GETTING TEXAS CONTRACTORS PAID ON SLOW PROJECTS

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