MECHANICS’ ANDMATERIALMANS’ LIENS

AN OVERVIEW AND GUIDE TO RECENT CHANGES

PRESENTED FOR THE DALLAS BAR ASSOCIATIONREAL ESTATE SECTION

JULY 10, 2000

STEVEN E. KENNEDY, ESQ.McGUIRE, CRADDOCK, STROTHER & HALE, P.C.

3550 LINCOLN PLAZA500 N. AKARD

DALLAS, TX 75201

TELEPHONE (214) 954-6821TELECOPY (214) 954-6868TOLL FREE (800) 355-5804

email: skennedy@mcguirecraddock.com

TABLE OF CONTENTS

The Basics ....................................................................................................................................... 1But First, the Constitutional Lien.................................................................................................... 2The Statutory (Property Code) Lien................................................................................................ 2The Lien Affidavit Contents - Claimants of All Tiers .................................................................... 3Notice of Lien.................................................................................................................................. 4Subcontractors and Suppliers - Notices of Claim - First Tier ......................................................... 4Additional Notices Required - Second Tier and Below.................................................................. 5Two Birds, One Stone ..................................................................................................................... 6Derivative Claimants Notices for Retainage................................................................................... 6Notice for Specially Fabricated Items............................................................................................. 7Architect/Engineer/Surveyor Liens................................................................................................. 7Liens for Landscape Improvements ................................................................................................ 8Homestead Properties...................................................................................................................... 8Liens on Leaseholds ...................................................................................................................... 10Right to Request Information........................................................................................................ 10Demand for Payment..................................................................................................................... 11Foreclosure .................................................................................................................................... 11Private Bond Claims...................................................................................................................... 11Perfection of a Private Bond Claim............................................................................................... 12Short Limitation Period for Suit on a Private Payment Bond ....................................................... 12New From 1997 and 1999 Legislature.......................................................................................... 12New Bond to Indemnify Notice Provisions .................................................................................. 13Summary Judicial Procedure......................................................................................................... 13Homestead Considerations and the New Residential Construction Definition............................. 14Time to File Lien Affidavit ........................................................................................................... 14Statute of Limitations .................................................................................................................... 14False or Misleading Bills Paid Affidavit Penalties ....................................................................... 14Disclosure Statement Required ..................................................................................................... 15List of Subcontractors and Suppliers Required............................................................................ 15Disbursement of Funds.................................................................................................................. 15Final Affidavit of Bills Paid .......................................................................................................... 15Conveyance to Contractor Cannot be Required............................................................................ 16Subcontractor Claims on Residential Construction ...................................................................... 16Changes to the Texas Trust Fund Statute...................................................................................... 17The Home Equity Lending Amendment to the Texas Constitution.............................................. 17Residential Construction Liability Act.......................................................................................... 18Summary ....................................................................................................................................... 19

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The Basics

The mechanics’ lien laws in Texas are complex.Construction lawyers and, even general practitioners must have aworking knowledge of the requirements of Texas and Federal lawsthat help secure payment for Contractors, Subcontractors andSuppliers. Owner’s attorneys must have this knowledge also toprevent unnecessary payment of unperfected claims.

The applicable law is determined by whether the project onwhich the claim is made is a public project (State or Federal)or a private project (residential or commercial), and what typeof payment bond, if any, has been provided. In the case ofprivate ownership, the Texas Property Code is applicable. Wherethe Owner is the State of Texas, a local state governmentalentity, subdivision or agency, the former McGregor Act, nowTexas Government Code Chapter 2253 is applicable. Federalgovernment projects are governed by the Miller Act, 40 U.S.C.A.beginning at Section 270a. This paper deals with privateprojects. Public works bond claims, state and federal, are notcovered in this paper.

The material presented is based on the current State ofTexas law, particularly, Texas Property Code Chapter 53, asamended through the 1999 regular session of the 76th Legislatureof the State of Texas. Since the legislature meets every twoyears and usually makes some revisions to the Texas PropertyCode and other laws that may affect lien rights, the shelf lifeof your form file and resource material for lien filings isrelatively short.

The procedure for filing mechanics’ and materialmans’ lienson private property in Texas is governed by the Texas PropertyCode Chapter 53 and, to a limited extent, Property Code Chapter41 and the Texas Constitution. For homestead property, PropertyCode Chapter 53. Chapter 41 and the Texas Constitution are allapplicable. Contracts for homestead renovation and remodel workare controlled by all three. If the claim is on a homesteadproperty specific additional procedures must be followed asdescribed in the section following on homesteads.

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For those having a contract directly with the owner(original or prime contractor) on a non-residential1 property,procedures for securing a mechanics’ and materialmans’ lien arerelatively simple. The lien must contain the information asoutlined below, be timely filed, and the owner must be timelyprovided with a copy of the lien. For those not having acontract directly with the owner, such as subcontractors, sub-subcontractors and suppliers, notices containing specificinformation and language must be sent within a specific timeframe to "perfect" the lien. A lien that is "perfected" issimply one in which the claimant (person or entity owed money)has complied with the statutory requirements for filing andnotice. Although Texas courts have held that Chapter 53 of theTexas Property Code is to be "liberally construed" in order toprotect the claims of laborers and materialmen, this liberalconstruction is generally applied only to specific wording andgeneral content issues and not to deadlines.2 There isapparently no prohibition to filing a lien affidavit before theindebtedness accrues.3

The materials that follow will provide an outline of TexasLien Law and the particular notices required, that, if timelysent, should comply with the requirements of the variousstatutes.

But First, the Constitutional Lien

1"Residential Construction" is now defined in the Texas Property Code at Section 53.001(9)and (10).

