A mechanic’s lien is an encumbrance on a property owner’s real estate title, used to guarantee payment to builders, contractors, and construction businesses which build or repair structures, by using the property where the work was completed as a form of collateral. Eligible parties include the general contractor, subcontractors, laborers, and material or equipment suppliers, as well as by architects, engineers, and surveyors. Material or equipment suppliers must have the materials actually delivered to or used in the project to claim a lien, but if the materials were specially manufactured, the supplier can get a lien even if the materials are not ultimately delivered or incorporated into the project. The lien ensures that the workmen are paid before anyone else if the property subject to the lien is eventually foreclosed upon.
Texas requires prelien notice to be served on the owner and other interested parties before filing and recording a mechanic’s lien. The type of project (whether residential or commercial) determines what kind of prelien notice must be served. The purpose of the required prelien notice is to protect the property owner by preventing him or her from having to pay twice on the project. For instance, if the owner pays a general contractor, who then fails to pay a subcontractor or supplier, the owner could find himself obligated for two sets of bills.
Therefore, when the owner receives the prelien notice, he or she becomes aware of potential lien claims and any issues of non-payment of other parties. This in turn allows the owner to “freeze” payment of any unpaid amounts by withholding that amount from the general contractor. The owner can then pay the general contractor from the frozen funds, but only after the payment issue is resolved or if/when a subcontractor fails to file a lien before the statute of limitation expires. Serve all prelien notices via certified mail.
The law of mechanic’s liens in Texas is complex, and demands strict compliance with its formalities to ensure the right to file and enforce a mechanic’s lien. Therefore, to preserve the right to a claim, remember and record deadlines and filing dates. The steps leading to a mechanic’s lien involve five primary documents – four preliminary notices and the actual lien:
- Notice of Contractual Retainage
- Notice of Specially Fabricated Items
- Second Month Notice
- Third Month Notice
- Affidavit of Lien
The final document, if necessary, is the complaint in a lawsuit to foreclose on a properly filed mechanic’s lien.
These prelien notices work as “fund trappers” because they “trap” money held by the owner, thus preventing it from going to the general contractor while the subcontractors and suppliers remain unpaid. Otherwise, if the owner has already paid the general contractor, the subcontractor loses that leverage. This can cause a subcontractor or supplier to file a mechanic’s lien against the owner’s property even though the owner already paid.
Under Texas lien law, potential claimants must send the owner a Second or Third Month Notice or the owner gains a defense against such double payment. Send the notice early (generally, on the 30th day following non-payment), because they only operate if the owner still owes the general contractor money at the time the notice is received. Consider the following example: a contractor completes a job in October and sends a bill on November 1. If it remains unpaid as of December 1, send out a second invoice that shows the unpaid amount as well as the prelien notice (either a second or third month notice).
Serve the notice no later than the 15th day of the second or third month. It’s permissible (and good practice) to serve the notice before the deadline. For instance, while a second month notice can be served anytime, the claimant must send it by day 15 of the second month following non-payment. Avoid serving the notice too early, though. While sending the second or third month notice at the start of a job might seem like a good idea, it effectively asks the owner and general contractor to freeze funds before they are even required to pay them. This can cause friction between the parties as owners typically treat these demands seriously – they contain strong warnings that failure to withhold the money due can lead to a mechanic’s lien and personal liability against the owner for any unpaid funds.
Under Texas lien law, an owner is subject to personal liability for the debt owed to a subcontractor or supplier when the owner does not withhold money due to the general contractor after receipt of the required notice. Thus, these warnings serve two purposes: freezing the money and holding the owner liable. After receiving the notice, the owner must withhold any money due unless the unpaid parties otherwise settle their claim or neglect to file on time and allow the claim to expire. Once a mechanic’s lien is timely filed, it will also require continued withholding of the funds.
Regarding retention (a percentage of the total amount due, which is retained for security purposes) §53.101 of the Texas property code requires the owner to withhold an amount at least 10% of the contract price for thirty (30) days after the job’s completion to ensure the funds are available. The contract price is represented by the cost to the owner for any part of construction or repair performed under an original contract.
Serve notices on all parties with a stake in the property or project. Service refers to the providing of such notice in a manner proscribed by law, which makes all parties aware of potential lien claims. Certified mail with a return receipt requested is usually the required mode of service.
Calculate the dates for service of third month notices by taking the current month in which labor or materials remain unpaid and add three months. Service must be made by the 15th day of the third month of non-payment. So, if labor or materials are not paid for January, serve the three-month notice on April 15th or if the unpaid month is in December, serve on March 15th of the following year. Note that work completed on an owner-occupied residential project (not including residential work for a developer) will shorten the time by one month. So, if a claimant improves such property in January, for instance, the deadline is March 15th.
Second month deadlines work the same way but the notice is served after two months. If the claimant is not paid for January’s work, serve the second month notice on March 15th. Be aware, however, as in the third month notice example, the time is shortened for residential owner-occupied projects.
Therefore, by sending proper notices and encouraging the owner to set aside 10% as retention funds, contractors may avoid the need for a mechanic’s lien entirely. Freezing the funds can ensure direct payment and also prevent subordination (losing the lien claim to a senior creditor who filed first).
