other person can effec­tively control the owner through the ownership of voting stock, interlocking directorships, or otherwise; or (3) the contract was made without good-faith intention of the parties that the other person was to perform the contract. Tex. Prop. Code § 53.026(a)(1), (a)(3). Such owner-controlled contractors have liens as original contractors and are commonly called “sham contractors.”

While a valid constitutional lien normally requires direct contractual privity with the owner, Tex. Prop. Code § 53.026 may allow a subcontractor or supplier to prevail on a constitutional lien claim against an owner. See Trinity Drywall Systems v. TOKA General Contractors, Ltd., 416 S.W.3d 201, 212 (Tex. App.—El Paso 2013, pet. denied) (construing “sham contract” provisions of Tex. Prop. Code § 53.026 as allowing subcontractors to have rights of original contractors to constitutional liens). But see Southwest Properties, L.P. v. Lite-Dec, Inc., 989 S.W.2d 69, 72 (Tex. App.—San Antonio 1998, pet. denied) (construing application of Tex. Prop. Code § 53.026 as loosening subcontractor lien notice requirements but not creating con­tractual alter ego liability for owners acting as original contractors).

Limitations of Constitutional Lien:      Many types of work are not covered by the constitutional lien, such as claims for water or sewer lines, landscaping, and other similar work not considered a “building.” See, e.g., Campbell v. City of Dallas, 120 S.W.2d 1095, 1097 (Tex. App.—Waco 1938, writ ref’d) (water and sewer lines); Black, Sivalls & Bryson v. Operators’ Oil & Gas Co., 37 S.W.2d 313, 316 (Tex. App.—Eastland 1931, writ dism’d) (repairing grade after a flood). See section 7.13:2 below for discussion of the term building.

Although a constitutional lien exists without the necessity of filing a lien affidavit, certain circumstances that would bar col­lection of the debt can prevent enforcement of the lien. For example, a constitutional lien cannot be enforced against a good-faith purchaser for value of the property who had no knowledge of the lien claim. See Cavazos v. Munoz, 305 B.R. 661, 681–82 (S.D. Tex. 2004). Therefore, in order to preserve such a claim against a subsequent good-faith purchaser, claimants are encouraged to file a lien affidavit in the county records for the property in question. The filing of the lien affidavit will put pro­spective purchasers of the property on notice of the lien. See Detering Co. v. Green, 989 S.W.2d 479, 481 (Tex. App.—Hous­ton [1st Dist.] 1999, no writ) (materialman’s statutory lien affidavit was not timely filed and therefore failed to protect constitutional lien against third party who purchased from foreclosing bank); FDIC v. Bodin Concrete Co., 869 S.W.2d 372 (Tex. App.—Dallas 1993, writ denied) (remanding to trial court for determination of priority of constitutional lien vis-à-vis deed of trust); Justice Mortgage Investors v. C.B. Thompson Construction Co., 533 S.W.2d 939 (Tex. App.—Amarillo 1976, writ ref’d n.r.e.); Wood v. Barnes, 420 S.W.2d 425, 429 (Tex. App.—Dallas 1967, writ ref’d n.r.e.) (filing lien or giving actual notice to third parties required to protect constitutional lien against third parties). See section 7.13:5 below.

Practice Note:      Because the constitutional lien is both limited in scope and cut off by a sale to a bona fide purchaser, the original contractor should always attempt to perfect a statutory lien. A constitutional lien should be treated as a remedy of last resort if the original contractor fails to timely perfect a statutory lien under the Property Code.

§ 7.13:2Eligibility—Real Property

Because the constitutional lien is restricted to work or material furnished for construction or repair of buildings or articles, defining the terms building and article becomes important. Although the constitutional provision refers to buildings and not the underlying land, decisional law has consistently found the lien to attach also to the land on which the building sits. See, e.g., Myers v. Houston, 30 S.W. 912, 913 (Tex. 1895); Ferrell v. Ertel, 100 S.W.2d 1084, 1088 (Tex. App.—Fort Worth 1936, writ dism’d). “Building” has been defined to include a pier. See Ambrose & Co. v. Hutchison, 356 S.W.2d 215, 216–17 (Tex. App.—Fort Worth 1962, no writ). Some actual construction must be made before a constitutional lien attaches. See Branecky v. Seaman, 688 S.W.2d 117, 120 (Tex. App.—Corpus Christi 1984, writ ref’d n.r.e.).

§ 7.13:3Enforcement Generally

The lien claimant must file suit to enforce the lien. However, there is no requirement of notice or fulfillment of other statutory obligations before suit is filed. Dee’s Cabinet Shop, Inc. v. Weber, 562 S.W.2d 945, 947 (Tex. App.—Fort Worth 1978, no writ). When a suit for foreclosure of real property under a constitutional lien is filed, the attorney should also file a notice of lis pendens to protect the claimant’s priority against a bona fide sale or encumbrance. See Tex. Prop. Code § 13.004.