2 See Van Horn Trading Company v. Day 148 S.W.2d 1129 (Tex. Civ. App.-San Antonio1912, no writ) and Hunt Developers, Inc. v. Western Steel Company 409 S.W.2d 443 (Tex. Civ.App.-Corpus Christi 1966, no writ).

3See L & N Consultants, Inc. v. Sikes 648 S.W.2d 368 (Tex. Civ. App.-Dallas 1983, writ ref’dn.r.e.).

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Original contractors benefit from a lien provided under theConstitution of the State of Texas. Texas Constitution ArticleXVI, §37 allows original contractors a lien for construction orrepair of "buildings and articles." This constitutional liendoes not require compliance with the requirements of the TexasProperty Code to enforce the lien. The Constitutional Lien isonly available to original contractors and, for constructionpurposes, is generally limited to "buildings." As an example,site improvements such as sidewalks and landscaping would notlikely be lienable on a constitutional basis.

Because of the limitations of a constitutional lien,claimants should not rely on it to protect their rights. Astatutory (Property Code) lien should always be perfected inorder to preserve claims and the constitutional lien relied ononly as a last resort for an original contractor who fails totimely perfect a statutory lien. Public property, both stateand federal, is not subject to constitutional lien, or any lien,for that matter. Although the constitutional lien exists withoutthe necessity of filing a lien affidavit (it is self executing)it would be doubtful that such a lien could be enforced againsta good faith purchaser without knowledge of the lien claim.Therefore, it is recommended that, even if a constitutional lienclaim is all that remains for the claimant, an affidavit shouldbe prepared and filed to preserve the claim.

The Statutory (Property Code) Lien

Although a constitutional lien is available to originalcontractors, they should not rely solely on the constitutionallien. The Texas Property Code provides a statutory mechanismfor both contractors and subcontractors of any tier to perfect aMechanic’s and Materialmans’s Lien on private property in Texas.Lien claimants must file an affidavit of lien with the DeedRecords for the county in which the property on which the laboror material was provide is located. The following section setsout the particular requirements of the affidavit of lien.

The Lien Affidavit Contents - Claimants of All Tiers

The Lien Content Requirements (some of which are new as of 1997)

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For all types of private construction, whether commercial or residential in nature, thecontent of the lien affidavit has changed from the pre-1997 requirements. The new law requiresthat the lien affidavit contain substantially the following (with the new material underlined):

(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 eachmonth in which the work was done and materials furnished for which payment isrequested;

(4) the name and last known address of the person by whom the claimant wasemployed or to whom the claimant furnished the materials 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 the lien; [and](7) the claimant’s name, mailing address, and, if different, 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 noticewas sent.

If there is a written contract, you should reference it inthe affidavit and attach a copy to the affidavit as an exhibit.The affidavit is not required to state individual items of workdone or material furnished and specifically allows the use ofabbreviations or symbols customarily used in the trade.However, you should be careful to provide a meaningfuldescription of the general type of work or material supplied andto not use abbreviations and symbols that are not commonlyrecognized in the trade and, preferably, by a judge that may bereviewing your lien affidavit if its adequacy is contested.

Of critical importance to the affidavit is the requirementof a "sworn statement." See §53.054 (a)(1). The signature lineon the affidavit must represent that the affidavit was"subscribed and sworn to" not just "acknowledged" to be true andcorrect.4

4See Sugarland Business Center, Ltd v. Norman 624 S.W.2d 639 (Tex. Civ. App.-Houston[14th Dist] 1981, no writ).

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Notice of Lien

As noted above, if the claimant’s contract is directly withthe owner, they only need to file the lien affidavit with theCounty Clerk in the county where the property is located by thefifteenth day of the fourth calendar month after the"indebtedness accrues." Indebtedness to an original contractoraccrues either on the last day of the month in which eitherparty terminates the contract in writing or on the last day ofthe month in which the original contract is completed, finallysettled, or abandoned. Indebtedness accrues to a subcontractoror supplier of any tier on the last day of the month in whichthe last of the labor or material was furnished. Forresidential construction, the deadline is the 15th of the thirdcalendar month after the indebtedness accrues.

Unlike subcontractor or supplier claims, the only noticerequired of an original contractor is notice of the filedaffidavit which must be provided to the owner or reputed ownerat the owner’s last known business or residence address and isrequired to be sent within five (5) calendar days after theaffidavit is filed. Tex. Prop. Code §53.055. In addition,subcontractors and suppliers (persons not having a contractdirectly with the owner) must also send a copy of the affidavitby certified mail to original contractor at the originalcontractor’s last known business or residence address within thesame time period.

Subcontractors and Suppliers - Notices of Claim - First Tier

If the claimant is a subcontractor or supplier and has acontract directly with the original contractor (first tiersubcontractor or supplier), they must give the owner writtennotice of the unpaid claim by the fifteenth day of the thirdcalendar month (second month for residential construction)following each month in which labor was performed or materialdelivered for which they have not been paid. See §53.056 (c).These notices must be sent certified mail, return receiptrequested, and must contain the following information:

If this claim remains unpaid, you may be personallyliable and your property may be subjected to a lienunless you withhold payments from the contractor for

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payment of the claim or the claim is otherwise paid orsettled.

See Property Code §53.056(d). This notice, sometimes referred to as afund trapping notice, third month notice, or notice of intent tolien is not only required in order to perfect the claim, but itrequires the owner to withhold funds in excess of the tenpercent retainage required by statute. This is particularlyimportant since the statutory ten percent retainage is rarelyenough to cover claims against a general contractor who hasdefaulted. Once notice is given, the time for filing the lienis calculated the same as with a general contractor, i.e., bythe fifteenth day of the fourth calendar month after accrual ofindebtedness. As with an original contractor, lower tierclaimants’ notice of the lien must be mailed to the owner bycertified mail, return receipt requested, no later than thefifth day after the date the person files the affidavit.

