.png){kind=small}
In this blog, presented by SunRay Construction Solutions and Emily A. Pendleton, Associate, Porter Hedges LLP, construction professionals in Texas can find out what these key steps and action items are, so that they can perfect their lien rights which in turn will help them get paid successfully for the work they perform on various types of construction projects.
What are the Different Types of Construction Projects?
The first and foremost point to remember is that protecting and preserving your right to payment in Texas largely depends on the type of construction project that you are working on. Typically, there are four types of construction projects:
• Commercial, private project (can be bonded or unbonded)
• Residential, private project
• State public project (must be bonded)
• Federal public project (must be bonded)
The steps that you need to take to preserve your right to payment on bonded projects (state/federal) are slightly different to what you need to do to preserve your right to payment through a lien. In this blog, we will focus primarily on commercial, private construction projects in Texas.
Where are the Lien Perfection Rules Applied?
There were numerous changes made to Chapter 53 of the Texas Property Code to streamline the lien perfection process. So, some projects may fall under the old lien laws, and some will fall under the new lien laws. Typically, the lien perfection rules apply to:
• Texas commercial, private construction projects where the original contract (the contract between the owner and the general contractor) was entered into on or after January 1, 2022.
• Any project that began before January 1, 2022, or it was a project started in 2021 but got delayed due to whatever reason, then make sure you consult an attorney to ensure that you are operating as per the correct lien laws.
• Projects that started prior to 2022 will be governed by the old statutes.
How to Perfect a Statutory Lien?
There are four key steps that you need to follow to perfect a statutory lien. These are:
• You need to send out a pre-lien notice before recording the lien affidavit.
• Second step is to record your lien affidavit.
• Once the lien affidavit is recorded, you need to send out a notice.
• Finally, you need to file a lawsuit to foreclose.
Let’s take a detailed look at each of these steps.
A) Step 1 – Pre-lien Notice
1) What is a pre-lien notice?
As per the new lien laws, the statute provides a specific form for the pre-lien notice in Texas. The Notice of Claim for Unpaid Labor or Materials contains several elements as well as a warning language.
• The form will include details like project description/address, claimant’s name, type of labor/materials provided, claim amount, original contractor’s name, party with whom claimant contracted if different from the original contractor, etc.
• If you have any outstanding contractual retainage that you are going to need to send the pre-lien notice for, then you need to include one additional element, i.e., the amount of the contractual retainage. This is a separate form, but it can be combined into one.
2) Who needs to send pre-lien notice?
The entities that need to send the pre-lien notice depends on your upstream, contractual relationships. So, ideally, the pre-lien notice is mandatory for all subcontractors and not required for original contractors.
• Original contractor – a person who is directly contracting with the owner or through the owner’s agent.
• Subcontractor – a person who works or provides labor/materials to fulfill an obligation to an original contractor or to a subcontractor of any tier to perform all or part of the work required by an original contractor. This includes material suppliers (vendors).
3) Who should receive the pre-lien notice?
• In all cases, the notice should go to the owner and the original contractor.
• The best practice is to send the pre-lien notice to all your upstream parties.
4) When to send the pre-lien notice by?
• The pre-lien notice should be sent by the 15th day of the third month after the labor or materials were provided. This is the deadline to follow if you are working on commercial, private projects.
• If you are working on a residential, private project, then the timeline to send the pre-lien notice is shorter. You will need to send the pre-lien notice by the 15th day of the second month after the labor/materials were provided.
• For example, you are a second-tier subcontractor who has provided materials in the months of April, May and June. It is July now, but you still haven’t been paid. So ideally, you will need to send your pre-lien notice by the 15th of July to ensure that you perfect your lien claim for all the outstanding work performed.
• Also, the July 15th pre-lien notice should include the outstanding amounts due for the months April, May and June.
• If it is residential, private project, then you're deadline would be June 15th.
5) How to send the pre-lien notice?
As per the statute, you must send the pre-lien notice by certified mail, return receipt requested.
• This is because, as per the law, once you deliver your pre-lien notice to the United States Postal Service with certified mail receipt, it is deemed as delivered.
• So, if whatever reason the USPS loses it or the notice does not reach the destination, the statute considers it to be delivered.
• It is also recommended that you avail the services of FedEx or UPS because these private services tend to be faster which is crucial to meet the deadlines.
• Another recommended tip is to find a last known address which is not a PO Box. This is because FedEx or UPS delivery typically requires a signature which is not possible if it’s a PO Box. So, if you find the last known address as well as a PO Box, then send it to both.
• Another key action item is to keep a copy of the white receipt as well as the returned green card for your records. These come in handy if you do end up filing a lawsuit to foreclose.
B) Step 2 – Record Lien Affidavit
Once you have sent your pre-lien notice to the owner and the original contractor, if it hasn’t resulted in you getting paid, then you move on to step two which is recording the lien affidavit. There are several items you need to include in your affidavit, and you must ensure that it is signed and notarized by the claimant.