§ 7.13:4Enforcement against Public Property or Homestead

A constitutional lien cannot attach to public buildings or grounds or to a homestead unless the claimant has complied with other constitutional or statutory requirements for perfecting such a lien. Atascosa County v. Angus, 18 S.W. 563 (Tex. 1892) (public buildings); J.D. McCollom Lumber Co. v. Whitfield, 59 S.W.2d 1106, 1107 (Tex. App.—Austin 1933, writ ref’d) (homesteads).

§ 7.13:5Enforcement against Third Parties

A claimant’s constitutional lien is valid against the property owner even if the claimant takes no affirmative steps, such as recording the contract, to perfect the lien. Brick & Tile, Inc. v. Parker, 186 S.W.2d 66, 67 (Tex. 1945). This self-executing aspect of the lien, however, does not protect the claimant if the property is sold or mortgaged to a bona fide purchaser. Third parties may cut off the constitutional lien claimant’s rights to the property unless they have notice of the claim. Irving Lumber Co. v. Alltex Mortgage Co., 446 S.W.2d 64, 72 (Tex. App.—Dallas 1969), aff’d, 468 S.W.2d 341 (Tex. 1971).

If the constitutional lien involves construction, constructive notice of the constitutional lien protects the lien claimant. Some courts have held that anyone acquiring an interest in property while it is under construction has constructive notice of a poten­tial constitutional lien. Inman v. Clark, 485 S.W.2d 372, 374 (Tex. App.—Houston [1st Dist.] 1972, no writ); Tomlinson v. Higginbotham Bros. & Co., 229 S.W.2d 920, 922 (Tex. App.—Eastland 1950, no writ). The party claiming bona fide pur­chaser status has the burden of proving the absence of actual or constructive notice; it is an affirmative defense. Contract Sales Co. v. Skaggs, 612 S.W.2d 652, 653 (Tex. App.—Dallas 1981, no writ).

If the property is involved in bankruptcy, the trustee or debtor-in-possession can avoid a constitutional lien unless some notice of the lien has been recorded. See In re Mid-America Petroleum, Inc., 83 B.R. 937, 943 (Bankr. N.D. Tex. 1988); McEvoy v. Ron Watkins, Inc., 105 B.R. 362, 364–65 (Bankr. N.D. Tex. 1987).

§ 7.14Constitutional Lien on Personal Property

The Texas Constitution grants every original contractor a constitutional lien “upon the buildings and articles made or repaired by [the contractor] for the value of their labor done thereon, or material furnished therefor.” Tex. Const. art. XVI, § 37.

For a petition and application to foreclose a constitutional lien on personal property, see form 7-22 in this chapter.

§ 7.14:1Eligibility—Personal Property

The term articles made is restricted to articles specially fabricated according to the purchaser’s specifications, rather than arti­cles manufactured for sale on the open market, such as refrigerators and ranges installed in an apartment complex. First National Bank in Dallas v. Whirlpool Corp., 517 S.W.2d 262, 268 (Tex. 1974). If the articles are specially made in accordance with the ultimate purchaser’s instructions, the lien will attach. In re A&M Operating Co., 182 B.R. 986, 991 (Bankr. E.D. Tex. 1993), rev’d in part, 182 B.R. 997 (Bankr. E.D. Tex. 1995), aff’d, 84 F.3d 433 (5th Cir. 1996).

§ 7.14:2Possessory Rights in Property

Unlike a claimant who may have a right to possession by virtue of a lien arising from Tex. Prop. Code ch. 70, a constitutional lien claimant has no authority under the constitutional provision itself to keep or repossess the repaired article pending pay­ment. Garcia v. Rutledge, 649 S.W.2d 307, 311 (Tex. App.—Amarillo 1982, no writ). If he does so solely on the basis of the constitutional lien, he may be liable for conversion. Clifton v. Jones, 634 S.W.2d 883, 886 (Tex. App.—El Paso 1982, no writ). The right to this constitutional lien, which may be foreclosed through the courts, and any right to retain possession until the debt is paid are two separate and distinct rights. Paul v. Nance Buick Co., 487 S.W.2d 426, 428 (Tex. App.—El Paso 1972, no writ). Therefore the attorney should strongly consider coupling a petition for writ of sequestration with the constitutional lien suit. See section 8.16 in this manual regarding sequestration and form 7-23 in this chapter for an application and affidavit for writ of sequestration in a suit to foreclose a constitutional lien.

§ 7.15No Personal Liability of Owner

A constitutional lien by itself does not create any personal liability in the owner. Fox v. Christopher & Simpson Iron Works Co., 199 S.W. 833, 835 (Tex. App.—Galveston 1917, writ ref’d).

§ 7.16Attorney’s Fees

A constitutional lien itself does not provide for payment of attorney’s fees. Rhoades v. Miller, 414 S.W.2d 942, 944 (Tex. App.—Tyler 1967, no writ). The lien claimant may be entitled to attorney’s fees either under a contractual provision for their payment or under Tex. Civ. Prac. & Rem. Code ch. 38. See Wood v. Barnes, 420 S.W.2d 425, 429–30 (Tex. App.—Dallas 1967, writ ref’d n.r.e.). See chapter 31 in this manual regarding attorney’s fees.