Caution: If the claim is to include a "lien on retainedfunds," Property Code, §53.103 requires the claimant to file thelien affidavit before thirty days after the work is completed!

This presents a significant dilemma for subcontractors whohave sent the required notice of a contractual retainageagreement under Property Code §53.057. That provision providesthat a claimant who gives the required timely notice ofretainage under that section is not required to give any othernotice as to retainage. Under §53.103, if a lien affidavit isnot filed before thirty days after the work is completed, aclaimant will not have a lien on the "retained funds." Thisplaces subcontractor claimants in the difficult position ofbeing required to file a lien for the "retained funds" beforepayment of retainage is even due. This would appear to be anunintended "catch 22" that needs to be addressed by thelegislature, unless §53.103 is meant to be limited strictly to alien in "funds" rather than on the property.

If there is any question in the subcontractor or supplier’smind as to whether the original contractor or any other upstreamcontracting party will be willing or able to pay the retainageto the subcontractor once the contractor is paid by the owner,the subcontractor or supplier should request a joint checkagreement as to the retained amount. This should help assurepayment of the subcontractor’s retainage. Otherwise, absent

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fund trapping notices for amounts other than retainage, theowner is free to pay all remaining amounts due to the originalcontractor after the expiration of thirty days from completionof the work.

Owner’s Limitation on Liability (and what this means to yourclients)

Absent a fund trapping notice, the limitation of owner’sliability to holding retainage for thirty days past completionunder §53.084 and §53.101, serves to effectively shorten thetime for giving a fund trapping notice for work completed at theend of the project. As an example, a subcontractor having itscontract directly with the original contractor would usuallyhave until the fifteenth of the third month in which all or partof the claimant’s labor was performed or material delivered tosend the fund trapping notice. Since the owner, in the absenceof a fund trapping notice, may release funds without liabilityafter the expiration of thirty days after completion of the work(meaning the project), the effective deadline for sending a fundtrapping notice is the shorter of either thirty days after theproject is completed or the fifteenth of the third monthfollowing each month in which all or part of the claimant’slabor was performed or material delivered.

Additional Notices Required - Second Tier and BelowSubcontractors and Suppliers Not Having a Contract With theOriginal Contractor

If the claimant does not have a contract with the originalcontractor, the claimant must also give written notice viacertified mail, return receipt requested, to the originalcontractor not later than the fifteenth day of the secondcalendar month following each month in which all or part of thelabor or material was provided to the project. See §53.054(b).In addition, the same fund trapping notice as described in theprevious section must be given to the owner by the fifteenth dayof the third calendar month ("third month" notice) as requiredfor those having a contract directly with the originalcontractor. The second month notice is not required onresidential construction because the deadline for the thirdmonth notice is moved up a month.

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Two Birds, One Stone

If the third month notice contains the statutory languagerequired by §53.056, it may be sent to all upstream contractingparties, including the owner, on or before the fifteenth of thesecond month after all or part of the claimant’s labor ormaterial was provided thus, eliminating the need to send twoseparate notices. However, the advantage to a lower tierclaimant in sending two separate notices, the first of which isnot sent to the owner, is to give the original contractor achance to see that payment is made without the necessity ofputting the owner on notice of a potential lien, and possibly atodds with the original contractor, before such action isrequired. Having the owner on notice early can also be anadvantage - depending on how you look at it. If the claimantelects to perfect the claim by sending a single second monthnotice as described above, they must include the "you may bepersonally liable" language required by Section 53.056.

After all of the required notices, a lien affidavit muststill be filed within the requirements of the Property Code§53.052 through §53.054 as described above. As with the originalcontractor’s claims, a copy of the filed affidavit must be sentto the owner and the original contractor via certified mail,return receipt requested, within the five day deadline notedabove.

Derivative Claimants (this means subs and suppliers) Noticesfor Retainage

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If the contract provides for retainage to be withheld fromprogress payments, and if the contract is not directly with theowner, filing a notice for contractual retainage under §53.057will relieve the claimant of the necessity to send monthly fundtrapping notices for retainage. Under §53.057, derivativeclaimants must give the owner notice of the retainage agreementnot later than the fifteenth day of the second month followingcommencement of performance. If the contract is not with theoriginal contractor, the claimant must also give notice withinthat time to the original contractor. The notice must includethe amount of money to be retained, the due date for payment ofthe retainage, if known, and a general indication of the natureof the agreement. This last requirement can usually beaccomplished by referencing the contract and including a copy ofit with your notice. These notices must be sent by registeredor certified mail to the last known business or residenceaddress of the owner or reputed owner and the originalcontractor as applicable.

Although subsection 53.057(e) provides that a claimant whogives this notice is not required to give any other notices forretainage, it does not appear to authorize the owner to withholdany additional funds as under a fund trapping notice. Even ifthis notice is given, in order to secure a lien for "retainedfunds" under subchapter E, the claimant must file a lien for theretainage before thirty days after completion of the work. Tofurther confuse the matter, the definitional section ofsubchapter A states that "retainage" is an amount representing apart of the contract payment that is not required to be paid tothe claimant within the month following the month in which thelabor is performed and the term does not include retainage undersubchapter E. As a possible alternative to filing a lienbefore retainage is due, the claimant might propose a jointcheck agreement for the amount of retainage to ensure thatretainage paid by the owner to the contractor is then paid tothe claimant. Make sure the joint check agreement isappropriate for the circumstances.

