Anthony LaPlaca | Seyfarth Shaw LLP | February 15, 2016
Introduction
Commercial owners and developers do not appreciate encumbrances on their property. In Texas, construction contracts reflect this self-evident phenomenon. Virtually every Lone Star contractor owes its client a duty to discharge subcontractor liens filed against the land, building or materials that make up the construction project. Some contracts may even authorise the owner to remove the liens without notice to the contractor and offset costs incurred against the remaining balance owed. Fending off subcontractor liens can be a costly and unpleasant (albeit mandatory) exercise for general counsel.
In Texas’s ever-growing construction market, understanding the lien law can go a long way towards eliminating defective liens and mitigating the effects of those which substantially comply with statutory requirements. When defending a lien, the first step is to scrutinise the timing and contents of the lien filing for defects with the compulsory statutory requirements of the Texas Property Code. This update provides preliminary insight into some of the more common legal defences to statutory mechanic’s liens. Having identified the possible statutory defences, general counsel must determine the best method for discharging the lien; this update thus goes on to discuss the three options available to general contractors facing subcontractor liens.
Strict compliance with Texas Property Code
In Texas, anyone that furnishes labour or materials for construction or improvement of a building has an inchoate (ie, automatic) lien on the property.(1) However, in order to enforce its lien, the claimant must strictly comply with the statutory requirements of the Property Code.(2) The Texas Supreme Court has repeatedly held that:
“Because a subcontractor is a derivative claimant and, unlike a general contractor, has no constitutional, common law, or contractual lien on the property of the owner, a subcontractor’s lien rights are totally dependent on compliance with the statutes authorizing the lien.“(3)
Failure to comply with statutory requirements could warrant the permanent dismissal or partial exclusion of the lien, depending on whether the defect causes material prejudice to the general contractor or the property owner.(4) Put differently, what may seem like a mere technicality may be fatal to a subcontractor lien, regardless of the amount or character of the underlying work performed. The requirements discussed below are imperative to the subcontractor claimant enforcing its lien rights.
Possible defects with lien filing
Lack of prior notice to contractor or owner
Before filing any mechanic’s lien, subcontractors must give written notice of the unpaid balance of the subcontract to both the original contractor and the property owner.(5) Notably, notice of indebtedness can be relatively informal; the statute provides that a “copy of the statement or billing in the usual and customary form is sufficient as notice”.(6) Notice is valid only if it is sent by registered or certified mail to the contractor/owner’s last known business address.(7) Notice is deemed to have been delivered as soon as it is deposited in the mail, as long as it is addressed to the proper entities.(8)
The notice requirement affords the original contractor the opportunity to pay amounts claimed in order to avoid a lien filing. The timing of the notice is extremely important; the subcontractor must send written notice of the subcontract balance no later than the 15th day of the second month following the month in which the labour was performed or materials delivered.(9) However, notice to the owner must be dispatched by the 15th day of the third month after the work was performed or materials delivered.(10) For example, if a supplier delivers materials to the work site in January, the supplier cannot lien for those materials unless it:
- notifies the contractor of the disputed subcontract balance by March 15 and;
- notifies the owner of the outstanding subcontract balance by April 15.
Failure to ‘perfect’ lien in timely manner
The notice requirements above are only preliminary stages to filing a mechanic’s lien. The subcontractor must also ‘perfect’ the lien by filing a verified lien affidavit with the clerk for the Texas county in which the construction property is located.(11) Any subcontractor claiming a lien must file an affidavit of lien with the clerk “not later than the 15th day of the fourth calendar month after the day on which the indebtedness accrues”.(12)
The language regarding perfection of the lien differs significantly from the language regarding the notice requirements. In particular, the statute provides that indebtedness accrues to a subcontractor on the last day of the month in which the labour was performed or materials delivered.(13) Accordingly, if a subcontractor wishes to lien for materials delivered to the work site during January, it must file a lien affidavit with the clerk no later than May 15 2016.(14) Thus, the ordinary sequence of events for notice and perfection of a subcontractor lien is as follows:
- January – the subcontractor performs labour or delivers materials to the project.
