If you provide labor and/or materials (i.e., contractor or subcontractor), or if you are planning on hiring a contractor for your next project, then you should familiarize yourself with the mechanic’s lien process and how to enforce said lien under Article XVI, Section 37 of the Texas Constitution and Chapter 53 of the Texas Property Code.
Mechanic and Materialman’s Lien: Contractors can protect themselves from non-payment by customers using a legal tool called a lien. Specifically, a contractor is entitled to secure a mechanic’s and materialman’s lien (“MML”) if he or she labors, specially fabricates material, or furnishes labor or materials for construction or repair a house, building, or improvement. A contractor also has a right to a lien if he or she labors, specially fabricates the material, or furnishes the labor or materials under or by virtue of a contract with the owner or the owner’s agent, trustee, receiver, contractor, or subcontractor.
The MML secures payment for: 1) all of the labor and material furnished for the project, even if the material has not been delivered or incorporated for the project, minus its fair salvage value; and 2) the preparation of plans drawn up by an architect, engineer, or surveyor. Depending on timing, all subcontractors who have perfected their mechanic’s lien have preference over other creditors of the original contractor in the event the project falls through. This means that in the event of a foreclosure or bankruptcy, the contractor or subcontractor with the perfected lien may be protected against other creditors. In short, the contractor with a lien in place has the best chance of recovering all the costs incurred and secured by the lien.
Requirements: There are a couple of requirements that need to take place before a contractor or subcontractor can file a mechanic’s lien. First, timely notice needs to be sent in order to protect your right to file a lien claim. Second, the mechanic’s lien needs to be timely recorded in the County Clerk’s office. Lastly, the lien needs to be timely enforced through the appropriate court. The way notice and recording are accomplished will be based on the status of the individual or company preforming the work or supplying materials and the type of project.
All contractors or subcontractor who are not in a contract with the property owner should send a Notice of Contractual Retainage to the property owner and all contractors who have hired them to perform work or whom have directed their work on a project.
If the project deals with “specially fabricated material,” meaning the material could not be easily reused on other projects, a Notice of Specially Fabricated Materials needs to be sent to the owner and the original contractor. This notice can protect contractors if they haven’t even delivered or incorporated the specially fabricated material into the project, but needs to be sent in a timely matter; which, in best practice is no later than 30 days after the receipt and acceptance of an order for the material.
Subcontractors must send a notice to original contractor of the unpaid account, in a timely manner, which, as provided above, is best if given as soon as possible after non-payment. Texas law contains very strict time deadlines concerning notices. A new notice needs to be sent for each month the amounts due are unpaid. Similarly, subcontractors must send notice to the property owner of the unpaid account. The same rules apply here as in the above notice. The notice to the property owner must include “fund trapping” language which alerts owner to retain funds from the original contractor to cover the claim.
Mechanic’s Lien Recording: After the applicable notices have been sent, the actual lien, the Affidavit of Mechanic’s Lien, needs to be “recorded” in the real property records of the County Clerk’s office. To record simply means filing, which can be done by personal delivery or mailing the lien to the County Clerk’s office with the recording fee. The lien need be filed only once. Recording a mechanic’s lien provides the contractor or subcontractor the best chance to collect the unpaid amounts due and owing. Pay careful attention to the time frames allotted for recording a lien. The timeframes are different for the original contractor and subcontractors.
Original Contractor: If the project is commercial in nature, the original contractor must record the lien no later than the 15th day of the 4th month from written termination, abandonment, settlement, or contract completion. If the project is a residential construction project, the lien must be recorded no later than the 15th day of the 3rd month from written termination, abandonment, settlement, or contract completion.
Subcontractor: The subcontractors should record the lien within 30 days of completion of the project in order to ensure a retained fund is being held by the property owner. The subcontractor should be paid out of this retained fund. If there are no retained funds, the lien needs to be filed no later than: (15th day of the 4th month – commercial project); (15th day of the 3rd month – residential project) from the last month which labor was performed and/or materials were furnished.
After recording the applicable lien with the County Clerk’s office, a copy should be sent to the property owner and the original contractor within five days of being recorded. In order to enforce a mechanic’s lien, a claimant must bring a suit in the appropriate court in a timely manner. From there, the Court can order the lien to be foreclosed and order the property to be sold in order to have the claimant paid.
The mechanic’s and materialman’s lien is an invaluable legal tool; however, the contractor or subcontractor must pay careful attention to timing and procedural issues and not delay in seeking this remedy. A word of advice – if the project involves the construction of a residence, a written construction agreement must be signed by all parties before construction and the agreement must be recorded in the county records. Many contractors lose their lien rights without even knowing because of the complexity of Texas lien law. Don’t be caught making a simple mistake that could cost you—both expenses and potential projects.
THE TAKEAWAY: For all construction projects, enter into a contract with the property owner and all contractors with whom you are working with and under the direction. If you fail to receive payment for your labor performed or materials supplied, act quickly to send the appropriate notices and file the necessary lien in the County where the property is located.
– The Business Team
Scott | Josh | Jeremy