Notice for Specially Fabricated Items

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Section 53.058 of the Property Code provides additionallien right to persons that provide specially fabricatedmaterials. These persons must give the owner notice not laterthan the fifteenth day of the second month after the month inwhich they receive and accept an order for the speciallyfabricated materials. If their contract is with a person otherthan the original contractor, they must also give notice withinthat same time to the original contractor.

The notice must contain a statement that the order has beenreceived and accepted and the price of the order. This noticemust be sent by registered or certified mail, return receiptrequested, to the last known business address or residenceaddress of the owner or reputed owner and/or the originalcontractor as applicable.

IMPORTANT: In addition to the notice required by thissection, the claimant must also give fund trapping notices under§53.056 if delivery has been made or if the normal delivery timehas passed.

Since the lien of a claimant who accepts an order forspecially fabricated materials, but fails to give notice underthis section is valid as to delivered items, if they have givennotice under §53.056 (the fund trapping notices), theimplication is that a lien will be valid for items not deliveredif a claimant providing specially fabricated material hascomplied with the notice requirements of this section. See,Property Code §53.058(f).

If notice of a retainage agreement has been provided andconsists in whole or in part of an obligation to furnishspecially fabricated material, as provided under §53.057, theclaimant is not required to give separate notice of a contractfor specially fabricated materials under this section.

Architect/Engineer/Surveyor Liens

Architects, engineers and surveyors no longer are requiredto have a contract "in recordable form" that contains a legaldescription of the property. The architect, engineer orsurveyor still must have a written contract with the owner orthe owner’s agent.

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Accrual of indebtedness for architects, engineers andsurveyors, is now controlled by §53.053 in the same manner asfor other mechanics or materialmen. However, the time ofinception for the architect, engineer or surveyor’s lien, is thedate of recording of the affidavit of the lien. This is asignificant difference between the architect, engineer andsurveyor lien and other mechanics’ or materialmans’ liens, whichare on an equal footing as to each other without regard to thedate of filing and whose inception date relates back to thecommencement of improvements or delivery of materials to theproperty. This is now also the case for persons providinglandscaping. See §53.021(d) and the following section.

Liens for Landscape Improvements

The 1999 amendments change Property Code subsections 53.021(d) and 53.124(e) tospecifically allow for a Mechanic’s Lien for landscaping services. The lien of a landscapecontractor, however, is now on par with those of the Architects, Engineers, and Surveyors, in thatits inception date relates back to the day of recording of the lien, rather than the commencementof construction. Unfortunately, this means that, for landscaping contractors doing work on newconstruction, their lien rights may be behind other subcontractors and suppliers on the project.

Homestead Properties

In order to have a valid mechanics’ and materialmans’ lienon a homestead, there must be a written contract between theoriginal contractor and owner, signed by both spouses (ifproperty is owned by a married coupled) and filed with thecounty clerk prior to any work being done on the homestead.Under Section 41.007 of the Texas Property Code, a contract forhome improvements must contain the following warningconspicuously printed, stamped or typed in an equal size to atleast a ten point bold type or computer equivalent next to theowner’s signature line on each document creating a lien.

IMPORTANT NOTICE: YOU AND YOUR CONTRACTOR ARERESPONSIBLE FOR MEETING THE TERMS AND CONDITIONS OFTHIS CONTRACT. IF YOU SIGN THIS CONTRACT AND YOU FAILTO MEET THE TERMS AND CONDITIONS OF THIS CONTRACT, YOUMAY LOSE YOUR LEGAL OWNERSHIP RIGHTS IN YOUR HOME.KNOW YOUR RIGHTS AND DUTIES UNDER THE LAW.

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Failure to include the required language is, by statutorydefinition, a false, misleading or deceptive act within themeaning of the Texas Deceptive Trade Practices Act, Section17.46, Texas Business & Commerce Code. Unlike statutory lienson non-homestead properties, a lien on a homestead is valid onlyif the claimant strictly complies with the requirements ofChapter 53 of the Property Code and any other relevantconstitutional or statutory provisions.5 Tx. Prop. Code Ch. 41and Texas Constitution, Art. 16 §50.

It is important to note that where the work on a propertyis started before it acquires its homestead status, theadditional requirements for perfecting on a homestead would notapply due to the relation-back doctrine.6 But watch out for the"residential construction" requirements discussed later in thepaper.

Subcontractors or suppliers not having a contract directlywith the owner or a homestead must still comply with the noticeprovisions and deadlines for filing of liens (shortened for allresidential construction) required by Chapter 53 of the PropertyCode with the additional requirement that warning language mustbe contained in the notices as well as the lien affidavit.Notices for a homestead, however, must include or have attachedthe following statement:

If a person who furnishes materials or performs laborfor construction of improvements on your property isnot paid, your property may be subject to a lien forthe unpaid amount if:

(1) after receiving notice of theunpaid claim from the claimant, you fail towithhold payment to your contractor that issufficient to cover the unpaid claim untilthe dispute is resolved; or

5See Tex. Const. Art. 16, §50 Vernon Sup. 1985); Callier v. Valley Bldg.. & Loan Ass’n. 62S.W.2d 82 (1933); and Moray Corporation v. Griggs 713 S.W.2d 753 (Tex. Civ. App.-Houston1986 writ ref’d).

6See Floyd v. Rice 444 S.W.2d 834 (Tex. Civ. App.-Beaumont 1969, writ ref’d n.r.e.).

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(2) during construction and for 30days after completion of construction, youfail to retain 10 percent of the contractprice or 10 percent of the value of the workperformed by your contractor.