- March 15 – deadline for the subcontractor to notify the original contractor of the unpaid subcontract balance.
- April 15 – the deadline for subcontractor to notify the property owner of the unpaid subcontract balance.
- May 15 – deadline for the subcontractor to file a lien affidavit with clerk for the county where the project is located.
A subcontractor’s failure to comply with any or all of these deadlines may raise a valid ground for the contractor to invalidate the lien and, if applicable, recover its costs and fees from the subcontractor.
Non-compliant lien affidavit
Even where a subcontractor fulfils its obligations to give notice and file the lien in a timely manner, contractors may have a good defence that the lien affidavit contains material defects under the statute. Every lien affidavit filed in Texas must meet eight specific requirements established in Section 53.054 of the Property Code. This provision mandates that the lien affidavit be signed by an authorised agent of a company claiming the lien and substantially contain:
- a sworn statement of the amount of the claim;
- the name and last known address of the owner or reputed owner;
- 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 each month in which the work was done and materials furnished for which payment is requested;
- the name and last known address of the person by which the claimant was employed or to which the claimant furnished the materials or labour;
- the name and last known address of the original contractor;
- a description, legally sufficient for identification, of the property sought to be charged with the lien;
- the claimant’s name, mailing address and, if different, physical address; and
- for a claimant other than an original contactor, a statement identifying the date on which each notice of the claim was sent to the owner and the method by which the notice was sent.(15)
Texas courts will invalidate any lien filing that fails to “substantially comply” with the requirements stated above. If information is missing from the lien affidavit and the deficiencies cause significant prejudice to the owner or contractor, a court of law will treat the lien as if it never existed. Texas courts have found prejudice to exist based on various omissions from the lien affidavit.(16) When reviewing any lien affidavit, contractors should identify all omissions or irregularities and notify subcontractors in writing that the liens should be immediately withdrawn from the land records.
Lack of post-filing notice to contractor or owner
Once it has filed a lien affidavit, the subcontractor has five calendar days to notify the original contractor and owner that a lien has been filed.(17) As with pre-filing notice, post-filing notice is deemed to be delivered as soon as it is placed in registered or certified mail by the subcontractor. If either the owner or the contractor does not receive notice of a lien filing within five days, it may have a good defence that the lien should be removed.
Limitations period for bringing lawsuit to foreclose on lien
Filing a proper, verified lien affidavit with the clerk completes the process of ‘perfecting’ the lien. However, in order to exercise its rights against the property, the subcontractor must file a legal action to foreclose on the lien. The deadline for filing such an action is the later of:
- two calendar years after the last date on which the claimant could have filed its lien affidavit; and
- one calendar year after completion, termination or abandonment of the work under the prime contract between the owner and contractor.(18)
If the subcontractor fails to file an action to enforce the lien within the time prescribed by statute, the lien is invalid as a matter of law.
Process for removing or invalidating liens
This section discusses the three principal methods of discharging subcontractor liens: negotiated releases, statutory lien bonds and petitions to remove invalid liens.
Negotiated release
Subcontractor liens are valid only to the extent that funds are due and owing to the claimant. The amount of a lien claimed by a subcontractor may not exceed the proportional amount of the subcontract price reflecting the work performed, less the sum of previous payments received by the subcontractor.(19) Therefore, to the extent that a subcontractor has already been paid or has agreed to an accord or settlement of claims, the original contractor should demand that any lien that includes this amount be released by the claimant.(20) However, any lien will remain in effect until the releases are filed with the clerk for the appropriate county.(21)
The form of the release filed with the clerk is also prescribed by statute. In particular, the release must meet all of the requirements of Section 53.284 of the Property Code. This statute provides that “a waiver and release given by a claimant or potential claimant is unenforceable unless it substantially complies with the applicable form described by Subsections (b)-(e)”.(22) The specific form of the release depends on two factors:
- whether the release is an unconditional release or a partial release and;
- whether the release relates to a progress payment or a final payment.