§ 7.17Priority of Constitutional Lien

If property involved in construction is the subject of a constitutional lien, lien priorities among competing claimants are gen­erally determined by the date of inception of the liens. See University Savings & Loan Ass’n v. Security Lumber Co., 423 S.W.2d 287, 293–96 (Tex. 1967).

If the property subject to the constitutional lien is chattel, actual notice may be required because establishing constructive notice of the lien would be impossible under ordinary circumstances. See Continental Radio Co. v. Continental Bank & Trust Co., 369 S.W.2d 359, 362 (Tex. App.—Houston 1963, writ ref’d n.r.e.) (finding good-faith mortgagee’s lien on airplane was superior to lien asserted by installer of autopilot when mortgagee had no actual or constructive notice of installer’s lien).

If the property is a chattel subject to a competing claim under the Uniform Commercial Code, resolution of the priority con­flict depends in part on whether the constitutional lien claimant has possession of the chattel. Garcia v. Rutledge, 649 S.W.2d 307, 311 (Tex. App.—Amarillo 1982, no writ). However, if possession is authorized by another statute, such as Tex. Prop. Code § 70.001, a valid constitutional lien may take priority over a perfected security interest under Tex. Bus. & Com. Code § 9.333. See Nelms v. Gulf Coast State Bank, 516 S.W.2d 421, 424 (Tex. App.—Houston [1st Dist.] 1974), aff’d, 525 S.W.2d 866 (Tex. 1975).

The attorney representing a party who wishes to assert a constitutional mechanic’s lien for repairs should ensure that a bank holding a security interest in the same property has a record of the mechanic’s lien. If the bank becomes insolvent and is then subject to FDIC receivership, a mechanic’s lien of which the bank has no record cannot be enforced against the FDIC. See D’Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942). The existence of federal recording statutes governing certain types of property may also preempt state statutes governing mechanic’s liens. See Aero Support Systems, Inc. v. FDIC, 726 F. Supp. 651, 653 (N.D. Tex. 1989).

 

 

 

[Sections 7.18 through 7.20 are reserved for expansion.]

III.  Bond Claims on Governmental Projects

§ 7.21Bond Claims on State and Local Public Works Contracts

§ 7.21:1State and Local Projects Generally

Since mechanic’s liens cannot be asserted against public works in Texas, the legislature has provided subcontractors with alternative methods to secure their rights to payment for work on government projects. See City of LaPorte v. Taylor, 836 S.W.2d 829, 831–32 (Tex. App.—Houston [1st Dist.] 1992, no writ). These methods include maintaining a lien on money due the prime contractor and pursuing a claim on a payment bond. The amount of money involved in a contract for public works determines the relief that a subcontractor can pursue.

A “governmental entity” refers to a governmental or quasi-governmental authority authorized by state law to make a public work contract. This could include a department, board, or agency of the state or a school district or subdivision of a school dis­trict. Tex. Gov’t Code § 2253.001(1). A “public work contract” is a contract for constructing, altering, or repairing a public building or carrying out or completing any public work. Tex. Gov’t Code § 2253.001(4). Public work labor or material is labor or material used to carry out this purpose. See Tex. Gov’t Code § 2253.001(5).

Governmental Entity That Is Not a Municipality or Joint Board:      If the amount of the contract does not exceed $25,000, an aggrieved party (who provides proper notice) can maintain a lien on the money, bonds, or warrants due for the work if the governmental entity is not a municipality or joint board created under subchapter D, chapter 22, of the Texas Transportation Code. Tex. Prop. Code § 53.231(a). When this type of governmental entity enters into a contract with a prime contractor for a public work project in excess of $25,000, the contractor is required to execute a payment bond in the amount of the contract. Tex. Gov’t Code § 2253.021(a)(2)(A).

Municipality or Joint Board:      If the amount of the contract does not exceed $50,000, an aggrieved party (who provides proper notice) can maintain a lien on the money, bonds, or warrants due for the work if the governmental entity is a municipal­ity or joint board created under subchapter D, chapter 22, of the Texas Transportation Code. Tex. Prop. Code § 53.231(b). When a municipality or joint board created under subchapter D, chapter 22, of the Transportation Code enters into a contract with a prime contractor for a public work project in excess of $50,000, the contractor is required to execute a payment bond in the amount of the contract. Tex. Gov’t Code § 2253.021(a)(2)(B).

Contracts in Excess of $100,000:      If the contract is in excess of $100,000, the prime contractor must also execute a perfor­mance bond. See Tex. Gov’t Code § 2253.021(a)(1).