If you have complied with the law regarding the 10percent retainage and you have withheld payment to thecontractor sufficient to cover any written notice ofclaim and have paid that amount, if any, to theclaimant, any lien claim filed on your property by asubcontractor or supplier, other than a person whocontracted directly with you, will not be a valid lienon your property. In addition, except for therequired 10 percent retainage, you are not liable to asubcontractor or supplier for any amount paid to yourcontractor before you receive written notice of theclaim."

The lien affidavit must contain the following noticeconspicuously printed, stamped, or typed in a size equal to atleast ten point boldface or computer equivalent at the top ofthe page:

Notice: THIS IS NOT A LIEN. THIS IS ONLY ANAFFIDAVIT CLAIMING A LIEN.

IMPORTANT: See Recent Developments section for additionalhomestead and "residential construction" related issues.Liens on Leaseholds

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For those providing improvements to tenants, it is veryimportant to know that lien rights may be limited with regard toimprovements to a leasehold. If the original contract is with atenant, then the lien rights of any claimant may be limited to aclaim against the leasehold interest of the tenant.7 Underrecent case law, however, it may be possible for the claimant toshow that the tenant was acting as contractor for the owner, andproperly foreclose the lien against underlying property.8

Often, if a lien is filed on property that is occupied by atenant, the filing of such a lien will likely be an event ofdefault in the lease agreement between the tenant and the ownerand the owner is likely to put pressure on the tenant to pay,regardless of whether the lien is valid. Note that, theProperty Code provides for recovery of attorneys fees by theprevailing party where legal action is required to have a liendeclared invalid. See §53.156

Right to Request Information

Under Property Code Section 53.159, owners and contractorsare required to furnish certain information to claimants neededto perfect their lien rights. An owner is required to furnishwithin ten days of a request a description of the property beingimproved legally sufficient to identify it. The owner must alsostate whether there is a bond in place and, if so, the name ofthe bonding company and a copy of the bond, whether there areany prior recorded liens or security interests on the propertyand the name and address of any persons having lien or securityinterests. An original contractor is required to provide withinten days of a written request the name and last known address ofthe person to whom the original contractor has furnished laborand materials for the project (usually the owner) and whetherthe contractor furnished or was furnished with a payment bondand, if so, the name and address of the surety and a copy of thebond. Subcontractors are required to provide similarinformation upon written request.

7See Diversified Mortgage Investors v. Lloyd D. Blalock, General Contractor, Inc. 576S.W.2d 794 (Tex. 1978).

8James C. Bond v. Kagan-Edelman Enterprises, 985 S.W.2d 253 (Tx. App.–Houston [1stDist.] 1999 no writ)

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Similarly, an owner who has received notice of a claim mayrequest that the claimant furnish a copy of any applicablewritten agreement, purchase order, or contract and any billingstatement, or payment request reflecting the amount claimed. Ifrequested, the claimant must provide the estimated amount duefor each calendar month in which the claimant has performedlabor and furnished material.

If the person from whom information is requested does nothave a direct contractual relationship with the personrequesting the information, the person requesting theinformation may be required to pay for costs to produce theinformation not to exceed twenty-five dollars. Caution: Requesting information necessary to perfect alien does not toll (suspend) the time limit for filing a lien ornotice. If you have requested information and it is notprovided, this will not extend the time for filing notice or alien affidavit. Therefore, you should always allow enough timeto obtain the required information elsewhere should the upstreamcontracting party fail to provide it.

Demand for Payment

Under §53.083 of the Property Code, once a subcontractor orsupplier has provided the owner with notice of a claim againstthe general contractor, demand for payment may be made to theowner. The demand must state that all or part of the claim hasaccrued under §53.053 or is past due according to the agreementbetween the parties. A copy of the demand letter must be sentto the original contractor. Once this is done, the originalcontractor must notify the owner within thirty days if theyintend to dispute the claim. If the original contractor doesnot provide timely notice to the owner that they dispute theclaim, they are considered to have assented to the demand andthe owner is required to pay the claim. You may, of course,incorporate a demand for payment into your notice of claim as isdone in the suggested form at the end of this section.

Important: Notice and demand alone will not preserve alien claim. If the owner does not pay you, you must still filean affidavit of lien within the time required by the statute.

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Foreclosure

Although filing of a mechanics’ lien affidavit oftenresults in payment by the owner in exchange for a release oflien, this is not always the case. If the owner continues torefuse payment, suit must be brought to foreclose the lien. Asuit must be brought to foreclose the lien within two yearsafter the date of filing of the lien affidavit (one year orresidential construction) or within one year after completion ofthe work under the original contract under which the lien isclaimed, whichever is later. In any suit to foreclose on alien, or in any suit to declare that any lien or claim isinvalid, the Court may award costs and reasonable attorney’sfees. Since the language of the statute is permissive (may)rather than mandatory (shall), there can be no guarantee thatyou will recover all of your attorney’s fees. See §53.156.

Private Bond Claims

Although the primary mechanism for protecting lien rightson private property is the ten percent (10%) retainagerequirement and fund trapping provisions found in subchapters Dand E of the Texas Property Code, private payment bonds areavailable. Under subchapter I, an original contractor who has awritten contract with the owner may furnish a bond for thebenefit of claimants. If a valid bond is recorded with thecounty clerk as required under §53.203, the claimant may not filesuit against the owner or the owner’s property and the owner isrelieved of their obligations under subchapters D and E. See§53.201.