Verified petition and summary motion to invalid lien
In the event that the parties are unable to negotiate a settlement of the lien claim, the contractor may be able to invalidate the lien filing by initiating a court action under Section 52.150 of the Property Code. This statute authorises a cause of action to seek judicial declaratory relief that the lien filing is invalid based on seven possible theories. The available grounds for objecting to the lien are limited to situations in which:
- notice of claim was not timely or properly furnished to the owner or original contractor;
- an affidavit claiming a lien failed to comply with Section 53.054 of the Property Code or was not filed as required by Section 53.052;
- post-filing notice of the affidavit was not furnished to the owner or original contractor as required by Section 53.055;
- the deadlines for perfecting a lien claim for retainage expired and the owner complied with Section 53.101 and paid the retainage and all other funds owed to the original contractor before:
- the claimant perfected the lien claim; and
- the owner received a notice of the claim as required by this chapter;
- all funds subject to the notice of a claim to the owner and a notice regarding the retainage were deposited in the registry of the court and the owner has no additional liability to the claimant;
- the lien was filed on property subject to a claim of homestead and failed to meet special requirements set forth in Section 53.254; or
- the claimant executed a valid and enforceable waiver or release of the claim or lien claimed in the affidavit.(23)
Any petition to invalidate the lien must be accompanied by a sworn affidavit attesting to the facts supporting the removal of the lien. The contractor must serve copies of the petition and affidavit on the lien claimant at least 21 calendar days before any hearing on the petition.(24) The court will then schedule an evidentiary hearing to determine the validity of the lien. At the hearing, the court will enter an order:
- upholding the lien;
- declaring the lien invalid; or
- directing the contractor to enter a bond in lieu of the lien, so that further evidence may be offered to decide the validity of the claim.
Notably, contractors may recover court costs and attorneys’ fees incurred as a result of any improper lien filing by a subcontractor.(25)
Statutory lien bond
Once the memorandum of mechanic’s lien is filed by a claimant, the contractor has the option to file a bond with the clerk.(26) While the contractor is usually still required to defend the lien claim, the bond effectively takes the place of the lien and frees the property and the project from any encumbrances.(27)The bond must meet the following requirements:
- describe the property on which the liens are claimed;
- refer to each lien claimed in a manner sufficient to identify it;
- be in an amount that is double the amount of the liens referred to in the bond, unless the total amount claimed in the liens exceeds $40,000, in which case the bond must be in an amount that is the greater of 1.5 times the amount of the liens or the sum of $40,000 and the amount of the liens;
- be payable to the parties claiming the liens;
- be executed by:
- the party filing the bond as principal; and
- a corporate surety authorised and admitted to do business under Texas law and licensed in Texas to execute the bond as surety; and
- be conditioned substantially that the principal and sureties will pay to the named obligees or to their assignees the amount that the named obligees would have been entitled to recover if their claims had been proved to be valid and enforceable liens on the property.(28)
Once the contractor files the lien bond, the clerk will issue written notice of the bond and copies of the bond to the lien claimant, and will record the bond and notice in the appropriate land records. The burden then shifts to the lien claimant to institute an action against the bond to enforce its claim for unpaid subcontract amounts. This action must be filed no later than one year after the date on which the notice of bond is served on the claimant.(29)
Comment
The Texas legislature has imposed complicated requirements for noticing, perfecting and enforcing statutory mechanic’s liens. There are countless ways that subcontractors can go wrong when attempting to assert their lien rights. Even the most technical and innocuous misstep in the lien process can bring a claim to an abrupt and permanent end. The diligent general contractor understands the lien requirements set forth in the Texas mechanic’s lien statute, pounces on defective lien filings and is always prepared to negotiate, defend, or bond away unwanted liens in a timely fashion…