The following changes affect both commercial and residential construction:
New Requirements For Mechanic's Lien Affidavits.
The requirements for perfecting a Mechanic's Lien Affidavit have been changed. There are four new requirements that must be added to all Mechanic's Lien Affidavits, whether the lien affects residential or commercial construction. In addition to the items previously required to be stated in the lien affidavit, the lien affidavit must now contain the following:
a. The last known address of (1) the owner of the property, (2) the original contractor, and (3) the person with whom the claimant contracted.
b. The claimant's (1) physical address, and if different, (2) its mailing address, too.
c. Any claimant other than a original contractor must state the month or all months in which the work was performed or the material was delivered. The amendment does not go so far as to require that the claimant state the dollar amount of his claim that was provided to the project in each given month but the total needs to be stated. We recommend that you state separate totals for each month.
d. Any claimant other than an original contractor must identify the dates on which notice of claim was sent (1) to the owner and (2) to the original contractor, and it must state (3) the method by which the notice was sent (i.e. hand delivery, federal express, certified mail, return receipt requested).
b. The claimant's (1) physical address, and if different, (2) its mailing address, too.
c. Any claimant other than a original contractor must state the month or all months in which the work was performed or the material was delivered. The amendment does not go so far as to require that the claimant state the dollar amount of his claim that was provided to the project in each given month but the total needs to be stated. We recommend that you state separate totals for each month.
d. Any claimant other than an original contractor must identify the dates on which notice of claim was sent (1) to the owner and (2) to the original contractor, and it must state (3) the method by which the notice was sent (i.e. hand delivery, federal express, certified mail, return receipt requested).
This additional information in the lien affidavit should enable both owners and courts to more readily determine the validity of liens filed against property. These new requirements are directly related to the new summary court proceedings discussed below.
Deadline Shortened for Sending Copy of Lien Affidavit to Owner.
The time requirement for sending a copy of the lien affidavit to the owner has been changed. Under the old law a claimant had to send a copy of the lien affidavit to the owner and the original contractor no later than the 10th business day after the lien is filed of record, or if earlier, on the date the statute requires the affidavit to be filed. Claimants are now required to send a copy of the lien affidavit to the owner and original contractor no later than ONE business day after the lien affidavit is filed. This will provide all recipients of the notice with more timely information but does not provide much leeway for the claimant. Since there is no requirement that the notice be mailed out after the lien affidavit is filed, you should now consider mailing the lien affidavit to the owner and/or original contractor on the same day that the lien affidavit is filed.
All Bills Paid Affidavits.
Certain of the changes to the All Bills Paid Affidavits that are optional on commercial properties are mandatory on residential projects. See the Final Bills Paid Affidavit Section later in this article.
This section of the Code has been significantly changed and should be carefully studied. The new language requires persons seeking payment for labor and material furnished to a construction project, whether commercial or residential, to also furnish an affidavit stating that all bills have been paid. In the event that there are certain bills which have not been paid, the person giving the affidavit is required to disclose the amount of each unpaid bill and the name of the person to whom the bill is owed. In addition, the affiant must state the address and telephone number, if known, of each person to whom a bill is owed.
The Legislature attempted to recognize the reality of the construction industry in which contractors use the proceeds of a progress payment to pay bills incurred since the date of the last payment. Under those circumstances, the contractor receiving payment can be required to make an express representation that the money will be used for paying those current obligations.
When the All Bills Paid Affidavit includes a lien waiver and payment is not made in current funds, the new language will authorize the affiant to condition its lien waiver on receipt of actual payment. In addition, the affidavit may contain an indemnification by the affiant for any loss or expense resulting from false or incorrect information in the affidavit.
The new language also makes the person signing the affidavit personally liable for any false or incorrect information. The statute further states that a person convicted of violating this section shall be punishable by a fine not to exceed $4,000.00 or confinement in jail for a term not to exceed one year, or both. A person convicted under this section will not be allowed to receive community supervision for the offense.
New Procedure to Remove Invalid or Unenforceable Liens.
The Legislature also attempted to provide owners of property with a faster means of clearing title to their property when disputed liens are filed against their property. For example, when a contractor defaults and several subcontractors file lien claims, often one or more of the liens are not valid. While the old law provided that an owner could bond around those liens, owners were clamoring for an alternative method to clear title so that the owner could sell or borrow money against the property. This new summary proceeding is applicable to claims arising from both commercial and residential projects.
Three new sections were added to the Property Code creating this procedure, to allow owners to file an expedited motion to address the validity of liens against the owner's property. When a lien claimant has filed suit to foreclose a lien or when an owner has filed suit to declare a lien invalid or unenforceable, the owner may file a motion with the court to remove the lien. The motion is required to be verified and must state the legal and factual basis for objecting to the lien and/or the underlying claim.
The statute sets forth seven separate grounds for attacking the lien claim. Those grounds relate to whether there is a defect in the notice given or in the lien affidavit filed, whether the claimant previously released or waived the lien and whether the claimant actually trapped funds or properly perfected a claim against the statutory retainage.