The bond must be in a penal sum at least equal to the totalof the original contract amount, be written in favor of theowner, with the written approval of the owner endorsed on thebond. The bond must also be executed by the original contractoras principal and a corporate surety authorized and admitted todo business in the State of Texas and licensed by the state toexecute bonds as surety. Finally, the bond must be conditionedon prompt payment for all labor, subcontracts, materials,specially fabricated materials, and normal and usual extras notexceeding fifteen percent (15%) of the contract price. Oncefiled with the county records as required under §53.203, apurchaser, lender or other person acquiring an interest in theproperty, is entitled to rely on the record of the bond and the

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contract as constituting payment of all claims as each claimanthad filed a complete release and relinquishment of lien rights.See §53.204.

Perfection of a Private Bond Claim

A claim can be perfected on a payment bond in one of twoways. First, the claimant may perfect a lien claim undersubchapter C or, in addition to providing the originalcontractor any applicable notices required under subchapter C,give to the surety on the bond, instead of the owner, allnotices otherwise required to be given to the owner undersubchapter C. See §53.206.

A claimant on a statutory private payment bond need notgive notice directly to the surety unless the claimant has adirect contractual relationship with the original contractor andthe agreed retainage is in excess of ten percent (10%) of thecontract. See §53.206(b)(1). Under §53.207, however, if theowner receives any notices for a lien a fixed under subchapterC, the owner is to mail the surety a copy of all noticesreceived. Failure, however, of the owner to send copies ofnotices to the surety does not relieve the surety of anyliability under the bond if the claimant has complied with therequirements for notice to the owner and the contractor. See§53.207.

Short Limitation Period for Suit on a Private Payment Bond

A claimant must wait at least sixty (60) days afterperfection of the claim on a payment bond for suit. Once thesixty (60 ) days is past, if the bond is recorded at the timethe lien is filed, the claimant must sue on the bond within oneyear following perfection of the claim if the bond is notrecorded at the time the lien is filed, the claimant must sue onthe bond within two (2) years following perfection of the claim.See §53.208.

New From 1997 and 1999 Legislature (Including the "Residential Construction" Changes)

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As you may be aware, the 1997 Legislative Session enacted substantial changes to theTexas Mechanic’s Lien law and in 1999, the Legislature fine tuned some of those changes.Although the majority of the efforts were geared toward protecting the residential constructionconsumer, many of the changes will affect both residential construction and non-residentialconstruction projects.

New Bond to Indemnify Notice Provisions

Provisions dealing with bonds to indemnify against liens have been changed to makesuch bonds effective to discharge the lien upon filing and notice of the bond. Significantly,"notice" is now accomplished by mailing the notice certified mail to the claimant’s address asstated in the lien affidavit, rather than personal service of the notice as was required under theprior law. See §53.173.

Summary Judicial Procedure

Of particular interest is the new "summary procedure" provided under §53.160 of theProperty Code. Under the new provision, the party objecting to the validity or enforceability of alien may file a motion to remove the lien. The new section sets forth specific grounds forobjecting to the validity or enforceability of a lien for the purpose of such a summaryproceeding. At the hearing for such a motion, the burden is on the lien claimant to prove that thenotice of claim and affidavit of lien were furnished to the owner and original contractor asrequired, and the burden is on the movant to establish that the lien should be removed for any"other ground authorized by this section." According to the new section, "the court shallpromptly determine a motion to remove a claim or lien under this section." (Emphasis added.)

A party to this summary proceeding may not file an interlocutory appeal from an adverseruling by the court. However, provisions are provided for the court to enter a stay of the orderremoving the lien if the claimant files a bond or deposit in lieu of a bond that complies withspecific statutory requirements within thirty (30) days after the date the order is entered by thecourt. If an order removing a lien is not stayed by posting the proper bond or security, the ownermay file a certified copy of the order with the county records, together with a certificate from theclerk of the court stating that:

-No bond or deposit in lieu of the bond was filed within thirty (30)days after the date the order was entered by the court, and

-No order staying the order to remove the lien was entered by thecourt.

Once this is done, the lien is extinguished as to a bona fide purchaser purchasing after thecertificate is filed with the county clerk. The removal of the lien through the new summaryproceeding does not, however, constitute a release of liability, if any, of the owner to the

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claimant. If, in further proceedings, the claimant establishes the validity of the lien and an orderof foreclosure is obtained, the filed judgment then revives the lien, and the claimant mayforeclose on the property. A lien so revived is void as to a creditor or subsequent purchaser forvalue obtaining an interest in the property after an order removing the lien and the certificatefrom the clerk are filed with the county clerk and before final judgment reviving the lien wasfiled with the county clerk.

Homestead Considerations and the New Residential Construction Definition

Even before the recent changes, construction on residential property that was ahomestead required special language in the construction contract and in the lien affidavit in orderto preserve the contractor’s lien rights. Under the newly defined "residential construction"subcategory, special considerations have now been expanded to non-homestead residentialprojects. A "residence" is now defined in the property code to mean a "single family house,duplex, triplex or quadruplex or a unit in a multi-unit structure used for residential purposes thatis: (a) owned by one or more adult persons and (b) used or intended to be used as a dwelling byone of the owners." See §53.01(8).

A residential construction project is defined as "a project for the construction or repair ofa new or existing residence, including improvements appurtenant to the residence, as providedby a residential construction contract." See§53.01(9)(10). The new requirements for residentialconstruction are set out in the new "Subchapter K" of chapter 53 of the Texas Property Code.

CHANGES FOR "RESIDENTIAL CONSTRUCTION" ONLY

Time to File Lien Affidavit

The time requirements for filing a residential construction lien affidavit have changed.The lien affidavit must now be filed no later than the 15th day of the third month afterindebtedness accrues. Indebtedness accrues for an original contractor when the project is finallycompleted, terminated, or abandoned.