A payment bond provides security to parties who contract with the prime contractor to ensure that the prime contractor will be able to make payment to the downstream subcontractors and suppliers under the contract. See Tex. Gov’t Code § 2253.021(c). The performance bond, on the other hand, acts as security for the government should the contractor fail to complete the proj­ect. See Tex. Gov’t Code § 2253.021(b).

There are no payment bonds available for the protection of prime contractors (i.e., those with a direct contractual relationship with the public entity). If a public entity fails to pay, the prime contractor is left to contractual remedies and statutory claims procedures. Indeed, sovereign immunity may insulate the public entity from suit, a topic beyond the scope of this manual. See generally Tex. Gov’t Code ch. 2260.

§ 7.21:2Perfection

To recover in a suit on a payment bond for a public work project, a claimant must “perfect” his claim. Perfection of a claim means providing the proper notice and information required under the applicable statutes. Texas courts have recognized that the rules regarding the substance of notices should be liberally construed. See S.A. Maxwell Co. v. R.C. Small & Associates, 873 S.W.2d 447, 454 (Tex. App.—Dallas 1994, writ denied) (construing article 5160 of the Texas Revised Civil Statutes, repealed and replaced by Tex. Gov’t Code § 2253.041). It is important to note, however, that strict compliance will be required as to rules regarding the time and manner of giving notice. Failure to timely and procedurally comply with the requirements could result in the loss of all potential recovery. See S.A. Maxwell Co., 873 S.W.2d at 451.

Contracts under $25,000:      The Texas Property Code requires the lien claimant to send written notice of his claim by regis­tered or certified mail to (1) the officials of the state, county, town, or municipality whose duty it is to pay the contractor and (2) the contractor at the contractor’s last known business or residence address. Tex. Prop. Code § 53.232. The notice should include—

1.the amount claimed;

2.the name of the party to whom the materials were delivered or for whom the labor was performed;

3.the dates and place of delivery or performance;

4.a description reasonably sufficient to identify the materials delivered or labor performed and the amount due;

5.a description reasonably sufficient to identify the project for which the material was delivered or the labor per­formed; and

6.the claimant’s business address.

Tex. Prop. Code § 53.233. The notice must be sent not later than the fifteenth day of the second month following the month in which the labor was performed or the material furnished. Tex. Prop. Code § 53.234. If the claim involves an action on a bond, the claimant must sue on the bond within six months after the bond is filed. Tex. Prop. Code § 53.239.

Contracts Exceeding $25,000:      To perfect a claim, the aggrieved party must mail to the prime contractor and the surety written notice of the claim. Tex. Gov’t Code § 2253.041(a). “The notice must be mailed on or before the 15th day of the third month after each month in which any of the claimed labor was performed or any of the claimed material was delivered.” Tex. Gov’t Code § 2253.041(b). The statute also requires that the notice be accompanied by a sworn statement of account that states that—

1.the amount claimed is just and correct; and

2.all just and lawful offsets, payments, and credits known to the affiant have been allowed.

Tex. Gov’t Code § 2253.041(c).

The statement of account must also include the amount of any retainage that has not become due under the terms of the con­tract between the beneficiary and the prime contractor or between the beneficiary and a subcontractor. Tex. Gov’t Code § 2253.041(d). The aggrieved party may also enclose a copy of the written agreement and a statement of the completion or the value of the partial completion of the agreement. Tex. Gov’t Code § 2253.042.

All notices must be sent by certified or registered mail. Notice to a prime contractor must be addressed to the contractor’s res­idence or last known business address. Tex. Gov’t Code § 2253.048(a), (b). Notices are effective on the day they are sent and not on the day received. See Tex. Gov’t Code § 2253.041(b); see also Buckner v. Anderson-Dunham, Inc., 482 S.W.2d 350 (Tex. App.—Eastland 1972, writ ref’d n.r.e.) (construing article 5160, section B, of the Texas Revised Civil Statutes, repealed and replaced by Tex. Gov’t Code § 2253.041).

Oral Contracts:      If the contract between the parties was an oral agreement, the notice for a claim must contain—

1.the name of the party for whom the labor was performed or to whom the material was delivered;

2.the approximate date of performance or delivery;

3.a description of the public work labor or material for reasonable identification; and

4.the amount due.

Tex. Gov’t Code § 2253.043(a).

The claim should be itemized, and documents should be included that identify the work performed or material delivered, the job, and the destination of the delivery. Tex. Gov’t Code § 2253.043(b).

Multiple Claims:      If a party seeks a lump sum for several items of labor or material, the party should include in the notice a description of the labor or material provided, the name of the party for whom the labor was performed or to whom the material was delivered, and the approximate date of performance or delivery. The notice should also provide whether the contract was written or oral, the amount of the contract, and the amount claimed. Tex. Gov’t Code § 2253.044. If the claim is for work or materials under a written unit price agreement, the party should attach to the sworn statement a list of units and unit prices as set under the contract and a statement of those completed or partially completed units. Tex. Gov’t Code § 2253.045.

