With the COVID-19 recession clouds gathering on the horizon, understanding your lien rights is more important than ever. Unfortunately, Texas’ mechanic’s and materialman’s liens create a minefield of procedural and substantive requirements. Among the most commonly detonated mines are confusion over who is an “original contractor”, missing notice and filing deadlines, and failing to properly identify the property being liened.
Common Mistake #1: Confusing Original Contractor and General Contractor
An original contractor is not always synonymous with a general contractor, at least not in Texas. An original contractor is defined in the Texas mechanic’s lien statute as “a person contracting with an owner either directly or through the owner’s agent.” This encompasses any contractor who enters into a contract with a project owner, not just the general contractor. Depending on the size or complexity of a project, there may be more than one “original contractor”. As the Texas mechanic’s lien statute contains different deadlines for original contractors, subcontractors, and sub-subcontractors to provide written notice, understanding whether you are an “original contractor” or something else is vitally important.
Common Mistake #2: Wrong Notice, Untimely Notice
One of the more common mistakes under Texas lien laws is the subcontractor’s failure to send proper or timely notice. Both are imperative. The written notice requirements under the Texas mechanic’s lien statute are strict and severe; failing to adhere to them can result in your lien being invalid.
Texas law differentiates between subcontractors who perform work on commercial and residential projects and then again between first and second tier subcontractors. Different deadlines for sending written notice apply to each category. When determining whether notice of non-payment is valid, the first step should be to determine whether the project is defined as “non-residential” or “residential”.
The next step should be determining whether the proper notices have been provided to all the necessary persons. Subcontractors must send a so-called “fund trapping notice” to the owner and the “original contractor”, putting them on notice of the unpaid claim. As the name indicates, the notice is intended to notify the owner that it should “trap” funds owed to the subcontractor rather than pay those funds to the original contractor. Many times, subcontractors send notice to either the owner or general contractor, but not both.
The subcontractor must also send the fund trapping notice within specific, but confusingly worded, time frames contained in the lien law.
- For first-tier subcontractors, fund trapping notices must be mailed no later than the 15th day of the third month following each month in which labor was performed or material delivered (“third month notice”).
- For second-tier subcontractors, in addition to sending a third month notice, fund trapping letters must be sent to the original contractor not later than the 15th day of the second month following each month in which the second-tier subcontractor supplied labor or materials (“second month notice”).
Subcontractors frequently fail to identify their tier correctly and then fail to send the fund trapping notice in a timely fashion, compromising the validity of a later filed lien affidavit.
Common Mistake #3: Inaccurate Property Information
Another common mistake in preparing a lien affidavit is failing to provide a complete and accurate description of the property. It is also, somewhat surprisingly, one of the more complicated tasks to perform correctly. Since liens are filed with the county clerk and attached to the property records, having a complete and accurate description of the property is imperative if the clerk is to perform his/her job properly.
Unfortunately, most contracts define the property by using the project owner, project name and sometimes, the street address. The project owner is not always the same property owner. When the person hiring the construction contractor is a tenant, not the owner of the property, the contractor may be limited on what it may lien. And a street address or a general description of the location by defining landmarks such as the old oak tree or street intersections is not a legal description.
The liened property must be accurately described with a full legal description in the lien affidavit. Those legal descriptions are available by searching the property records in the county where in which the property is located. A county’s appraisal district website usually will only have a brief legal description, which may not be complete or even accurate.
Common Mistake #4: Untimely Filing of Lien Affidavit
As with the deadlines for sending fund trapping notices, the deadlines for filing a lien affidavit in Texas are unforgiving. Those deadlines, whether for notices or lien affidavits, vary depending on the characterization of the project and whether an original contractor or subcontractor is filing the affidavit.
For commercial property, the deadline for filing a mechanic’s lien is the 15th day of the fourth month after the month in which indebtedness accrues. For residential property the deadline is the 15th day of the third month after the month in which indebtedness accrues.
For an original contractor (discussed in Common Mistake #1), indebtedness accrues on the last day of the month in which the contract is terminated, completed, settled, or abandoned. For a subcontractor or sub-subcontractor, indebtedness accrues on the last day in which the subcontractor or sub-subcontractor performed labor or supplied material on the project. If an original contractor, subcontractor, or sub-subcontractor is filing a lien on contractual retainage (another requirement of the Texas mechanic’s lien statute), additional deadlines and obligations apply.
Common Mistake #5: More Late Notices
Even if the notice and affidavit deadlines are met, Texas lien laws contain another trap for the unwary: The original contractor must send written notice with a copy of the lien affidavit to the owner no later than the 5th day after the lien was filed. A subcontractor or sub-subcontractor must send written notice with a copy of the lien affidavit to the owner and the original contractor no later than the 5th day after the lien has been filed.
Perfecting a lien for unpaid amounts is an important right for contractors and designers, and one that can be waived easily by making any one of these common mistakes. Our attorneys in Dallas and Austin are available to help you understand and assert your lien or other legal rights. Contact us at info@gstexlaw.com with any questions you may have.
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