In summary, the required prelien notice forms for residential projects include the following depending on tier:
- First Tier Subcontractors and Suppliers under contract with the general contractor must serve Second Month Notice (called a Notice of Unpaid Balance) and subcontractors must serve a Notice of Contractual Retainage.
- Second Tier Sub-subcontractors and Suppliers under contract with a subcontractor must serve a Second Month Notice and a Notice of Contractual Retainage (these same rules apply for all other tiers below the second tier).
- Suppliers of specially fabricated materials must serve a Notice of Specially Fabricated Materials as well as the previous required notices explained above for first and second tiers depending on where the supplier stands in the chain.
- General contractors under direct contract with the owner are not required to serve any form of notice.
The required prelien notices for commercial projects work a bit differently:
- First Tier Subcontractors and Suppliers under contract with the general contractor must serve a Third Month Notice (called a Notice of Unpaid Balance and Demand for Payment) and a Notice of Contractual Retainage (by Subcontractor).
- Second Tier (and lower) sub-subcontractors and suppliers under contract with a subcontractor must serve a Second Month Notice (a.k.a. Notice of Unpaid Balance and Demand for Payment) and a Notice of Contractual Retainage (by Sub-Subcontractor). These same rules apply to all lower tiers.
- Suppliers of specially fabricated materials must serve a Notice of Specially Fabricated Items as well as the above-described notices depending on which tier the supplier occupies.
- General contractors under direct contract with the owner need not serve any form of notice.
Explanation of notice types:
Second Month Notice a.k.a., Notice of Unpaid Balance. All subcontractors and material or equipment suppliers under direct contract with the general contractor or another subcontractor on a residential project use this notice. It is also used by general contractors without a direct contract with the owner. The notice must be served no later than the 15th day of the second month following each month for which the work remains unpaid. So, if a contractor performed the work in October and November but were only paid for October, serve the notice for unpaid work no later than January 15. The actual days of work are irrelevant, even if work was performed on either the first or last week of the month. Always base the time on the 15th day of the second month regardless of whether the work was performed on the 1st, 10th, or 20th day. Sending this notice early often increases the chance of success. Start by sending a regular invoice and only send the notice if two weeks pass without payment.
The notice must be served (and must continue to be served successively) by the 15th day of the second month of non-payment for every month unpaid. Serve both the owner and general contractor on the project. The notice need not be verified or notarized – it’s more akin to a demand letter signed by the claimant. Attach an invoice to the notice. Although not required, this clarifies the terms of payment along with the letter (and increase the chances of payment).
The Third Month Notice (Notice of Unpaid Balance and Demand for Payment) is the next form of prelien notice, and is served following the third month of non-payment on an account. All subcontractors and material or equipment suppliers under direct contract with the general contractor or another subcontractor on a residential project must serve this notice, as well as a general contractor who contracts directly with the owner. This is called the Third Month Notice because it’s served no later than the 15th day of the third month following non-payment and then every month thereafter that the work remains unpaid. It can be served any time after an invoice remains unpaid, but no later than the 15th day of the third month.
Under Texas lien law, the Second Month Notice is required by the Property Code. The Code isn’t as clear, however, on the Third Month Notice, and some interpretations suggest that it’s required only for commercial jobs. Speak with an attorney familiar with the Texas lien law for any questions about the Third Month Notice.
Serve the notice no later than the 15th day of the third month following any month for which there was unpaid work. For instance, if the claimant performs work in October and is not paid, serve the notice by January 15. Again, like the Second Month Notice, there is no difference what day of the month the work was performed. It must be served by the 15th day of the third month. Of course, as previously suggested, sending the notice earlier increases the odds of success. If the general contractor continues to withhold funds, file every month the funds continue to be withheld. Serve both the owner and general contractor, and attach relevant invoices.
The Notice of Contractual Retainage is used by subcontractors and sub-subcontractors. Retainage means an amount representing part of a contract payment that is not required to be paid to the claimant within the month following the month in which labor is performed, material is furnished, or specially fabricated material is delivered. Texas Property Code §53.102 states that the property owner is required to retain 10% of the contract price or value of the work from the general contractor for at least 30 days after completion of the job. §53.102 states this amount is to be used for the benefit of a general contractor, subcontractors, and suppliers under the contract.
As of September 1, 2011, §53.057(b) states that the notice can be served within 30 days of the claimant’s completion of their contract (although this will shorten the time available to file a mechanic’s lien). The time to file the mechanic’s lien can also be shortened if the owner sends a notice under §53.057(g) demanding a filing of a mechanic’s lien within 30 days of the demand. Include the retention amount in a regular filed mechanic’s lien that is filed by the 15th day of the fourth month. The notice must be served on the owner and general contractor (for a subcontractor) and to the owner, general contractor, and direct subcontractor (for a sub-subcontractor).