Statute of Limitations

The 1997 revisions make the statute of limitations for bringing a suit to foreclose on alien arising under residential construction project one year after the last date the claimant mayfile the lien affidavit or within one year after completion termination or abandonment of thework under the original contract, whichever is later.

False or Misleading Bills Paid Affidavit Penalties

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A contractor or subcontractor providing an affidavit of bills paid on residentialconstruction now may face a substantial fine and be personally liable in the event that theaffidavit contains false or incorrect information. Under the new law, a person who"intentionally, knowingly, or recklessly" makes a false or misleading statement in an affidavitstating that all subcontractors and suppliers have been paid commits a Class A Misdemeanor thatmay be punishable by fine up to $4,000.00 or one year in jail or both. Any person signing suchan affidavit may be personally liable for any loss or damage resulting from any false or incorrectinformation in the affidavit. The personal liability appears to arise whether the incorrectinformation is provided intentionally or not. This applies to both residential and non-residentialconstruction §53.085 and §53.259.

Disclosure Statement Required

Perhaps one of the more significant changes for residential projects is that an originalcontractor now must furnish a disclosure statement to the owner before a contract for residentialconstruction is entered into. The contents of the disclosure statement are set out at Section53.253. It is suggested that you provide a place for the owner to sign on the disclosure statementacknowledging that it was provided to them. In the case of a married owner, both should signthe acknowledgment. The new disclosure statements are extensive, however, failure to providethe appropriate disclosure does not invalidate any lien later filed. It remains to be seen whetherfailure to include the required disclosure statement will result in DTPA liability to the contractorfailing to do so.

List of Subcontractors and Suppliers Required

In addition to the disclosure statement, the contractor on a residential construction projectis required to give the owner a list of subcontractors and suppliers that they intend to use on theproject. As that list changes, the contractor is required to update the information with the ownerno later than 15 days after a new subcontractor or supplier is added or deleted. In addition, thislist must include a disclaimer as follows:

"NOTICE: THIS LIST OF SUBCONTRACTORS AND SUPPLIERS MAY NOT BE A FINALLIST. THE CONTRACTOR IS REQUIRED BY LAW TO SUPPLY UPDATEDINFORMATION, AS THE INFORMATION BECOMES AVAILABLE, FOR EACHCONTRACTOR OR SUPPLIER USED IN THE WORK PERFORMED ON YOURRESIDENCE."

It would probably be a good idea to incorporate a reference to receipt of the list ofsubcontractors and suppliers in the disclosure acknowledgment required under §53.255,referenced above.

The subcontractor disclosure statement is now "waiveable." See §53.256 for thedisclosure requirements and §53.256(d) for the waiver provisions.

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Disbursement of Funds

Section 53.0258 of the Property Code has been clarified to more precisely define thedisclosure required upon disbursement of funds. The statute now requires the contractor toprovide the owner a disbursement statement at any time that a request for payment is made. See§53.258.

Final Affidavit of Bills Paid

A final affidavit of bills paid is now required of the Original Contractor/Seller forresidential construction, whether requested by the Owner/Buyer or not. As noted above, thereare substantial criminal penalties and personal liability exposure for persons signing bills paidaffidavits that contain false or misleading information. See §53.259.

Conveyance to Contractor Cannot be Required

The contractor can no longer require the owner to transfer title to the property to thecontractor during construction. The statute states: "An original contractor may not require anowner of real property to convey the real property to the original contractor or an entitycontrolled by the original contractor as a condition to performance of the residential constructioncontract for improvements to real property." See §53.260.

Subcontractor Claims on Residential Construction

For a subcontractor or supplier lien on non residential work to be valid in Texas, thesubcontractor or supplier must send a notice by registered or certified mail to the owner of theproperty by the 15th of the third month after every month in which the supplier or subcontractorprovided labor or materials for which they did not get paid. As you will recall, this notice muststate in substance:

If the claim remains unpaid, the owner may be personally liable and the owner’sproperty may be subjected to a lien unless: (1) the owner withholds payment fromthe contractor for payment of the claims; or (2) the claim is otherwise paid orsettled.

In the case of residential construction, the deadline for sending this notice is reduced to the 15th

day of the second month following each month in which all or part of the labor or material wasprovided for which the claimant has not been paid. On a residential homestead, the notice mustcontain additional language that states:

IF A SUBCONTRACTOR OR SUPPLIER WHO FURNISHES MATERIALS ORPERFORMS LABOR FOR CONSTRUCTION OF IMPROVEMENTS ON YOUR PROPERTY

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IS NOT PAID, YOUR PROPERTY MAY BE SUBJECT TO A LIEN FOR THE UNPAIDAMOUNT IF:

(1) AFTER RECEIVING NOTICE OF THE UNPAID CLAIM FROM THECLAIMANT, YOU FAIL TO WITHHOLD PAYMENT TO YOUR CONTRACTOR THAT ISSUFFICIENT TO COVER THE UNPAID CLAIM UNTIL THE DISPUTE IS RESOLVED; OR

(2) DURING CONSTRUCTION AND FOR 30 DAYS AFTER COMPLETION OFCONSTRUCTION, YOU FAIL TO RETAIN 10 PERCENT OF THE CONTRACT PRICE OR10 PERCENT OF THE VALUE OF THE WORK PERFORMED BY YOUR CONTRACTOR.

