TEXAS MECHANIC S LIEN LAW

Transcription

1 TEXAS MECHANIC S LIEN LAW Go to: Texas Mechanics Lien Forms More Info: Section Contents Pre-lien Notice(s) Name of Notice Who Must Use This Notice When How to Serve Verified or notarized? Section Contents Texas Mechanic s Lien Who is Entitled to a Lien? When to File/Record Where to File/Record How to Serve Amount of Lien Property Subject to the Lien Furnishing Information Verified or Notarized Priorities Lien Release Bond Miscellaneous Issues 1

2 Section Contents Lawsuit to Foreclose Lien Introduction When Where to File Arbitration Need a Lawyer? General Notes Be Careful: The courts consider a mechanic s lien to be a privilege and not a right. You receive its benefits only if you strictly adhere to the state law requirements. Bottom line: miss a deadline by one day and you have lost it. Unlike other areas of the law where you can argue equities, find technical exceptions, and lawful excuses, there is no forgiveness here. In this case, knowledge is not only power, it s a necessity. In this State you will be writing down dates for at six documents: a) Third Month Notice; b) Second Month Notice; c) Notice of Contractual Retainage; d) Notice of Specially Fabricated Items; e) Mechanic s Lien; and f) lawsuit to foreclose the mechanic s lien. Write down all the deadlines in your calendar. Use a highlighter or red pen. If you have a staff, use a fail safe system by doubling up and putting it in their calendar also. This reminds you twice. The first calendar entry should be two weeks before the due date as a preliminary reminder. On the second calendar entry, do a white lie to yourself. Put the due date as one week before it is actually due as insurance in case you get busy or need legal advice. Time is money. You will waste a lot of valuable time running around and doing it at the last moment, as opposed to doing it early. Because of the complexity of these notices, it is highly recommended that you consult the chart on this website which is called: What Forms to Use and When, for a detailed description of what forms to use and their time limitations. NEW PROPOSED TEXAS MECHANICS LIEN LAW Texas is currently discussing the possibility of drastically revising its mechanic s lien law under Chapter 53 of the Property Code. This is pursuant to House Bill 3065 and Senate Bill As of yet, this law is not fully out of committee and signed by the governor. But, many 2

3 watchful experts predict it will become the law in the short foreseeable future. So keep an eye out for these changes. Some of the proposed changes are summarized as follows: Eliminating the difficult second and third month notices for subcontractors and suppliers. Instead, replacing them with a Notice of Furnishing which will be served near the beginning of the project. The Texas Secretary of State would establish, similar to Utah, North Carolina and Pennsylvania, a state registry website containing information on the project and allowing the filing of notices. As to the time deadline of filing a lien, it begins on the day in which the indebtedness accrues. This confusing definition will be replaced with the date the work under the original contract is completed or terminated. TEXAS PRELIEN NOTICES Texas requires Notices be sent out before the mechanic s lien is filed/recorded. The basic information on these notices is as follows: There are many different kinds of prelien notices in Texas. Because they vary, including their time limitations and whether the project is residential or commercial, they will described separately below. Purpose of the Notices: One of the biggest dangers to an owner is paying the general, who in turn, does not pay subs or suppliers. If this happens, the owner can pay twice if those subs later file a mechanic s lien. The purpose of the various Texas pre-lien Notices is to prevent such a result. It informs the owner of one s lien rights and that the sub/supplier has not or may not be paid. After an owner receives the Notice, he or she withholds monies unpaid to the sub/supplier from the general whether the unpaid amount under the base contract or the retention--they are in essence frozen. These monies are paid only upon settlement or if the sub fails to timely file a lien. How to Serve? All the Notices are served by certified mail. How Do They Work? The notices described above, including the Texas Notice of Specially Fabricated Items, Notice of Contractual Retainage, Third Month Notice, and the Second Month Notice are all called fund trapping notices. The reason is that if done properly, they trap money that is still in the possession of the owner and prevent it from being paid to the general contractor if there are outstanding 3