Retainage:      “Retainage” refers to payments under the contract that are not required to be paid within the month after the month in which the labor is performed or materials are delivered. Tex. Gov’t Code § 2253.001(7). A claim for retainage is limited to the amount specified for retainage in the contract, and in no event may it exceed 10 percent of the total contract price. Tex. Gov’t Code § 2253.076(c).

To recover for a claim for retainage, written notice of the claim must be mailed to the prime contractor and the surety on or before the ninetieth day after the date of final completion of the contract. Tex. Gov’t Code § 2253.046. The notice should con­tain the amount of the contract, any amount paid, and the outstanding balance. Tex. Gov’t Code § 2253.046(b).

No Direct Contractual Relationship with Prime Contractor:      It is important to note that additional notice requirements exist for second- or lower-tier subcontractors, who do not have a direct contractual relationship with the prime contractor. In addition to the notices described above, on or before the fifteenth day of the second month after the date of the beginning of delivery of material or performance of labor, the second-tier subcontractor must mail written notice to the prime contractor and send a copy of the statement to the subcontractor with whom the second-tier subcontractor has a direct contractual rela­tionship. If the claim is for retainage, the notice must state that the contract provides for retainage and generally provide the nature of the retainage. Tex. Gov’t Code § 2253.047.

Notice for Each Claim:      The importance of perfecting each claim for each month is illustrated in S.A. Maxwell Co., 873 S.W.2d at 451–53. In this case, the second-tier subcontractor shipped materials to a warehouse under an agreement with the subcontractor in May 1990. The subcontractor retrieved the materials from the warehouse on May 31 and June 4. When the second-tier subcontractor was not paid, he attempted to perfect his claim by sending notice on July 26, 1990, and a second notice on August 15, 1990. A person not in a direct contractual relationship with the prime contractor must send notice on or before the fifteenth day of the second month after materials are delivered, and, in this case, the court held that the materials were “delivered” when the contractor picked them up, both on May 31 and June 4. Thus, to perfect a claim for the first pickup, the second-tier subcontractor had to send notice by July 15 (not July 26). Accordingly, the court held that he had not properly perfected his claim for this first delivery.

§ 7.21:3Requests for Information

To properly file a bond claim, the claimant must send notices to the prime contractor and the surety who provided the bond. Tex. Gov’t Code § 2253.041. The addresses of the prime con-tractor and the surety may be obtained from the governmental entity for whom the work is being performed. Tex. Gov’t Code § 2253.026. The surety’s information is also available from the Texas Department of Insurance. The governmental entity may charge a reasonable fee for a copy of the bond.

Practice Note:      Do not expect the request to be processed timely if it is made at the last minute. It is good practice to rou­tinely request this information at the start of each job.

Prime Contractor’s Obligations:      On request from anyone who provides public work, prime contractors must provide—

1.the name and last known address of the governmental entity with whom the prime contractor contracted for the pub­lic work;

2.a copy of the payment and performance bonds for the public work, including bonds furnished by or to the prime contractor; and

3.the name of the surety issuing the payment bond and the performance bond and the toll-free telephone number maintained by the Texas Department of Insurance under subchapter B, chapter 521, of the Texas Insurance Code for obtaining information concerning licensed insurance companies.

Tex. Gov’t Code § 2253.024(a). The prime contractor must provide this information within ten days from receiving a request. Tex. Gov’t Code § 2253.024(c).

Subcontractor’s Obligations:      A subcontractor must provide, on written request from a governmental entity, the prime con­tractor, the surety on a bond covering the public work contract, or any other person providing work under the subcontract—

1.the name and last known address of each person from whom the subcontractor purchased public work labor or mate­rial, other than public work material from the subcontractor’s inventory;

2.the name and last known address of each person to whom the subcontractor provided public work labor or material;

3.a statement of whether the subcontractor furnished a bond for the benefit of its subcontractors and materialmen;

4.the name and last known address of the surety on the bond the subcontractor furnished; and

5.a copy of that bond.

Tex. Gov’t Code § 2253.024(b). The subcontractor must also provide this information within ten days from receiving a request. Tex. Gov’t Code § 2253.024(c).

The prime contractor or the subcontractor may require payment of the actual cost of producing this information (up to $25) if the requestor does not have a direct contractual relationship with the provider. Tex. Gov’t Code § 2253.024(d). Failure to pro­duce this information may result in the prime contractor or subcontractor being liable to the requestor for the reasonable and necessary costs incurred in obtaining the requested information. Tex. Gov’t Code § 2253.024(e).

Payment Bond Beneficiary’s Obligations:      If a request for information is made to the payment bond beneficiary by the prime contractor or the surety, the beneficiary must provide within thirty days—

1.a copy of any applicable written agreement or purchase order; and

2.any statement or payment request of the beneficiary that shows the amount claimed and the work performed by the beneficiary for which the claim is made.

Tex. Gov’t Code § 2253.025(a). If it is requested, the beneficiary must also provide the estimated amount due for each calen­dar month in which the beneficiary performed labor or provided material. Tex. Gov’t Code § 2253.025(b).

