Tuesday, July 29, 2008

Lien On Me: Texas Lien Laws

One of the best tools a contractor has to ensure payment on a construction project is the lien. Filing liens may seem like a technical, burdensome legal process, but with a little forethought and by having the right procedures in place, it can be an efficient way to avoid litigation down the road.

The Texas Property Code establishes the requirements for filing mechanic’s lien, contractor’s lien, or materialman’s liens. According to the Code, a person has a lien if (1) the person labors, specially fabricates materials, or furnishes labor or materials for construction or repair of a house, building, improvement, levee, or railroad, and (2) the person labors, specially fabricates the material, or furnishes the labor or materials pursuant to a contract with the owner, owner’s agent, contractor, or subcontractor. In short, if you’ve built or improved a structure, there’s a good chance you can protect your interests with a lien.

The lien extends to the building, house, fixtures, and improvements, and it secures payment for the labor or material furnished. It also secures payment for specially fabricated materials even if they haven’t been delivered.

One of the biggest issues with liens involves properly perfecting them. If your lien is not properly perfected, then you’re probably not going to be able to take advantage of its protections. Even worse, if you file a lien without complying with the statutory requirement, you could face a hefty penalty.

To perfect a lien in Texas, you must file a "lien affidavit" with the county clerk of the county of the to-be-liened property not later than the 15th day of the fourth calendar month after the day the indebtedness accrues. The lien affidavit is fairly simple, but there are a few things that the Texas Property Code requires such as a general description of the work performed and materials furnished (if the claimant did not contract with the owner, this must include a statement of each month in which the work was done or materials furnished for which payment is sought), a description of the property to be liened, the name and last known address of the owner, and a statement identifying when notice of the claim was sent to the owner and how it was sent. You can see all the requirements of the lien affidavit here.

The rules are slightly different for subcontractors that want to place a lien on property. Subcontractors must still file the lien affidavit, but they must also give the original contractor (who contracted with the owner) written notice of the unpaid balance not later than the 15th day of the second month following each month in which all or part of the labor or materials was provided. The owner must be given this notice by the 15th day of the third month.

For subcontractors, the best practice is to send out a notice every month to both the general contractor and owner after payment is late. Make this a regular practice of your billing department. What happens too often is that the sub simply waits and waits for payment. Several months pass and by the time they realize they are not getting paid, it’s too late to file a lien – the notices were not timely sent. If the timing requirements are not satisfied, a lien cannot be filed. This is a rule that simply cannot be bent, and the penalties in Texas for wrongfully filing a lien can be up to $10,000.

Mechanic's liens or materialman's liens on residential construction/homesteads have a few more technical requirements, which will be discussed in future posts.

The key for any contractor seeking to protect its interests via lien is proper perfection. With a little advance planning and good billing practices, you can add this powerful remedy to your toolbox.

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