4 claims of subcontractors or suppliers. It is like having the owner hold money for your benefit. What would you rather have: a lien on the property that requires the time and expense of bringing a lawsuit to foreclose or money sitting in an account to cover your unpaid bills? These are powerful devices, but they have their limitations: they are good only if the owner still owes the general at the time he/she receives the Notice. If the owner has already paid the general, there is nothing left to hold. That is why it is important not to wait too long to serve. In the case of the Third and Second Month Notices, a long time is given to serve between two and three months. This has the effect of giving a claimant a false sense of security but watch out--the money may be gone in the meantime. This prevents the owner paying twice. A classic dilemma is when the owner pays the general but the money does not filter down to the subs and suppliers. A sub then files a mechanic s lien and requests the owner to pay twice, by remitting those funds directly to them. In Texas, unless a second or third month notice is sent, the owner has a complete offense and does not have to pay twice. The lesson is clear. Send out your notices so you can eliminate this owner defense. The best advice: serve your Texas prelien notices early. How early should that be? Recommendation: on the 30 th day after non-payment. Here is a common example. You work in February and send a standard billing on March 1st. It is now April 1 with no payment. Send out a second copy of your invoice, marked unpaid, and in the same envelope send the prelien notice (whether a third month or second month notice). Don t wait any longer. Remember, these notices have to be served no later than the 15th of the second or third month, but they can be served earlier! For example, take the second month notice. It is not a notice that is served on the second month it is served no later than the second month. These notices are sent only after non-payment. Some people are confused in thinking the notices have to go out every month, regardless of whether you have been paid. In some states, such as California, you serve prelien notices at the beginning of the job whether not you have been paid. In Texas these are like collection notices and only go out during periods of nonpayment. What about sending the second and third month notice at the beginning of the job in other words, serving them early and getting them out of the way so you do not forget? As stated above, this would not be required. It would also cause a public relations nightmare because the owner and general would be asked to trap funds before they have the obligation to pay. Does an owner typically abide by the demand to withhold funds? You bet your boots. The language in these notices is strong and states that if money is not withheld to a sub or supplier, there can be both a mechanic s lien and 4

5 holding the owner personally liable. These notices are also a prerequisite for you eventually filing a Texas mechanic s lien. As you know, this allows a lien to be placed on the owner s property and if it remains unpaid, to bringing a lawsuit to foreclose. So in Texas, the owner can be personally liable for the debt of a sub or supplier. This happens if the owner fails to withhold money due the general after receiving the Notices described above. This is a material difference from the majority of states that will not allow the owner to be personally liable only to subject the property to a lien. Putting this all together, they are like a double barrel trapping the money and holding the owner personally liable--like a Stop Notice. In some states, such as California, a subcontractor or supplier can serve the owner with a Stop Notice which freezes the funds in the hands of the construction lender or owner. Texas does not use that same phrase, but it has the same effect. Thus, once an owner receives a funds trapping notice, unless the claim is settled or released, he or she must withhold sufficient monies to take care of your claim. Unless settled or otherwise released, the money has to be held until the time expires for filing a mechanic s lien. Of course, if you file the mechanic s lien on time, the money must continue to be withheld. What about retention? There is also good news in this regard. Section of the Texas Property Code requires an owner to withhold at least 10% for 30 days after completion so there will be funds available. The following tables will help you determine the time deadlines for service of the Third and Second Month Notices: THIRD MONTH NOTICE TIME DEADLINES UNPAID LABOR OR MATERIALS FOR THIS MONTH DATE NOTICE IS SERVED January April 15 February May 15 March June 15 April July 15 May August 15 June September 15 July October 15 August November 15 September December 15 October January 15 5

6 November February 15 December March 15 Important Note: For residential projects in which the owner occupies the property (as opposed to residential work for a developer), the above time deadlines are shortened by one month. SECOND MONTH NOTICE TIME DEADLINES UNPAID LABOR OR MATERIALS FOR THIS MONTH DATE NOTICE IS SERVED January March 15 February April 15 March May 15 April June 15 May July 15 June August15 July September 15 August October 15 September November 15 October December 15 November January 15 December February 15 Important Note: For residential projects for Texas in which the owner occupies the property (as opposed to residential work for a developer), the above time deadlines are shortened by one month. As an example, assume you have performed services in April and are unpaid. This could be for services during any period in that month April 1 through 16; April 10 through 25, April 17 through 30, etc. any periods for that month. Your Three Month Notice is given on the 15 th of the third month following the month those services were performed. In summary, if the notices are properly sent and the owner retains a 10% retention, there may not be the requirement of a mechanic s lien in the first place. You will have trapped the funds which can be paid rectally to you. It also prevents a mechanic s lien from being wiped out after a construction lender forecloses on the property. Being paid directly eliminates filing the lien in the first place. 6

7 SUMMARY OF TEXAS PRELIEN NOTICES RESIDENTIAL Subs and suppliers who have a contract with the general (first tier subs--suppliers). Second Month Notice (Notice of Unpaid Balance residential) Third Month Notice (Notice of Unpaid Balance and Demand for Payment residential) Notice of Contractual Retainage (sub) Sub-subs and suppliers who have a contract with a sub (2 nd tier subs suppliers and below). Second Month Notice (Notice of Unpaid Balance residential) Third Month Notice (Notice of Unpaid Balance and Demand for Payment residential) Notice of Contractual Retainage (sub-sub) (Same rules apply to sub-sub-subs in other words, third and below tiers) Suppliers of specially fabricated items. Notice of Specially Fabricated Items Same Notices as above, depending on whether you are a first or second tier supplier Generals. No prelien Notices required SUMMARY OF TEXAS PRELIEN NOTICES COMMERCIAL Subs and suppliers who have a contract with the general (first tier subs--suppliers). Third Month Notice (Notice of Unpaid Balance and Demand for Payment-commercial) Notice of Contractual Retainage (sub) Sub-subs and suppliers who have a contract with a sub (2nd tier subs suppliers and below). Second Month Notice (Notice of Unpaid Balance-commercial) Third Month Notice (Notice of Unpaid Balance and Demand for Payment-commercial) Notice of Contractual Retainage (sub-sub) (Same rules apply to sub-sub-subs in other words third and below tiers) 7

