In this blog, presented by SunRay Construction Solutions and Emily A. Pendleton, Associate, Porter Hedges LLP, we will provide you all the required information and the various steps that you need to take to ensure that you have successfully recorded your lien which in turn will ensure that your lien rights are preserved and you are getting paid successfully.
Understanding Lien Rights
The first and foremost thing that you should be aware of are the lien rights that are provided to you by perfecting your lien claim. Your lien rights will essentially give you leverage which is very important.
- Without your lien, you may have your claim against the contractor or the subcontractor for breach of contract. However, in most cases, this doesn’t get you very far.
- However, when you record your lien, it gives you a claim against the property owner.
- The property owner is liable to the lien claimant for two types of funds:
- Reserved funds; and
- Trapped funds.
Know more: Texas’s Lien Law Makeover
What are Reserved Funds?
The reserved fund is typically a pot of money that the owner must retain from the general contractor throughout the construction project.
- This reserved fund keeps growing over the life of the project and it is typically 10% of the original contract price, or if the project is still ongoing, then 10% of the value of the work performed.
- So, in practice, how this works is that the owner withholds 10% of every invoice that the general contractor submits.
- This pot of money is withheld by the owner until 30 days after the original contract is completed.
- This is why it is very important for you to record your lien affidavit and send your lien notices as per the timelines provided. This will notify the owner about your claim, and they can withhold these funds before releasing them.
As long as you get your lien is perfected timely, this reserved fund should be withheld by the owner as per Texas statutory laws.
What are Trapped Funds?
Trapped funds are funds that the owner pays to the general contractor after receiving your Pre-Lien Notice.
- So, if you have sent your Pre-Lien Notice, but the owner failed to withhold funds from the general contractor and makes the full payment, then they will have the additional liability to you for failing to reserve the funds.
- The owner will have to pay the general contractor an amount which will be sufficient to satisfy the lien amount claimed in your Pre-Lien Notice.
- This is another reason why you need to adhere to the deadlines while sending out your Pre-Lien Notices. It will help in notifying the owner that there is a non-payment issue going on.
Another key point pertaining to your lien rights is that the property owner’s liability is in addition to the contractor/subcontractor’s liability for the amounts due under the line.
So, irrespective of where the money is coming from, both the contractor/subcontractor and the owner have a liability towards you.
For further reading, check out our article: What Happens After I Record My Lien? How Do I Get Paid?
What are the Steps you can take to collect your Lien?
Step 1 - Set up a call with the owner’s representative to discuss the payment resolution. Most of the owners are never happy to have a lien on their property, and they will want to get it off as soon as possible.
- Sometimes, the owner may be willing to get the payment issue resolved and ensuring the general contractor pays you by issuing a joint check in exchange for a lien release.
- If a lien release is involved, make sure that you read the language thoroughly. Always sign a ‘conditional’ release stating that it is contingent on receipt of the funds. So, if the owner insists that you sign a lien release before you actually get paid, sign a conditional lien release.
- Once the funds are received, the release can be unconditional.
Step 2 - Another thing that you can try is to send a demand letter to all the upstream parties stating that if payment is not made within seven days, then you will be turning over the claims to an attorney and the attorney will be seeking attorneys’ fees, interest payments, etc., in addition to the lien amount.
- Finally, if nothing else works, and litigation is the only option, then go ahead and involve your attorney.
What are the next Steps?
So, once you have discussed your situation with your counsel, you need to follow the steps below.
- The first step is to file a suit to foreclose on your lien.
- The deadline to file a suit is within one year of the last day the claimant could have recorded the lien.
- Next, make sure that you contact your attorney as soon as you realize that the non-payment issue cannot be resolved without litigation. This is because contractors sometimes try to make false promises and string you along in the hopes that you miss the deadline to file suit to foreclose your lien.
- Under the Texas Property Code, there is a provision which entitles you to seek your attorneys’ fees in connection with having to file a lawsuit to enforce your lien.
Bond Claims – Things You Should Do
Below are the things that you should do when dealing with bond claims:
- In most of the cases, when you send your notice to the surety, they will ask you to provide additional information, such as your contract, details of outstanding invoices, any communications that you had with the upstream parties, etc. Make sure that you respond to the surety and provide them all the details.
- You can also get some additional information from the surety, because the surety will request details from the bond claimant as well as the general contractor.
- Next step is to consult your attorney.
- The deadline to file a suit on a payment bond on a public project is one year from the date notice of a claim is first mailed.
- The deadline to file a suit on a payment bond on a private project is one year from the perfection of the claims.
- Like the lien statutes, there are provisions to recover your attorneys’ fees when filing a suit against a payment bond.
The key point to remember is to always keep an eye out on the deadlines. If you fail to meet the deadlines, then your lien or bond claims may not be valid. Make sure that you perfect your lien claims and follow the steps mentioned above to ensure that your lien gets you paid successfully.