§ 7.21:4Procedures after Perfection

Once the bond claim has been perfected, it is still incumbent on the claimant to press its claim by following up with the surety. Often negotiations result in compromise and settlement on payment of an agreed amount by the bonding company or the prime contractor (who generally is required to indemnify the bonding company). In other cases, it is necessary for the claim­ant to file suit or institute arbitration proceedings to force the prime contractor or surety to pay the balance due under the con­tract.

The substantive requirements to perfect a bond claim on state and local public works contracts can be easily completed. The true hurdle is ensuring that all deadlines have been timely met and that all notices contain the necessary information. Failure to do so can result in loss of the security provided by the payment bond. Where the prime contractor becomes insolvent, failure to meet the perfection deadlines can totally eliminate any recovery on a valid claim for payment. See S.A. Maxwell Co. v. R.C. Small & Associates, 873 S.W.2d 447 (Tex. App.—Dallas 1994, writ denied).

§ 7.22Bond Claims on Federal Public Works Projects

§ 7.22:1Federal Projects Generally

The Miller Act, 40 U.S.C. §§ 3131–3134, requires the prime contractor of a federal project to furnish a payment bond to insure payment to individuals who supply labor or materials for the federal project. The Miller Act was designed as an alterna­tive remedy to the mechanic’s lien available in ordinary private construction disputes because the lien cannot attach to govern­ment property. United States v. Aetna Casualty & Surety Co., 981 F.2d 448, 450 (9th Cir. 1992).

The amount of the payment bond shall equal the total amount payable by the terms of the contract unless the officer awarding the contract determines, in a writing supported by specific findings, that a payment bond in that amount is impractical, in which case the contracting officer shall set the amount of the payment bond. The amount of the payment bond shall not be less than the amount of the performance bond.

40 U.S.C. § 3131(b)(2). The performance bond, which protects the project owner, is required to be in such amount as the offi­cer awarding the federal contract deems adequate for the protection of the United States. 40 U.S.C. § 3131(b). The perfor­mance and payment bond requirements of the Miller Act apply to all contracts of more than $100,000 for the construction, alteration, or repair of any public building or public work of the United States. The federal acquisition regulation provides alternative payment protections for contracts that are more than $25,000 and not more than $100,000. The contracting officer selects from among these alternative protections and specifies in the solicitation of offers the payment protections selected. 40 U.S.C. § 3132.

§ 7.22:2Perfection

In order to have the right to sue on the payment bond, a first-tier subcontractor on a federal project is not required to give any specific notice. The Miller Act provides that any subcontractor who has not been paid in full for its labor or material before the expiration of ninety days after the last day on which labor was done or material supplied has the right to sue on the pay­ment bond for the amount unpaid at the time the suit is filed. 40 U.S.C. § 3133(b)(1). It is presumed that the general contractor has notice of the amounts due and unpaid to its own subcontractors. See Continental Casualty Co. v. United States, 305 F.2d 794, 797 (8th Cir.), cert. denied, 371 U.S. 922 (1962).

However, any second-tier subcontractor, defined as “a person having a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond,” must perfect its claim on the bond by giving written notice to the general contractor within the ninety-day period, stating with substantial accuracy the amount claimed and the name of the party to whom the material was supplied or for whom the labor was performed. 40 U.S.C. § 3133(b)(2). The notice must be served by any means that provides written, third-party verification of delivery to the contrac­tor at any place he maintains an office or conducts his business or at his residence; or in any manner in which the U.S. marshal for the district in which the public improvement is situated may serve summons. 40 U.S.C. § 3133(b)(2). The notice must be received by the contractor, rather than merely being mailed, within the ninety-day period. Pepper Burns Insulation, Inc. v. Artco Corp., 970 F.2d 1340, 1343 (4th Cir. 1992), cert. denied, 506 U.S. 1053 (1993).

Unlike the procedure for bond claims in state and local public works projects, bond claims on federal projects do not require repeated notices to be sent either to the general contractor or to the surety. Notice to the principal contractor is a strict condi­tion precedent to suit under the Miller Act by a supplier who deals with a subcontractor, but the supplier is not required to give notice to the surety before commencing suit. Continental Casualty Co., 305 F.2d at 797.

§ 7.22:3“Subcontractor” vs. “Materialman”

Although the Miller Act is to be construed liberally, it is limited by a proviso that the payment bond protects only those per­sons who have a contractual agreement with a prime contractor or first-tier subcontractor engaged in a federal project. Persons supplying labor or material to a mere “materialman” are not protected. United States v. Aetna Casualty & Surety Co., 981 F.2d 448, 450 (9th Cir. 1992). The United States Supreme Court has defined a subcontractor as “one who performs for and takes from the prime contractor a specific part of the labor or material requirements of the original contract.” See Clifford F. MacE­voy Co. v. United States, 322 U.S. 102, 109 (1944). The test for whether one is a subcontractor is based on the “substantiality and importance of his relationship with the prime contractor.” F.D. Rich Co. v. United States, 417 U.S. 116, 123 (1974). This means that even though a supplier may have an express written contract directly with the prime contractor, the supplier may not qualify as a “subcontractor” unless the supplier’s relationship with the prime contractor is “substantial” enough. If the sup­plier does not qualify as a subcontractor, those who provide labor or material to that supplier are dealing with a mere material­man and cannot claim protection under the Miller Act payment bond.