8 Suppliers of specially fabricated items. Notice of Specially Fabricated Items Same Notices as above, depending on whether you are a first or second tier supplier Generals. No prelien Notices required TEXAS RESIDENTIAL PROJECTS Prelien Notices for All Subcontractors and Suppliers (1 st, 2 nd, and below tiers your contract is with a general contractor or another subcontractor) Name of Notice: Who Must Use this Notice: Second Month Notice (Notice of Unpaid Balance residential) All Texas subcontractors and material/equipment suppliers who have a direct contract with the general contractor or another subcontractor on a residential project. Also, as to general contractors who do not have a direct contract with the owner. Why is it Called a Second Month Notice? Because it must be served no later than the 15 th day of the second month following every month which has unpaid work. The name of the Notice is confusing to many people because it implies you served it two months after nonpayment. This is not the case. You can serve it anytime after your invoices are unpaid, but not later than the 15 th day of the second month. In fact, if sent earlier than the second month (and this is usually what happens), some people ask: It is a second month notice why are you sending it now, it is not the second month? For this reason, the Notice is titled: Notice of Unpaid Balance. Actually, it is nothing more than a glorified demand for payment or follow-up invoice. In fact, some people simply send a letter demanding payment with their last invoice attached. But, the danger of doing this is that it will be invalid unless it includes special statutory language. That is why the forms on this website are in the form of a formal notice with that special language. When? It cannot be any later than the 15 th day of the second month following any month that has unpaid work. For example, assume you have performed work in January and February, but thus far have only been 8

9 paid for January. For the unpaid work in February, you must serve the Notice no later than April 15. The same rule applies for any other unpaid month. So, if you haven t been paid for June, you would serve the notice no later than August 15. And remember, it doesn t make any difference what days of the month you performed your unpaid work in Texas. For example, it makes no difference if you worked the first or the last week of February you still have until April 15. You count ahead to the fifteenth day of the second month regardless. Finally, it is not two months from the date you last performed the work in other words if you last worked on June 20, you would not be filing your Notice on August 20 (instead it would be August 15). Nevertheless, it is recommended you send it earlier than the deadline. First send a standard invoice or billing and if unpaid within two weeks, serve the Notice. For example, if you have performed services in February, send your invoice on March 1 st, and if it has not been paid by March 15, send the Notice right away and do not wait until April 15. Why Serve it so Early? In Texas, a lien is good only in situations in which the owner is still holding money due the general contractor when the Notice is received. If the money has already been paid to the general contractor before the Notices received, you are too late to file a lien and will end up with nothing except the right to sue the general contractor for breach of contract. For this same reason, an owner will be subjected to a Texas mechanic s lien only if they ignore the Notice at a time in which they are still holding the money. Does it Have to be Served Month After Month as Long As I Am Unpaid? Yes, unfortunately. It has to be served by the 15 th day of the second month for every unpaid month. If the general contractor continues to withhold money, you would have to file it for successive months. Again, assume you have been unpaid for February and March. You would have to send out a separate Notice for February and a separate notice for March. Of course, you could lump the two months together and serve one Notice by April 15, but be careful about waiting too long. Who to Serve? Serve both the owner and general contractor. 9

10 Verified or Notarized?: This Texas notice does not have to be verified or notarized. It is in the form of a letter and is simply signed by the claimant. Is an Invoice Attached? It is not required by statute but is nevertheless recommended. There s less chance of your being paid if there is uncertainty as to the items being billed. Invoices neatly set out that information. It is also human nature to think of any excuse possible not to pay. A well presented invoice prevents that type of defense o Name of Notice: Who Must Use this Notice: Third Month Notice (Notice of Unpaid Balance and Demand for Payment residential) All subcontractors and material/equipment suppliers who have a direct contract with the general contractor or another subcontractor on a residential project. Also, as to general contractors who do not have a direct contract with the owner. Why is it Called a Third Month Notice? Because it must be served no later than the 15 th day of the third month following every month which has unpaid work. The name of the Notice is confusing to many people because it implies you served it three months after nonpayment. This is not the case. You can serve it anytime after your invoices are unpaid, but not later than the 15 th day of the third month. In fact, if sent earlier than the third month (and this is usually what happens), some people ask: It is a third month notice why are you sending it now, it is not the third month? For this reason, the Notice is titled: Notice of Unpaid Balance and Demand For Payment. Actually, it is nothing more than a glorified demand for payment or follow-up invoice. In fact, some people simply send a letter demanding payment with their last invoice attached. But, the danger of doing this is that it will be invalid unless it includes special statutory language. That is why the forms on this website are in the form of a formal notice with that special language. Is This Required By Texas Law? The Second Month Notice is absolutely required and clearly stated in the Texas Property Code. But, serving a Third Month Notice on residential property is not as clear. Texas Property Code Section (b) in essence states that you must serve a Second Month Notice and in 10

