Texas Mechanic’s & Materialman’s Liens

Adapted from Feb. 2006 paper by Stanley P. Santire entitled

"Texas Mechanic’s & Materialman’s Liens: A Complex Process Just Got More Complex"

Original version published in the April 2006 issue of Construction Risk Management Library ConstructionRisk.com

Introduction: Texas provides a contractor with different types of possible liens.  These liens are contractual, constitutional, and statutory. The Texas Legislature made the latest change in 2005 with H.B. 629, incorporated into the Texas Property Code, §53.103 & §53.107.  H.B. 629 added a new element to the already complex Texas mechanic’s and materialman’s lien process.

Contractual Lien: A contractor can obtain a lien by contract or by operation of law.  An example of a contract for creating a lien is a deed of trust. For most contractors this is not viable. In the vast majority of construction situations, contractors rely on liens that come into being through the operation of law.  In Texas, the sources of such liens are the State Constitution and Chapter 53 of the Texas Property Code.

Constitutional Lien: Lien law in Texas began when Texas was still a Republic.  The Constitution of the Republic provided a lien to anyone who improved real property.  The doctrine was carried over to the Constitution of the State of Texas.  The constitutional lien is available regardless of what notices and affidavits a contractor may send or file. Therefore, it is self-executing.  Texas is the only state providing a self-executing lien for construction.  It benefits only a contractor in privity of contract with the owner; i.e. an original contractor. In other words, it is not available for subcontractors. Even for original contractors the protection is very narrow. Later came a more powerful and complex, statutory procedure for all contractors. 

Statutory Lien: Unlike the Constitutional lien, the statutory lien is a powerful tool for subcontractors as well as original contractors.  However, the statutory lien is not automatic.  Contractors must carefully follow the steps specified in Chapter 53.  These steps differ depending on the role of the contractor and the type of work done.  Every contractor doing business in the State must understand the statutory process.

Contractor Chain: The fist thing to remember about the Texas statutory filing requirements is that they depend on a contractor’s position in the contract chain.  The original contractor, often referred to as a general contractor, has a direct relationship with the owner and is therefore first in the chain.  First tier subcontractors are next in the chain. Subcontractors who have a relationship only with a subcontractor are still further down the chain. These are second and third tier contractors, cumulatively referred to as derivative contractors.

Derivative Contractors: The obligations of derivative contractors differ considerably from first tier contractors. For example, to perfect a lien the derivative contractor must provide a notice not required of first tier contractors.  In other states, the deadline for a notice is determined by the last date a subcontractor provides equipment or material.  Texas law mandates a notice for each month that equipment or material was supplied or for which payment was not made. In other words, the Texas procedure progresses through time rather than being keyed to completion. Texas law also specifies extensive minimum content requirements for notices and affidavits.

Notices: In addition to filing the affidavits, subcontractors must send two different notices.  The first notice must be sent by the 15^th of the 2^nd month in which all or part of the labor is performed or material is delivered. This notice describes any unpaid balance.  A distinction between a first tier subcontractor and a derivative contractor is the parties to whom the first notice must be sent. A first tier contractor must send the first notice to both the original contractor and the owner. A derivative contractor must send this notice only to the original contractor. Both types of subcontractor must send a second notice that has the same information as the first notice by the 15^th of the 3^rd month to the original contractor and the owner.

Affidavits: Unlike subcontractors, an original contractor does not need to send any notices to the owner to perfect a lien. However, both original contractor and subcontractors must file affidavits with the county clerk and send a copy to the owner. These affidavits must be filed by the 15^th of the 4^th month the debt accrues.  Though the deadlines for both the original and subcontractors are tied to debt accrual, an original contractor’s debt accrues at a different time than a subcontractor.  For the original contractor, debt accrues on the last day of the month following declaration of termination of the contract or completion, settlement or abandonment of the contract.  Except for specially fabricated material, indebtedness to subcontractors accrues on the last day of the month in which the subcontractor’s labor was performed or material was furnished.

Specially Fabricated: Indebtedness to subcontractors for specially fabricated material by both first tier and derivative contractors accrues (1) on the last day of the last month in which materials were delivered, (2) on the last day of the last month in which delivery of the last of the material would normally have been required at the job site, or (3) on the last day of the month of any material breach or termination of the original contract by the owner or contractor or of the subcontract under which the specially fabricated material was furnished.

Copy to Owner: A copy of the affidavit must be sent to the owner by the 5^th day after the filing.  A subcontractor must also send a copy of the affidavit to the original contractor.

Homesteads: For a contractor working on a homestead, the requirements for a lien increase dramatically. The term homestead refers to the special protection given to a place that is a home or both a home and a place of business. Texas law is very protective of a homestead. H.B. 629 expands this special treatment in that it does not apply to residential projects. A major consideration in perfecting a lien against a homestead is the requirement for a written contract with the owner and spouse.  This contract must be executed before labor or material is furnished.  It must then be filed with the county clerk. Furthermore, in addition to notice requirements as required in any construction situation, before construction begins the owner of a homestead is entitled to a disclosure agreement as well as a list of subcontractors from the original contractor. The disclosure must include statutory notice language regarding the rights and responsibilities of the owner. Furthermore, lien affidavits for a homestead must be filed one month earlier than the deadline specified for other types of projects.

Retainage & H.B. 629: In addition to the steps necessary to have a lien directly against the property for unpaid funds, Texas law specifies a process for trapping funds to cover those same unpaid monies. Up until the Texas Legislature enacted H.B. 629, the only responsibility owners had was to withhold funds as retainage.  To trap funds, subcontractors must give notice of unpaid funds to the owner and the original contractor. The deadline for this notice is the fifteenth of the third month following each month in which the claimant provided labor or delivered material. When a trapping notice is received, the owner is obligated to withhold payment to the original contractor in an amount equal to the claimed funds.

Trapping: If the trapping notice is sent after the deadline of the fifteenth of the third month, the funds are not trapped.  This is where H.B. 629 makes a difference.  According to H.B. 629, an owner must provide notice that the original contractor has been terminated or abandoned the project.  H.B. 629 also specifies the content of the notice. This notice must be sent to subcontractor that, before abandonment or termination by the original contractor, requests it and to anyone that provided notice of specially fabricated materials or notice of an unpaid account.  Failure by the owner to respond by sending the requested notice provides a lien to a requesting subcontractor even though the subcontractor does not file an affidavit if such subcontractor meets the notice requirements.

Exempt: Residential projects are exempted from H.B. 629.  Therefore, owners of residential projects do not have an obligation to send the notice required of other owners pursuant to H.B. 629.

Owner Responsibility: Through the statutory provision for retainage, Texas law places a responsibility on the owner to retain 10% of the original contract price for at least thirty days after project completion.  If an owner does not properly trap funds in response to a trapping notice or fails to meet the retainage requirement, the owner is responsible to the subcontractor regardless of what monies may have already been paid to the original contractor. H.B. 629 did not change this.

Conclusion: H.B. 629 added another step to the lien process in Texas and a new responsibility for many owners involved in a construction process. A complex situation has become more complex.

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