The Court in F.D. Rich reasoned, “It is the substantiality of the relationship which will usually determine whether the prime contractor can protect himself, since he can easily require bond security or other protection from those few ‘subcontractors’ with whom he has a substantial relationship in the performance of the contract.” F.D. Rich Co., 417 U.S. at 123–24.

The Court acknowledged, however, that “ ‘this method of protection is generally inadequate to cope with remote and undeter­minable liabilities incurred by an ordinary materialman.’ ” F.D. Rich Co., 417 U.S. at 123 (quoting Clifford F. MacEvoy Co., 322 U.S. at 110).

In distinguishing a subcontractor from a materialman, courts apply a balancing test with certain factors tending to weigh in favor of a subcontractor relationship—particularly if the company assumed a significant and definable part of the construction project—and other factors tending to weigh in favor of a materialman relationship.

Generally, courts have found the following factors to weigh in favor of a subcontractor relationship:

1.The product supplied is custom fabricated.

2.The product supplied is a complex integrated system.

3.A close financial interrelationship exists between the companies.

4.A continuing relationship exists with the prime contractor as evidenced by the requirement of shop drawing approval by the prime contractor or the requirement that the supplier’s representative be on the job site.

5.The supplier is required to perform on site.

6.There is a contract for labor in addition to materials.

7.The term subcontractor is used in the agreement.

8.The materials supplied do not come from existing inventory.

9.The supplier’s contract constitutes a substantial portion of the prime contract.

10.The supplier is required to furnish all the material of a particular type.

11.The supplier is required to post performance bonds.

12.There is a back charge for costs of correcting the supplier’s mistakes.

13.There is a system of progressive or proportionate fee payment.

Generally, courts have found the following factors to weigh in favor of a materialman relationship:

1.A purchase order form is used by the parties.

2.The materials come from preexisting inventory.

3.The item supplied is relatively simple in nature.

4.The contract is a small percentage of the total construction costs.

5.Sales tax is included in the contract price.

Aetna Casualty & Surety Co., 981 F.2d at 451–52.

Practice Note:      Lower-tier suppliers of labor or materials on federal projects would be well advised to tailor their agree­ments to incorporate as many of the factors weighing toward “subcontractor” classification as possible.

§ 7.22:4Oral Contracts

The Miller Act does not require that the contract between the claimant and the general contractor or a subcontractor be in writ­ing. There simply must be some underlying contract, whether established in a telephone call or a formal document. United States v. William L. Crow Construction Co., 826 F. Supp. 647, 654 (E.D.N.Y. 1993).

§ 7.22:5Express or Implied Contractual Relationship

As suggested by the foregoing discussion, the Miller Act protects subcontractors (as opposed to mere materialman) and, pro­vided they give proper notice, persons having direct contractual relationships with the subcontractor but no contractual rela­tionship, express or implied, with the prime contractor. Recovery under the theory of implied contracts known as “quantum meruit” is appropriate when the breaching party has been unjustly enriched through its wrongful conduct, and such recovery may also be appropriate when the aggrieved party has been induced to perform beyond the scope of the express contract, resulting in a benefit to the breaching party. United States v. Mountain States Construction Co., 588 F.2d 259, 262 (9th Cir. 1978). Thus under appropriate circumstances a supplier of labor or material might be able to recover on the bond even though its contract claim may be barred for lack of a signed writing or other technical defect. The supplier might be able to recover amounts greater than the contract price if change orders were performed but never documented in an express contract. The cases are unclear as to whether second-tier subcontractors or other lower-tier claimants can maintain a suit against the prime contractor or the surety based on an implied contract under the principles of quantum meruit. See Undersea Engineering & Construction Co. v. International Telephone & Telegraph Corp., 429 F.2d 543 (9th Cir. 1970), abrogated on other grounds by Avery v. United States, 829 F.2d 817 (9th Cir. 1987) (work performed by second-tier subcontractor done under its express “sub” contract with subcontractor, thus negating implied contract with prime contractor); but see Fidelity & Deposit Co. of Maryland v. Harris, 360 F.2d 402 (9th Cir. 1966) (second-tier subcontractor’s supplier could recover against contractor on ground of unjust enrichment).

§ 7.22:6Procedures after Perfection

Just as in a state project, bond claimants on federal projects must pursue their claims against the surety by negotiation and, if necessary, litigation or alternative dispute resolution proceedings. Any lawsuit on a Miller Act bond must be filed in federal court in the federal district in which the contract was to be performed. Lawsuits under the Miller Act must be filed within one year after the day on which the last of the labor was performed or material was supplied by the claimant. 40 U.S.C. § 3133(b)(4).