11 addition (and not in lieu of), comply with other statutory requirements stated elsewhere in the Code. Other provisions of the code require a Third Month Notice for commercial property: A person must comply with this subchapter in addition to the other applicable provisions of this chapter to perfect a lien that arises from a claim resulting from a residential construction project. Because this language is somewhat vague, it is recommended that you seek the advice of a construction attorney for more details. NationalLienLaw takes a simple position: when in doubt, why not serve the Third Month Notice? After all, a further reminder and copy of the invoice may do the trick. You would be sending a follow-up invoice any way stamped Past Due, so why not be more formal and use the Notice? When? It cannot be any later than the 15 th day of the third month following any month that has unpaid work. For example, assume you have performed work in January and February, but thus far have only been paid for January. For the unpaid work in February, you must serve the Notice no later than May 15. The same rule applies for any other unpaid month. So, if you haven t been paid for June, you would serve the notice no later than September 15. And remember, it doesn t make any difference what days of the month you performed your unpaid work. For example, it makes no difference if you worked the first or the last week of February you still have until May 15. You count ahead to the fifteenth day of the third month regardless. Finally, it is not three months from the date you last performed the work in other words if you last worked on June 20, you would not be filing your Notice on September 20 (instead it would be September 15). Nevertheless, it is recommended you send it earlier than the deadline. First send a standard invoice or billing and if unpaid within two weeks, serve the Second Month Notice. For example, if you have performed services in Texas for February, send your invoice on March 1 st, and if it has not been paid by March 15, send the Second Month Notice right away. If it is not paid by March 31, send right away the Third Month Notice with another copy of the invoice. Why Serve it so Early? In Texas, a lien is good only in situations in which the owner is still holding money due the general contractor when the Notice is received. 11

12 If the money has already been paid to the general contractor before the Notices received, you are too late to file a lien and will end up with nothing except the right to sue the general contractor for breach of contract. For this same reason, an owner will be subjected to a mechanic s lien only if they ignore the Notice at a time in which they are still holding the money. Does it Have to be Served Month After Month as Long As I Am Unpaid? Yes, unfortunately. It has to be served by the 15 th day of the third month for every unpaid month. If the general contractor continues to withhold money, you would have to file it for successive months. Again, assume you have been unpaid for February and March. You would have to send out a separate Notice for February and a separate notice for March. Of course, you could lump the two months together and serve one Third Month Notice by May 15, but be careful about waiting too long. Who to Serve? Serve both the owner and general contractor. Is an Invoice Attached? It is not required by statute but is nevertheless recommended. There s less chance of your being paid if there is uncertainty as to the items being billed. Invoices neatly set out that information. It is also human nature to think of any excuse possible not to pay. A well presented invoice prevents that type of defense o----- Name of Notice: Texas Notice of Contractual Retainage (for both subs and sub-subs). NEW NOTICE AS OF Rights to Retainage: Texas Property Code Section requires that an owner retain 10% of the contract price or 10% of the value of the work from the general contractor for at least 30 days after completion. Section states this must be for the benefit of a general contractor, as well as subcontractors and suppliers under their contracts. In addition, it is industry standard for a 10% retention to be in most construction agreements, enforceable under basic contract law. 12

