PART 1: The Mechanic’s Lien
At the construction management meeting, the General Contractor tells everyone that the project is behind schedule, and penalty provisions may apply. Translation: you will not get paid on time.
The bane of every person in the contracting business is getting paid. That simple task – payment for labor and services rendered – requires contractors, subs, and owners to navigate constant and tedious paperwork. The stress is built into how the process works. First, the contractor must determine where it is in the scope of work. Is the work done? Has the contractor been terminated, or is it merely a delay in payment? Does the General / Owner have a right to delay payment – as in the case of an unsigned work order, etc. - or require an outside party to rectify problems with the work rendered by the contractor. Next, the contractor must determine if there is a legal basis to preserve the right to payment. If there is a legal basis, is a lien appropriate, and should you file for arbitration?
The first discussion in this series is the Mechanic and Materialman’s Lien – or the M & M Lien.
Mechanic and Materialman’s Lien- Getting Security for Your Work
Contractors who provide labor and materials to worksites in Texas are entitled to powerful lien positions that provide security for their work. The Texas Constitution and Texas Property Code both provide remedies for a subcontractor not being paid for their work. Because contractors and materialman’s work occurs prior to mortgage deeds of trust, even small debts hold great leverage over owners and general contractors. However, failure to know how to perfect these liens leaves many contractors out in the cold.
Under Texas law there are three categories of contractors entitled to liens. The first step any contractor needs to take is to determine where they fit in the chain.
Original Contractor - An original contractor, or “General Contractor,” is a person contracting directly with a property owner. This also includes anyone acting as an agent for a property owner (such as an employee or someone acting on behalf of the property owner). Any trade or contractor can be considered an Original Contractor as long as they are directly contracting with the owner of the property.
A subcontractor is a person who furnishes labor or materials to fulfill an obligation to an Original Contractor.
First Tier Subcontractors - There are two tiers of contractors under Texas law. A First Tier subcontractor is a subcontractor that has an agreement with an Original Contractor but not the Property Owner. An electrician hired by the General Contractor is an easy example of this.
Second Tier Subcontractors -A Second Tier subcontractor does not have an agreement directly with either the General Contractor or the Property Owner, such as a material supplier or tradesman hired by a First Tier Subcontractor. An easy example of this is a subcontractor hired by the concrete subcontractor to place the reinforcement for the foundation.
All three categories are entitled to liens under Texas Law, however, the law requires that additional notices be sent by First and Second Tier subcontractors.
PERFECTING A LIEN - NOTICE
Original Contractor – An Original Contractor may file a Mechanic’s and Materialman’s lien without sending any prior notice to the Property Owner. This is because there is a direct contract between the property owner and the Original Contractor. However, once a lien is filed, an Original Contractor must send notice of the filing of the lien within a very small window.
First Tier Subcontractor – A First Tier subcontractor is required to send what is known as the “third month notice” or the “fund trapping” notice before a lien can be perfected. The letter must be sent by certified mail, return receipt requested, to both the Property Owner and the Original Contractor related to unpaid amounts. The letter must be send by the 15th day of the third calendar month “following each month in which labor was performed or material delivered.”
A copy of the invoice or billing statement is considered sufficient under the Property Code, however, it is recommended that the owner be specifically notified of the terms of the Texas Property Code 53.056 which provides if the claim remains unpaid the Property Owner may be personally liable and the property is subject to a lien unless the Property owner withholds payments from the Original Contractor for payment of the claim or the claim is otherwise paid or settled.
The sooner a “funds trapping” notice is received by a property owner, the more the Property Owner will be personally liable if they do not withhold such funds from the Original Contractor.
Second Tier Subcontractor – A Second Tier subcontractor is required to send one additional notice known as the “second month notice” to the Original Contractor no later than the 15th day of the second month “following each month in which the Second Tier subcontractor has supplied labor or materials.” This notice puts the Original Contractor on notice of the Second Tier subcontractor’s claim.
Additionally, the same “third month” and “fund trapping notice” as stated above for First Tier subcontractors must still be sent by the 15th day of the third calendar month to the Original Contractor and Property Owner.
Failure to send any notice as required under Texas law will mean that a subcontractor will lose the ability to perfect a lien and gain security for the work performed.
FILING THE LIEN
Once any required notice has been sent as described above, the next step is to perfect a Mechanic’s and Materialman’s Lien. To properly perfect the Lien a claimant must file an Affidavit in the property records of the county where the property is located “not later than the 15th day of the fourth calendar month after: the month in which the original contract was material breach or terminated, or last day of the month in which the original contract is completed, finally settled, or abandoned.”
Once a claimant perfects their lien, a copy of the affidavit must be sent certified or registered mail to the Property Owner and Original Contractor (if applicable) at their last known address no later than five (5) calendar days after the affidavit is filed in the property records. It is generally recommended that notice of the lien be sent on the same day so that the lien is filed.
The above deadlines refer to commercial projects and the deadlines related to residential properties are generally shortened. It is important that if you perform work on a property, either as a general contractor or subcontractor, that you get security for your work. While the steps to perfecting a lien are not difficult, the deadlines are unforgiving.
Do not delay. If you are faced with a property owner or General Contractor who refuses to pay for services rendered, we hope you will speak with a construction lawyer at the Vethan Law Firm, PC to help secure your rights.
To learn more about how the Vethan Law Firm, P.C. can assist you visit us at www.texasbizlaw.com