§ 7.23Texas Property Code Construction Trust Fund

Chapter 162 of the Texas Property Code provides a potential additional source of recovery for a claimant who is seeking to be paid under a construction contract for the improvement of real property. Chapter 162 provides that (1) all payments under a construction contract to an original contractor, a subcontractor, or an officer, director, or agent of a contractor or subcontractor and (2) all loan proceeds received by an owner, original contractor, or subcontractor or by an officer, director, or agent of an owner, contractor, or subcontractor for the purpose of improving specific real property are “trust funds” for the benefit of per­sons furnishing labor or materials on the construction project. Tex. Prop. Code §§ 162.001, 162.003.

However, chapter 162 does not apply to a lender, title company, closing agent, or corporate surety (Tex. Prop. Code § 162.004) or to a contractor’s fee under a cost-plus contract (Tex. Prop. Code § 162.001(c)).

§ 7.23:1Parties Liable as Trustees

An owner, original contractor, and subcontractor and their respective officers, directors, and agents who receive, control, or direct the “trust funds” (that is, the construction payments or loan proceeds) are deemed to be “trustees” of the funds. Tex. Prop. Code § 162.002.

§ 7.23:2Beneficiaries of Trust

An artisan, laborer, mechanic, contractor, subcontractor, or materialman who labors or furnishes labor or materials for the con­struction or repair of an improvement on real property is a beneficiary of any trust funds paid or received in connection with the improvement. Tex. Prop. Code § 162.003(a). A property owner is a beneficiary of trust funds paid or received in connec­tion with a residential construction contract, including funds deposited into a construction account. Tex. Prop. Code § 162.003(b).

§ 7.23:3Residential Homestead Projects

A contractor who enters into a written contract with a property owner to construct improvements to a residential homestead in an amount exceeding $5,000 shall deposit the trust funds in a construction account in a financial institution. Tex. Prop. Code § 162.006. The contractor must maintain account records in accordance with the requirements of Property Code section 162.007. See Tex. Prop. Code § 162.007.

§ 7.23:4Penalties for Misapplication of Monies by Trustees

A trustee who knowingly or intentionally retains, uses, or diverts trust funds without first fully paying all current or past-due obligations incurred by the trustee to the “beneficiaries” (that is, the unpaid contractors) has misapplied the trust funds. Tex. Prop. Code § 162.031(a). If the misapplied amount exceeds $500, this is a Class A misdemeanor if there is no intent to defraud and a third-degree felony if intent to defraud is shown. Tex. Prop. Code § 162.032.

Practice Note:      The statute, by imposing a statutory duty on the trustee, creates a civil cause of action for damages arising from the trustee’s breach of his duties. The statute also allows the claimant to sue certain individuals including the owner and officers of the business entity to get to the individual who actually handled the money or directed the use of the funds.

Intent to Defraud:      The statute defines “intent to defraud” to include—

1.retaining, using, disbursing, or diverting trust funds with the intent to deprive the beneficiaries of the trust funds;

2.the trustee’s failing to establish and maintain a separate construction account or the required account records for res­idential homestead improvement contracts of $5,000 or more; and

3.misapplying trust funds that were paid in reliance on a false bills-paid affidavit.

Tex. Prop. Code § 162.005(1); see also Tex. Prop. Code §§ 53.085, 162.006, 162.007. While the trustee is not required to open more than one bank account per project, the statute does specifically prohibit the trustee from comingling its own funds with the trust account. Failure to keep the accounts and the records is in and of itself a Class A misdemeanor. Tex. Prop. Code § 162.032(c).

Affirmative Defenses:      The statute establishes three affirmative defenses for a trustee accused of misappropriation. The first is that a trustee may affirmatively plead that trust funds not paid to the beneficiary of the trust were used to pay the trustee’s “actual expenses directly related to the construction or repair of the improvement.” Tex. Prop. Code § 162.031(b). Thus, the trustee may use construction funds to pay overhead expenses, as long as the expenses are actually incurred and are necessary to obtain or complete the project. However, the trustee will have to prove that the payments were for actual expenses directly related to the construction. The second affirmative defense is that, after notice to the claimant, the trustee merely retained the money because of the trustee’s reasonable belief that the beneficiary was not entitled to such funds or that the trustee was oth­erwise authorized or required by other provisions of the Property Code to withhold the funds. The trustee must prove that it withheld payment based on a reasonable belief. Tex. Prop. Code § 162.031(b). The third affirmative defense is that the trustee paid the beneficiaries the monies they were entitled to receive no later than thirty days following written notice to the trustee of the filing of a criminal complaint or other notice of a pending criminal investigation. Tex. Prop. Code § 162.031(c).

A trustee who commingles trust funds with other funds in the trustee’s possession does not defeat a trust created by chapter 162 of the Property Code. Tex. Prop. Code § 162.031(d).