13 So what notices are required to perfect the right to retention? It is called a Notice of Contractual Retention. That Notice must be served on the owner and general by the 15th day of the second month after the month in which the unpaid services were performed. If not, no retention could be included in a mechanic s lien. Unfortunate, many contractors either did not know about this Notice or decided not to serve it. After all, serving a notice well before completion seemed to many to be an inadvisable. Frankly, this remedy did not make a lot of sense. Fortunately the law has changed. Effective for contracts entered into on or after September 1, 2011, under Texas property code section (b), the Notice can now be served within 30 days of the claimant s completion. You can then include the retention amount in the regular mechanic s lien filed by the 15th day of the fourth month. Service is on the owner and general if you are a sub; to both the owner, general, and your direct subcontractor if you are a sub-sub. You can still serve the old Notice of Contractual Retention earlier, but there appears to be no need. Exception: If the owner of files an Affidavit of Completion under Section , the claimant must file a lien for the retention within 40 days of the date stated for completion in that Affidavit. Alternatively, the time to file a lien can be shortened another way. The owner can send a notice under Section (g) demanding the filing of a lien and the claimant must file such a lien within 30 days of that demand. Parenthetically, the demand must have a name and address of the owner and a description of the property so the lien can be properly recorded. Who Must Use this Notice: Subcontractors and equipment/material suppliers who have a direct contract with the general or another subcontractor. Also, as to general contractors who do not have a direct contract with the owner. What is the Purpose of the Notice?: As is commonly known, almost any project has a 10% retention on the base contract amount. Thus, if the contract price is $10,000.00, there would be a retention of $1, The idea is that this hold back amount is paid at the end of the job after the owner is assured all work has been satisfactorily completed. If not, the 10% is used to correct defective or incomplete items, including hiring a back-charge contractor. So, if there are progress draws, they are paid only to the extent of 90%. If you are not rightfully paid the retention, this can be included in your mechanic s lien. But the State of Texas does not want you to go to the 13

14 hassle of notifying the owner on each invoice of your right to receive a lien on the retention. So, they require it to be served only once at the beginning of the job--so as to apply to the overall job (Texas Property Code (b) and (e)). There is some information being given that this notice has to be served every month while you re on the job. This is not the case. When? It cannot be any later than the 15th day of the second month after first furnishing your labor or materials. So you do not forget sending it out, it is recommended you serve it after your contract is signed. If the owner or general contractor complains or ask questions why are you are sending out the notice at the beginning of the job before the obligation to make payment, simply inform them it is not a reflection on their integrity but is simply a requirement under Texas law. As you know, retention is paid at the end of the Texas project when all work has been completed and signed-off. Avoid the mistake of thinking the Notice is served at the end of the project. Unfortunately, many contractors assume they will be paid the retention at the usual time-- after completion of the project and simply do not serve the Notice beforehand. At that late date, when it becomes obvious they will not be receiving the retention, they then attempt to serve the Notice. It is too late at that point and therefore you would not be entitled to a mechanic s lien for that retained amount. For example, assume you furnish your first labor or materials on February 15. You would serve the Notice no later than April 15. And remember, it doesn t make any difference what day of the month you started work or furnished material. For example, it makes no difference if you started the first or the last week of February you still have until April 15. You count ahead to the fifteenth day of the second month regardless. Finally, it is not two months from the date you first performed the work in other words if you first worked on February 3rd, you would not be serving your Notice on April 3rd (instead it would be April 15). If you forget serving it at the beginning of the job, simply serve it approximately two weeks after your invoices are unpaid. Again assume you have worked in February and have sent out your invoice on March 1st. If you have not been paid within two weeks, it is time to send a follow-up invoice with the Second or Third Month Notice. Put the notice of Contractural Retainage in the same envelope and send it together with the other Notices(s). 14

15 Does it Have to be Served Month After Month? No. You serve only once at the beginning of the job. This covers the entire retention for the entire job. Who to Serve? Is an Invoice Attached? Verified or Notarized?: If your contract is directly with the general contractor, you simply serve the owner. If your contract is directly with another subcontractor, you serve both the owner and the general contractor. No. the 10% retention is not based on the unpaid balance under your invoices, but the overall contract amount with change orders. In fact, it might be confusing if you were to attach an invoice for unpaid work with the Notice because the owner might think the10% retention applied to the invoice amount instead of the overall contract amount. The notice is in the form of a demand letter and, therefore, does not need to be verified or notarized. TEXAS COMMERCIAL PROJECTS Prelien Notices for 1 st Tier Subcontractors and Suppliers (your contract is with a general contractor) Name of Notice: Who Must Use this Notice: Third Month Notice (Notice of Unpaid Balance commercial) All Texas subcontractors and material/equipment suppliers who have a direct contract with the general contractor on a commercial project. Also, as to general contractors who do not have a direct contract with the owner. Why is it Called a Third Month Notice? Because it must be served no later than the 15 th day of the third month following every month which has unpaid work. The name of the Notice is confusing to many people because it implies you served it three months after nonpayment. This is not the case. You can serve it anytime after your invoices are unpaid, but not later than the 15th day of the third month. In fact, if sent earlier than the third month (and this is usually what happens), some people ask: It is a third month notice why are you sending it now, it is not the third month? For this reason, the Notice is titled: Notice of Unpaid Balance and Demand For Payment. Actually, it is nothing more than a glorified demand for payment or follow-up invoice. 15

