Deadline Shortened to Send the Notice and File the Mechanic's Lien Affidavit on a Residence.
To perfect a lien on residential property a lien claimant must furnish written notice to the owner and original contractor. In order to provide owners with this information sooner, the notice requirement on residential projects was reduced by one month. The notice must be given no later than the 15th day of the second month after EACHmonth in which the unpaid work was furnished.
The time requirements for filing a Mechanic's Lien Affidavit have also been shortened. For liens arising from a residential construction project, the lien affidavit itself must be filed no later than the 15th day of the 3rd calendar month after the date the indebtedness accrues. This amendment shortens the time for filing the lien affidavit by one month. These two sections do not affect the time for filing a lien affidavit on a commercial project.
Deadline Shortened to File Suit to Foreclose Residential Lien.
The limitations period for bringing suit to foreclose a lien arising from a residential project has been shortened to the first anniversary of the date the lien affidavit is filed. The statutes of limitation on other causes of action which the claimant may have are not affected. The limitations period only applies to the suit to foreclose the lien.
What is a Residence?
The Legislature added a new subchapter to the Property Code dealing with contracts and claims regarding residential projects. The new subchapter K applies only to residential contracts. For purposes of this subchapter, the Code defines residence to mean a one to four unit house or residential structure used for residential purposes which is owned by one or more adult persons and which is actually used or intended to be used as a dwelling by one or more of those owners. The legislative analysis reflects that the definition includes a situation where an individual owner uses one unit as a dwelling and intends to lease or rent the remaining (three or less) units. This definition includes a family homestead as well as second homes, vacation homes or replacement homesteads. The legislative bill analysis states that the definition of a residence does not include a situation where an individual is building a residential structure for investment purposes such as resale or rental property. For multi unit structures, if all of the units are intended for lease or resale, the structure is not a residence for purposes of this chapter of the Property Code.
The Code defines a "residential construction project" as a project for the construction or repair of a new or existing residence, including improvements appurtenant to the residence as provided by a residential construction contract. For those familiar with the requirement for a notice of contractual retainage agreement in the old statute, the new legislation does away with that requirement.
The New Disclosure Statement.
The Legislature found that many consumers were not aware of the risks and protections provided to them by the mechanic's lien statutes. Therefore, one of the most important features of the new legislation is the requirement that those who contract with a homeowner and those who lend money for the construction of residential property must provide significant information in the form of a Disclosure Statement to owners about their rights and responsibilities. The new section requires an original contractor to furnish the Disclosure Statement to the owner before executing a contract for the construction of improvements to the property. The Disclosure Statement is required in all situations where an original contractor enters into a residential construction contract. A lender who lends money for the construction must also provide the Disclosure Statement to the owner. In order to insure that the homeowner receives the disclosures early on in the process, the new section requires a lender to provide the Disclosure Statement to the owner with the closing documents or in a separate document in advance of the closing.
The Legislature has provided the text of the Disclosure Statement in the statute itself and the statute requires that it read substantially similar to the actual wording set forth in the statute. The Disclosure Statement summarizes an owner's significant rights and risks with regard to many issues, including selecting a contractor, entering into the contract, retainage, monitoring the work, monitoring payments to the contractor and dealing with claims made by subcontractors and suppliers.
The new section also requires an original contractor to give the homeowner a list of all subcontractors and suppliers that the contractor intends to use on the project and obligates the contractor to update that information not later than the 15th day after a subcontractor/supplier is added or deleted. The list must contain the name, address and telephone number of each subcontractor and supplier. This list must be furnished by the contractor before the commencement of construction and must be updated during construction.
Original Contractor to Provide Periodic Statement.
Another totally new section to the statute requires that an original contractor provide a signed Periodic Statement to the homeowner for each payment request. Each Periodic Statement must be delivered to the owner and must list all bills and expenses that will be paid by the contractor out of the payment. The owner should be able to take the list of bills which the contractor represents will be paid, along with the list of subcontractors provided by the contractor, and determine whether the contractor is paying his subcontractors and if they are being paid timely. This should help avoid those situations in the past where the owner had no idea which subcontractors were owed money and who might file a lien against his property.