IF YOU HAVE COMPLIED WITH THE LAW REGARDING THE 10 PERCENTRETAINAGE AND YOU HAVE WITHHELD PAYMENT TO THE CONTRACTORSUFFICIENT TO COVER ANY WRITTEN NOTICE OF CLAIM AND HAVE PAID THATAMOUNT, IF ANY, TO THE CLAIMANT, ANY LIEN CLAIM FILED ON YOURPROPERTY BY A SUBCONTRACTOR OR SUPPLIER, OTHER THAN A PERSON WHOCONTRACTED DIRECTLY WITH YOU, WILL NOT BE A VALID LIEN ON YOURPROPERTY. IN ADDITION, EXCEPT FOR THE REQUIRED 10 PERCENT RETAINAGE,YOU ARE NOT LIABLE TO A SUBCONTRACTOR OR SUPPLIER FOR ANY AMOUNTPAID TO YOUR CONTRACTOR BEFORE YOU RECEIVED WRITTEN NOTICE OF THECLAIM.

Changes to the Texas Trust Fund Statute

The Texas Trust Fund Statute, Texas Property Code Chapter 162, has also been amendedto require a contractor doing "residential homestead" construction in excess of $5,000 to set up aseparate account for construction funds. Monthly statements from the Bank must refer to theaccount as a "construction account." The account must reflect the following information:

-The source and amount of the fund in the account and the date the fundswere deposited;

-The date and amount of each disbursement from the account and to whomthe funds were disbursed; and

-The current balance of the account.

Although it is not clear from the language of the statute, the drafter’s intent was not that aseparate construction account must be set up for each individual residential project. Thecontractor must, however, maintain accounting records for each residential construction projectthat specifies the direct cost and indirect costs charged to the owner. The statute now mandatesthat the contractor retain all invoices and other supporting documentation received related to thefunds that were disbursed. The statute requires that all deposit and disbursement documentation

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include the construction account number or information that provides a direct connectionbetween the documentation and the account. Lastly, the contractor cannot destroy informationrelated to the account before the first anniversary of the date for completion of the project.

The failure of the contractor to set up and maintain such an account, or to maintainproper records, will now establish the "intent to defraud" required to trigger criminal penaltiesunder the trust fund statute. Under Texas Property Code Subsection 162.032(a), the failure to setup such an account is a Class A misdemeanor.

The Home Equity Lending Amendment to the Texas Constitution

There are provisions in the recent amendments to the Texas Constitution that affectcontractors doing residential remodel or renovation. For contracts entered into after January 1,1998, contracts for repair or renovation to homestead property cannot be signed for the twelfthday after the Owner has made "written application for the extension of credit." There is noprovision for the waiting period in the event that the Owner is self financing such improvementsfor repair or renovation. There is an exception where immediate repairs are necessary because ofconditions that materially affect the health and/or safety of the Owner or person occupying thehomestead.

A contract for renovation or repair on a homestead also must include a three day right ofrescission, expressly set forth in the contract. Lastly, renovation contracts for homesteads mustbe executed in the office of a lender, attorney, or title company. There is nothing in theconstitutional amendment that identifies what party the attorney, title company or bank shouldrepresent.

The full text of the bill analysis for these revisions (House Bill 740) is available on theTexas Legislature’s website at www.capitol.state.tx.us. For the bill that was signed into law youwill want to select the "enrolled version" from the individual bill information section or thewebsite.

Residential Construction Liability Act

You should be familiar with the provisions of Chapter 27 of the Texas Property Code,which is the Texas Residential Construction Liability Act. This is a substantial limitation ofliability for the contractor. Under this chapter, an owner must give the contractor notice of claimand an opportunity to cure in order to recover damages from the contractor beyond the cost ofrepair or remediation of the construction deficiency.

In the last legislative session the Act was amended to require a disclosure statement to beattached to any contract for residential construction. This disclosure statement must also appearnext to the signature line in the contract in at least 10 point bold face type or the computerequivalent and read substantially as follows:

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THIS CONTRACT IS SUBJECT TO CHAPTER 27, PROPERTY CODE. THEPROVISIONS OF THAT CHAPTER MAY AFFECT YOUR RIGHT TO RECOVERDAMAGES ARISING FROM THE PERFORMANCE OF THIS CONTRACT. IF YOU HAVEA COMPLAINT CONCERNING A CONSTRUCTION DEFECT ARISING FROM THEPERFORMANCE OF THIS CONTRACT AND THAT DEFECT HAS NOT BEENCORRECTED THROUGH NORMAL WARRANTY SERVICE, YOU MUST PROVIDENOTICE REGARDING THE DEFECT TO THE CONTRACTOR BY CERTIFIED MAIL,RETURN RECEIPT REQUESTED, NOT LATER THAN THE 60TH DAY BEFORE THEDATE YOU FILE SUIT TO RECOVER DAMAGES IN A COURT OF LAW. THE NOTICEMUST REFER TO CHAPTER 27, PROPERTY CODE, AND MUST DESCRIBE THECONSTRUCTION DEFECT. IF REQUESTED BY THE CONTRACTOR, YOU MUSTPROVIDE THE CONTRACTOR AN OPPORTUNITY TO INSPECT AND CURE THEDEFECT AS PROVIDED BY SECTION 27.004, PROPERTY CODE.

Summary

As can be seen from this "brief" outline of notice andfiling requirements of the Property Code, the requirements forcompliance are complex.

If it appears that a lien will be necessary, at minimum,the following information should be gathered in advance:

- Name and address of the project;- Name and address of the owner;- Name and address of the prime contractor, if

applicable;- Name and address of person with whom you have your

contract;- A legal description of the property on which theproject is built, together with a street address ifavailable;- Invoices reflecting the amounts outstanding;- Dates that the work was performed for which theclaimant has not been paid.

Having this information ready should allow you to proceedpromptly and efficiently in preparing the lien affidavitrequired by the Property Code. The old adage "An ounce ofprevention is worth a pound of cure" is particularly applicablein the case of prompt action on past due accounts.

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