16 In fact, some people simply send a letter demanding payment with their last invoice attached. But, the danger of doing this is that it will be invalid unless it includes special statutory language. That is why the forms on this website are in the form of a formal notice with that special language. When? It cannot be any later than the 15th day of the third month following any month that has unpaid work. For example, assume you have performed work in January and February, but thus far have only been paid for January. For the unpaid work in February, you must serve the Notice no later than May 15. The same rule applies for any other unpaid month. So, if you haven t been paid for June, you would serve the notice no later than September 15. And remember, it doesn t make any difference what days of the month you performed your unpaid work. For example, it makes no difference if you worked the first or the last week of February you still have until May 15. You count ahead to the fifteenth day of the third month regardless. Finally, it is not three months from the date you last performed the work in other words if you last worked on June 20, you would not be filing your Notice on September 20 (instead it would be September 15). Nevertheless, it is recommended you send it earlier than the deadline. First send a standard invoice or billing and if unpaid within two weeks, serve the Notice. For example, if you have performed services in February, send your invoice on March 1st, and if it has not been paid by March 15, send the Notice right away. Why Serve it so Early? In Texas, a lien is good only in situations in which the owner is still holding money due the general contractor when the Notice is received. If the money has already been paid to the general contractor before the Notices received, you are too late to file a lien and will end up with nothing except the right to sue the general contractor for breach of contract. For this same reason, an owner will be subjected to a mechanic s lien only if they ignore the Notice at a time in which they are still holding the money. Does it Have to be Served Month After Month as Long As I Am Unpaid? Yes, unfortunately. It has to be served by the 15th day of the third month for every unpaid month. If the general contractor continues to withhold money, you would have to file it for successive months. Again, assume you have been unpaid for February and March. You would have 16

17 to send out a separate Notice for February and a separate notice for March. Of course, you could lump the two months together and serve one Texas Third Month Notice by May 15, but be careful about waiting too long. Who to Serve? Serve both the owner and general contractor. Is an Invoice Attached? It is not required by statute but is nevertheless recommended. There s less chance of your being paid if there is uncertainty as to the items being billed. Invoices neatly set out that information. It is also human nature to think of any excuse possible not to pay. A well presented invoice prevents that type of defense o----- Name of Notice: Texas Notice of Contractual Retainage (for both subs and sub-subs). NEW LAW AS OF See section above for details of the new law. Does it Have to be Served Month After Month? No. You serve only once. This covers the entire retention for the entire job. Who to Serve? Is an Invoice Attached? Verified or Notarized?: If your contract is directly with the general contractor, you simply serve the owner. If your contract is directly with another subcontractor, you serve both the owner and the general contractor. No. the 10% retention is not based on the unpaid balance under your invoices, but the overall contract amount with change orders. In fact, it might be confusing if you were to attach an invoice for unpaid work with the Notice because the owner might think the10% retention applied to the invoice amount instead of the overall contract amount. The notice is in the form of a demand letter and, therefore, does not need to be verified or notarized. 17

18 Texas Prelien Notices for 2nd Tier and Below Subs and Suppliers (your contract is with a subcontractor) Name of Notice: Who Must Use this Notice: Second Month Notice (Notice of Unpaid Balance commercial) All subcontractors and material/equipment suppliers who have a direct contract with another subcontractor on a commercial project. Why is it Called a Second Month Notice? Because it must be served no later than the 15 th day of the second month following every month which has unpaid work. The name of the Notice is confusing to many people because it implies you served it two months after nonpayment. This is not the case. You can serve it anytime after your invoices are unpaid, but not later than the 15 th day of the second month. In fact, if sent earlier than the second month (and this is usually what happens), some people ask: It is a second month notice why are you sending it now, it is not the second month? For this reason, the Notice is titled: Notice of Unpaid Balance. Actually, it is nothing more than a glorified demand for payment or follow-up invoice. In fact, some people simply send a letter demanding payment with their last invoice attached. But, the danger of doing this is that it will be invalid unless it includes special statutory language. That is why the forms on this website are in the form of a formal notice with that special language. When? It cannot be any later than the 15 th day of the second month following any month that has unpaid work. For example, assume you have performed work in January and February, but thus far have only been paid for January. For the unpaid work in February, you must serve the Notice no later than April 15. The same rule applies for any other unpaid month. So, if you haven t been paid for June, you would serve the notice no later than August 15. And remember, it doesn t make any difference what days of the month you performed your unpaid work. For example, it makes no difference if you worked the first or the last week of February you still have until April 15. You count ahead to the fifteenth day of the second month regardless. Finally, it is not two months from the date you last performed the work in other words if you last worked on June 20, you would not be filing your Notice on August 20 (instead it would be August 15). Nevertheless, it is recommended you send it earlier than the deadline. First send a standard invoice or billing and if unpaid within two weeks, serve the Notice. For example, if you have performed services in 18