If an owner is financing construction through a lender and the lender advances loan proceeds directly to the contractor, the lender must:
- obtain from the original contractor the signed Periodic Statement that covers the funds for which the original contractor is requesting payment; and
- provide to the owner a statement of funds disbursed by the lender since the last statement was provided to the owner.
The lender must provide the owner with copies of the lender's Disbursement Statement and the Disbursement Statement from the contractor before the lender disburses the funds
to the original contractor, although as a practical matter, most lenders require owners to approve the contractor's payment request prior to loan advances. The lender is not responsible for the accuracy of the information contained in the Periodic statement from the original contractor.
The statute provides that a person who intentionally, knowingly or recklessly provides false or misleading information in a Disbursement Statement can be found guilty of a misdemeanor and subject to a fine of up to $4,000.00 and/or confinement in jail for a term not to exceed one year, or both. A person may not receive community supervision for the offense.
Final Bills-Paid Affidavit Required.
The new section also requires, as a condition to final payment under a residential construction contract, that an original contractor must provide the owner with a final Bills Paid Affidavit. The affidavit must state that the original contractor has paid each person in full for all labor and material. If the original contractor has not paid each person, then he must state the amount owed and the name, address and telephone number of each person to whom a payment is owed. Also, a person selling real property on which a structure of not more than four units is constructed, must provide a Bills Paid Affidavit as a condition of sale of the property.
A person who intentionally, knowingly or recklessly makes a false or misleading statement in the affidavit can be found guilty of a misdemeanor and subject to a fine of up to $4,000.00 and/or confinement in jail for a term not to exceed one year, or both. A person may not receive community supervision for the offense. Further, the person signing the affidavit is personally liable for any loss or damage resulting from any false or incorrect information in the affidavit.
The Trust Fund Statute:
The Legislature made a couple of changes to the Trust Fund Statute. First, it added a section to the definition of trust funds by stating that if a contractor and property owner have entered into a written construction contract which provides for payment by the owner to the contractor of the cost of construction plus a reasonable fee, the fee paid to the contractor is not considered to be trust funds. However, the major change to the Trust Fund Statute is the addition of a new section which requires contractors on residential projects to maintain accurate records of payments received from or on behalf of homeowners and to keep homeowner funds in one or more trust accounts that are segregated from the contractor's other funds.
The new statute requires any contractor who enters into either a written construction contract with an owner for improvements to a homestead in an amount exceeding $5,000.00 to deposit all contract proceeds into a special trust account. The contractor may set up only one account; however, all payments received from all homeowners will have to go into that account and the contractor must segregate those payments from his own money and must maintain accurate records reflecting segregation of those funds.
The trust account requirement applies to home builders, contractors, specialty contractors and subcontractors who deal directly with the owner. The statute has been interpreted to exclude from the trust account requirement suppliers who simply furnish material to an owner but do not contract to construct improvements.
A contractor who is required to set up the trust account must provide information reflecting: (1) the source and amount of funds in the account, (2) the date of the deposit, (3) the dates and the amounts of each disbursement from the account, (4) the persons to whom the funds were disbursed; and (5) the current balance of the account.
In addition, the contractor must maintain an account record for each construction project which specifies the direct costs and indirect costs charged to the owner. The contractor must also retain all invoices and other supporting documentation relating to funds that were disbursed from the construction account. The contractor must insure that all documents reflecting deposits and disbursements reflect the account number or other information that provides a direct connection between the documentation and the account. All records required to be kept must be kept for at least one year after the work is completed. The statute states that a trustee who fails to establish or maintain a construction account in violation of the Trust Fund Statute commits a Class A misdemeanor.
Under the prior Trust Fund Statute, a misapplication of trust funds was not a felony unless the trustee misapplied the funds with the intent to defraud. However, under the new provisions, if a trustees misapplies trust funds and has failed to set up and maintain a special trust account, the trustee is deemed to have acted with intent to defraud. Failure to set up the trust account is a Class A misdemeanor and may result in the misapplication of funds being treated as a felony offense. In addition, a trustee that gives a false Bills Paid Affidavit will be deemed to have acted with intent to defraud if he misapplies the trust funds paid in reliance on the false affidavit.
These sweeping changes will affect most participants in the construction industry. The amendments may require changes to your documents, procedures and to your method of monitoring accounts. You should review the changes carefully with your lawyer to determine how they will affect your business.