1) When must the lien affidavit be recorded?
• The lien affidavit needs to be recorded by the 15th day of the fourth month after the claimant’s work is completed.
• So, if you are a subcontractor and you finish your work in the middle of the project, then you have to record the lien affidavit by the 15th day of the fourth month after your last day of work.
• If you are the general contractor, then you will have until the 15th day of the fourth month after the final completion of the project to record your lien affidavit.
• For example, if we take the previous example where you sent out your pre—lien notice by 15th July covering the outstanding work for April, May and June, then you have to record your lien affidavit by October 15th. This is for commercial, private projects.
• For residential, private projects, the lien affidavit must be recorded by the 15th day of the third month after the completion of the work.
2) Where must the lien affidavit be recorded?
• The lien affidavit must be recorded in the real property records of the county in which the property is located.
• In Texas, different counties have different procedures. For example, some counties offer electronic recording capabilities while in some counties you need to send in the signed affidavit to the county clerk to get it recorded.
C) Step 3 – Notice of Recorded Lien
Step 3 in perfecting your lien is to send a notice of your recorded lien affidavit.
1) To whom must notice be provided?
• The notice of recorded lien affidavit should be sent to the owner and the original contractor.
• However, the recommended practice is to send it to all the upstream parties.
2) When should the notice be sent?
• The notice should be sent within 5 days of recording the lien affidavit.
• A recommended tip is to send the notice on the same date you record the lien affidavit.
• Under the old lien law, there was no sympathy for whether or not the fifth day fell on a Saturday, Sunday, or a legal holiday. However, under the new lien law, there is some grace allowed in extending the deadline to the next day.
• But as mentioned above, the bets practice is to not wait until the last day to send out the notice because there is no harm in sending it early; however, if you fail to meet the deadline, then you cannot perfect your lien.
3) What are the claims available?
• You have your claim against the contracting entity for non-payment, which is your common breach of contract claim, if there is no formal agreement, other equitable claims, such as quantum merit, unjust enrichment, etc.
• Your perfected lien affidavit also gives you a claim against the owner; however, the owner’s liability is limited to two sets of funds:
o Reserved Funds
▪ These are funds that the owner is required to withhold from the general contractor throughout the project. As per the statute, the amount of reserved funds is 10% of the original contract, or if the project is not complete, then 10% of the value of the work performed.
▪ The owner must withhold the reserved funds until 30 days after the contract is completed. This is why it is very important to adhere to all the timelines that are mentioned above.
▪ You will also need to record your lien affidavit by the 30th day after the project is completed, terminated or abandoned. This may be confusing as we had earlier mentioned that you have four months. However, if you want to preserve your right to the reserved fund, then you must make sure that you send out your pre-lien notice and record your lien affidavit within 30 days of project completion.
▪ This will ensure that the owner does not release those reserved funds to the general contractor without setting aside the money to satisfy your lien.
o Trapped Funds
▪ Trapped funds are funds that the owner pays to the general contractor after receiving the pre-lien notice, without withholding amounts sufficient to satisfy the amount claimed in the pre-lien notice.
▪ This is why you should get your pre-lien notice in the hands of the owner as soon as possible so that you can ‘trap’ those funds in the hands of the owner.
D) Step 4 – File Suit to Foreclose
If perfecting your lien affidavit does not result in you getting paid, then you move on to the final step which is filing suit to foreclose. You must file a suit to foreclose on your lien claim, which means filing a lawsuit against the owner.
1) Limitations
• You need to file suit to foreclose within one year after the last day a claimant may file a lien affidavit.
Key Takeaway
The key takeaway here for contractors, subcontractors, and suppliers is to ensure that they perfect their lien and follow all the deadlines diligently. In many cases, steps 1-3 often push the owner/original contractor to resolve the payment issues because nobody really wants to get into litigation.
However, if you do find yourself in a situation where you need to file suit to foreclose on your lien claims, then ensure that you get in touch with your attorney or SunRay’s legal experts well in advance, so that they can take all the required steps in a timely manner. Call 800-403-7660 today and get paid what you deserve.
FAQs
What are the notice requirements for filing a construction lien in Texas?
Texas law mandates that subcontractors and suppliers must provide written notice to the property owner, general contractor, and/or construction lender within a specific timeframe to preserve their lien rights. Failure to comply with these notice requirements can invalidate the lien.
What is the "Texas Prompt Payment Act"?
The Texas Prompt Payment Act establishes timelines for payments in construction contracts. It outlines when payments must be made to contractors, subcontractors, and suppliers and provides remedies for late payments.
Is a written contract required for construction projects in Texas?
While not always required, having a written contract is highly advisable. It helps define the terms and expectations of the parties involved, reducing the likelihood of disputes.