19 February, send your invoice on March 1 st, and if it has not been paid by March 15, send the Notice right away and do not wait until April 15. Why Serve it so Early? In Texas, a lien is good only in situations in which the owner is still holding money due the general contractor when the Notice is received. If the money has already been paid to the general contractor before the Notices received, you are too late to file a lien and will end up with nothing except the right to sue the general contractor for breach of contract. For this same reason, an owner will be subjected to a mechanic s lien only if they ignore the Notice at a time in which they are still holding the money. Does it Have to be Served Month After Month as Long As I Am Unpaid? Yes, unfortunately. In Texas it has to be served by the 15 th day of the second month for every unpaid month. If the general contractor continues to withhold money, you would have to file it for successive months. Again, assume you have been unpaid for February and March. You would have to send out a separate Notice for February and a separate notice for March. Of course, you could lump the two months together and serve one Notice by April 15, but be careful about waiting too long. Who to Serve? Verified or Notarized?: Is an Invoice Attached? Serve only the owner (not the general contractor). The notice does not have to be verified or notarized. It is in the form of a letter and is simply signed by the claimant. It is not required by statute but is nevertheless recommended. There s less chance of your being paid if there is uncertainty as to the items being billed. Invoices neatly set out that information. It is also human nature to think of any excuse possible not to pay. A well presented invoice prevents that type of defense o Name of Notice: Third Month Notice (Notice of Unpaid Balance and Demand for Payment commercial) 19

20 Who Must Use this Notice: Why is it Called a Third Month Notice? All Texas subcontractors and material/equipment suppliers who have a direct contract with another subcontractor on a commercial project. Because it must be served no later than the 15 th day of the third month following every month which has unpaid work. The name of the Notice is confusing to many people because it implies you served it three months after nonpayment. This is not the case. You can serve it anytime after your invoices are unpaid, but not later than the 15th day of the third month. In fact, if sent earlier than the third month (and this is usually what happens), some people ask: It is a third month notice why are you sending it now, it is not the third month? For this reason, the Notice is titled: Notice of Unpaid Balance and Demand For Payment. Actually, it is nothing more than a glorified demand for payment or follow-up invoice. In fact, some people simply send a letter demanding payment with their last invoice attached. But, the danger of doing this is that it will be invalid unless it includes special statutory language. That is why the forms on this website are in the form of a formal notice with that special language. When? It cannot be any later than the 15th day of the third month following any month that has unpaid work. For example, assume you have performed work in January and February, but thus far have only been paid for January. For the unpaid work in February, you must serve the Notice no later than an May 15. The same rule applies for any other unpaid month. So, if you haven t been paid for June, you would serve the notice no later than September 15. And remember, it doesn t make any difference what days of the month you performed your unpaid work. For example, it makes no difference if you worked the first or the last week of February you still have until May 15. You count ahead to the fifteenth day of the third month regardless. Finally, it is not three months from the date you last performed the work in other words if you last worked on June 20, you would not be filing your Notice on September 20 (instead it would be September 15). Nevertheless, it is recommended you send it earlier than the deadline. First send a standard invoice or billing and if unpaid within two weeks, serve the Notice. For example, if you have performed services in February, send your invoice on March 1st, and if it has not been paid by March 15, send the Notice right away. 20

21 Why Serve it so Early? In Texas, a lien is good only in situations in which the owner is still holding money due the general contractor when the Notice is received. If the money has already been paid to the general contractor before the Notices received, you are too late to file a lien and will end up with nothing except the right to sue the general contractor for breach of contract. For this same reason, an owner will be subjected to a mechanic s lien only if they ignore the Notice at a time in which they are still holding the money. Does it Have to be Served Month After Month as Long As I Am Unpaid? Yes, unfortunately. It has to be served by the 15th day of the third month for every unpaid month. If the general contractor continues to withhold money, you would have to file it for successive months. Again, assume you have been unpaid for February and March. You would have to send out a separate Notice for February and a separate notice for March. Of course, you could lump the two months together and serve one Third Month Notice by May 15, but be careful about waiting too long. Who to Serve? Serve both the owner and general contractor. Is an Invoice Attached? It is not required by Texas statutes but is nevertheless recommended. There s less chance of your being paid if there is uncertainty as to the items being billed. Invoices neatly set out that information. It is also human nature to think of any excuse possible not to pay. A well presented invoice prevents that type of defense o----- Name of Notice: Notice of Contractual Retainage (for both subs and sub-subs). NEW LAW AS OF See discussion above as to details. Prelien Notice for Suppliers of Specially Fabricated Items (Residential and Commercial). Name of Notice: Notice of Specially Fabricated Items. 21