The motion can be heard on as little as 21 days notice, as long as the claimant has already appeared in the proceeding for at least 21 days. The claimant does not need to file a formal response to the motion. If the motion states that the claimant failed to furnish notice of the claim as required by the Code, the burden is on the claimant to prove that its notices and lien affidavit were properly sent. The owner will have the burden of proof on all other grounds for invalidating the lien.
At the hearing, the court will take testimony to determine the validity of the lien. Any evidence admitted at the hearing may be used later in the trial of the case. The drafters anticipated that the evidence will primarily consist of affidavits and documents, but it was also presumed that the court will listen to the testimony of live witnesses, should such be necessary. The new section then directs the court to promptly determine whether the movant is entitled to have the lien removed. If the court determines that the movant is entitled to have the lien removed, the court shall enter an order removing the lien claimed in the lien affidavit. If the court determines the movant is not entitled to remove the lien, the court will deny the motion. The summary proceeding is not intended to be a final judgment as to the validity of the lien nor does it resolve all issues between the owner and the contractor. Thus, a number of legal issues are left unanswered by the new procedure.
A lien claimant who loses the preliminary hearing may still keep the lien in place until the trial on the merits by bonding around the order removing the lien. When the court enters an order removing the lien, the court must also set the amount of the bond which the claimant may elect to provide in order to stay removal of the lien. The amount of the bond must be the amount which the court determines to be a reasonable estimate of the costs and attorney's fees
which the owner will incur in the ongoing litigation. However, in no event shall the amount of the bond be set at an amount greater than the lien claim itself. If the court fails to set the amount of the bond in the order of removal, the bond shall be the amount of the lien claim. The bond must be conditioned upon the claimant's payment of any final judgment rendered against the claimant with regard to attorneys' fees and costs to the movant. If the claimant does properly and timely file the bond, the court may stay the order removing the lien. The statute also contains a number of nuances with regard to the bond and a surety's exposure under the bond that space does not allow to be addressed here. Consult with your lawyer about these issues.
The purpose of this new section is to allow an owner to clear title to this property early when an invalid lien has been asserted. Since the order cannot be appealed until there has been a trial on the merits and a final judgment is entered resolving all outstanding issues between the parties, a pretrial order invalidating a lien would not normally remove the cloud on the owner's title. However, under the new procedures, the order will be effective to remove the lien with regard to third party creditors and purchasers for value under certain circumstances. If the claimant fails to provide the bond within thirty (30) days or as ordered by the court, the owner can obtain a certified copy of the order and a certificate from the clerk stating that no bond has been filed and record those two instruments in the real property records. When that is done, the lien is removed and extinguished as to any creditor or subsequent purchaser for valuable consideration. This removes the cloud on the title at least as to subsequent creditors and purchasers who pay valuable consideration for the property. If the claimant does not furnish a bond or is unable to furnish a bond in a timely fashion, but is still able to establish the validity of his lien at the time of final judgment, the claimant may file certified copies of the judgment with the county clerk. The lien is then revived and the claimant can foreclose on the property, but the lien is not revived as to creditors or purchasers for value who obtained an interest in the property after the lien was removed but before the final judgment reviving the lien was filed.
Bonds to Release A Lien.
This amendment affects the Code section which authorizes an owner or other interested party to file a bond to release a lien claim against the owner's property. This method of allowing an owner, contractor or other interested person to clear a cloud on its title created by a disputed lien has been available for some time. However, many owners/contractors have difficulty in complying with the requirement that the bond be served on a disputed lien claimant. Many times the lien claimant either dodges service or cannot be located. The amendments address this problem by stating that the county clerk will only have to mail a copy of the bond by certified mail to the claimant, instead of actually having to serve the claimant with a copy of the bond. The lien is released from the property when the bond is filed with the county clerk, the notice is issued by the clerk and the bond and notice are filed of record. Actual service of the bond on the claimant is no longer required.
The Sham Contractor Statute:
The portion of the Texas Property Code known as the "Sham Contractor statute" was originally enacted many years ago to address the situation where owners set up wholly owned subsidiaries or affiliates to act as the contractor for a given construction project. Whether the affiliate was a sham or a legitimate entity, the original provision allowed a claimant to treat the owner and the contractor as a single entity for purposes of determining how to perfect a lien claim when the owner owned and/or controlled the contractor. The statute, however, did not deal with the situation where the contractor owned and/or controlled the owner. The new amendments simply provide that when the contractor owns and/or controls the owner, they will be deemed the same entity for purposes of Chapter 53 of the Texas Property Code. In other words, a claimant who contracts with a contractor in that situation will be deemed to have contracted with the owner for purposes of determining the types of notices the claimant must furnish and the steps the claimant must take in order to perfect a valid lien or bond claim.
Cost Plus Fee Contracts --- Fee is not Trust Funds.
The Legislature added a section to the trust fund statute further defining trust funds. If an owner and a contractor enter into a cost plus a reasonable fee contract, the fee to be paid to the contractor is not considered to be trust funds. This will give contractors greater latitude with regard to the "fee" portion of their contract proceeds.