22 Who Must Use this Notice: Material suppliers only (not general contractors or subs) that fabricate a special item that cannot be used in any other projects. These persons are also required to service the Notice of Contractual Retainage, along with either a Third Month Notice or Second Month Notice. When: How to Serve: Verified or Notarized?: See Time Deadlines table. Serve the owner and general contractor by certified mail, return receipt requested. Since it is in the form of a demand letter, it does not need to be notarized or verified. TEXAS MECHANICS LIENS Who is Entitled to a Lien: When to File/ Record: A Texas mechanic s lien is primarily for general contractors, subcontractors, laborers, as well as material/equipment suppliers. But it also covers architects, engineers, and surveyors. Material/equipment suppliers must have their materials delivered to or used in the project in order to receive a lien. The exception is specially-fabricated materials that receive a lien even if the material is not delivered or incorporated. See the Texas Time Deadlines table. Be careful with the time limitations. You may have to file earlier than you think. For example, a mechanics lien based upon the 10% retention must be recorded within 30 days of completion of the project. Assume you have to file a mechanic s lien for the unpaid amounts on the base contract by the 15th day of the third month. You can do so, but it would then be too late to file the lien for the retention. Frankly, why wait more than 30 days? File the lien for all unpaid monies, whether retention or the base contract, within 30 days after completion. Where to File/Record: How to Serve: The Texas Lien Affidavit must be filed with the county clerk of the county in which the property is located. Within 5 days of filing the Lien Affidavit, service is made by certified mail, return receipt requested. If you are a general contractor, you only need serve the owner. For all others, you must serve the owner and the general contractor. 22

23 Amount of Lien: Primarily for unpaid labor, material, and equipment supplied. Attorney s fees, although they cannot be in the lien, can be awarded to the successful party in a lien foreclosure action. Property Subject to the Lien: A Texas mechanic s lien applies only to private projects. No lien is allowed in public projects against government property. A lien in an urban area extends to the entire lot upon which the work is done, while a lien in rural areas is limited to a total of 50 acres. Furnishing Information: Verified or Notarized?: Priorities: Lien Release Bond: Upon request, the general should furnish others with information about the owner so the required notices and lien can be filled out properly. A verified notice simply means you sign it and are representing the contents are true and accurate. A notarized notice is signed in front of a Notary Public or other official. The lien must be both notarized and verified. Note also that the verification must be by someone who has personal knowledge of the monies claimed. A mortgage has priority over mechanics liens only if it is recorded before the first spade of dirt is turned. In other words, if it is recorded before any work begins on the project. On the other hand, if it is recorded after work begins by any persons or trade, the lien claimants take priority. The only exception is that architects, engineers, and surveyors have a lien priority based on when their Lien Affidavit is recorded. Since all lien claimants, whether general contractors, suppliers, or subcontractors, have the same priority which relates back to the time the work first commences, in most cases contractors have priority over design professionals. Once a Texas lien is recorded against the property, the owner can clear it by posting a surety bond for twice the amount of the lien claim up to $40,000 and 1½ times the amount if the lien exceeds $40,000. You then proceed in court to prove your case and if you prevail, you will receive your money directly from the surety company. Miscellaneous Issues: 23

24 Residential Contracts. Residential construction contracts between the owner and general contractor must be in writing before the project starts and a copy of the contract must be filed with the county clerk. There are also special fund trapping letters which apply, with special statutory language of warning to the owner. The correct form must be used in residential projects. Subs and suppliers that do not have a direct contract with the owner, are also required to serve both the general and the owner with a special letter on residential projects that warns the owner: 1) the owner and that persons property can be personally liable if the claims are not paid, 2) the owner is required to withhold funds due the general after receiving a timely prelien notice, and 3) the owner is must hold the required retention for the benefit of the claimants. Notice of Completion: An owner can file with the Texas county clerk a Notice of Completion. After filing, it must be sent to the general contractor and to every lien claimant who has sent out notices for unpaid claims. Finally, a subcontractor or supplier who requests a copy of the Notice of Completion must receive one. Except as to a general contractor, copies of the Notice of Completion must be sent within 10 days of receiving the subcontractor s notice letter (letter requesting a copy of the Notice of Completion). These copies must be sent by certified mail. The actual form is titled, Affidavit of Completion. In many states, the time in which to file a mechanic s lien starts running after the Notice of Completion is filed or recorded. Not so in Texas. Regardless of when the Notice of Completion is filed, lien claimants on nonresidential property must file on the 15 th day of the 4 th calendar month after completing their portion of the work (the 3 rd calendar month for residential). Lien Waivers: NEW TEXAS LAW IN For contracts signed from and after January 1, 2012, Texas has four new statutory forms of lien waiver under Sections and It rectified the past problem of signing a waiver indicating full payment, but never receiving the promised check or getting one that never cleared. In the meantime third parties would rely upon the waiver and the contractor found it almost impossible to extricate from that waiver. Now, for the waiver to be valid, it must be signed by the claimant or authorized representative, on a standard statutory form, and notarized. Additionally as to conditional waivers, the statute makes it clear there must be evidence of payment for the waiver to be valid. The waivers follow the California scheme and can be summarized as follows: 24