The Notice of Contractual Retainage is used to hold back the required 10% retainage funds (as most projects designate 10% of the base contract amount as retainage). For example, if the contract amount is $100,000 the project has a $10,000 retainage. As earlier explained, this amount is held back to ensure the owner is satisfied with the completed work, and if not, the amount is used to correct or complete such work. The retainage amount can be included in the actual mechanic’s lien if it’s not rightfully paid. Give this notice at the beginning of the work and it will apply to the overall job. The notice must be served within 30 days after the designated portion of the contract has been completed (the overall project’s completion is not controlling). Unlike the other prelien notices described in this article, the Notice of Contractual Retainage does not need to be served month after month. Serve the owner if the contract is with the general contractor. If the contract is with a subcontractor, serve the owner and general contractor.
The rules differ for commercial projects, but as with residential jobs, there are still requirements to send prelien notices before a mechanic’s lien can be filed and recorded. First tier subcontractors and suppliers (meaning your contract is with the general contractor) must use the following forms of notice:
- Second Month Notice (Notice of Unpaid Balance)
- Third Month Notice (Notice of Unpaid Balance)
- Third Month Notice (Notice of Unpaid Balance and Demand for Payment)
- Notice of Specially Fabricated Items
The Second Month Notice is used by all (second tier and below) subcontractors and material or equipment suppliers with a direct contract with another subcontractor on a commercial project. The notice must be served no later than the 15th day of the second month. So, as in previous examples, for work in October and November where the October fees are paid, serve the notice no later than December 15. Also, like the other forms of prelien noticed described, continue to serve it every month without payment. Serve this notice on the owner only, not the general contractor. The document is in the form of a demand letter, signed by the claimant, with invoices attached for clarity. If the dispute proceeds to litigation, this act shows an attempt to put the owner on notice and resolve the payment issue amicably.
The first type of Third Month Notice (Notice of Unpaid Balance) is appropriate for all subcontractors and material or equipment suppliers under a direct contract with the general contractor on a commercial job, as well as by a general contractor not under a direct contract with the owner. The notice must be served prior to or on the 15th day of the third month (and every month thereafter) of non-payment. It works like the residential project notice described earlier, so if the work in October and November is unpaid for November, serve by February 15 for the unpaid November fees. The notice is also served month after month on the 15th day of every unpaid month on both the owner and general contractor. Like with the other notices, attach a clear invoice, itemizing charges and payments to date.
The second type of Third Month Notice (Notice of Unpaid Balance and Demand for Payment) is used by all subcontractors and material or equipment suppliers with a direct contract with another subcontractor (not the general contractor as in the first type of third month notice) on a commercial project. Again, the notice must be served by the 15th day of the third month of unpaid work, although it can be served earlier. Send this document to both the owner and general contractor.
Suppliers of specially fabricated materials for a project use the aptly named Notice of Specially Fabricated Items. Specially fabricated material means materials that are fabricated for use as a component of the construction or repair in a manner that makes them reasonably unsuitable for use elsewhere. Suppliers must also serve the Notice of Contractual Retainage and Second/Third Month Notices per their respective deadlines discussed above on both the owner and general contractor through certified mail with a return receipt requested.
If the account remains unpaid, claimants file an Affidavit of Lien under Sec. 53.054. An affidavit is a sworn statement of fact, in writing, made by an affiant under oath or affirmation, administered by a person lawfully authorized (such as a notary public). In this case, the affiant states that labor or equipment was furnished by the lien claimant and the balance owed remains unpaid. The affidavit is not a lien, but sets out sworn facts based on personal knowledge, that when recorded, will later become the lien. It is a necessary step to perfect (make effective against third parties) the lien. For residential jobs, record the affidavit by the 15th day of the third month of indebtedness, and by the 15th day of the fourth month for commercial projects. File the Affidavit of Lien form with the county clerk of the county where the property is situated. Serve the party subject to the lien through certified mail with a return receipt requested within five (5) days of filing the lien affidavit. General contractors must serve the owner, and all other lien claimants must serve the owner and general contractor.
Be aware that these times can be shortened by the owner or general contractor. The general contractor may shorten the time for a lien claiming retention amounts under §53.057(f) of the Texas Property Code thus reducing the time to 40 days after the subcontractor receives an Affidavit of Completion, Termination, or Abandonment of the project. The time can be shortened to 30 days, as well, if the owner sends notice under §53.057(g) that demands a lien be filed and states the lien claimant must file within 30 day of receipt of such demand. The demand must include the name and address of the owner and a description of the subject property so that the lien can be properly recorded.
Calculate the amount of the lien by adding up the unpaid labor, materials, and equipment supplied, but NOT attorney’s fees. If the lien proceeds to a foreclosure lawsuit, however, attorney’s fees can usually be recovered in the judgment. Mechanic’s liens are only available against private property in Texas; public or government properties are exempt. A unique feature of Texas’s mechanic’s lien law is that a lien within an urban area includes the entire lot where the work was completed, but in rural areas, the lien is limited to only 50 acres. Lastly, the lien must be verified (signed and attested that its contents are accurate) and notarized.
Priority describes the order in which lien claimants and other creditors will be paid upon a foreclosure sale of the property. Mortgage lenders have priority over the lien but only if the mortgage is recorded first before any work begins. If the mortgage is recorded after the work starts, then the lien claimant has priority. Architects, engineers, and surveyors have priority which relates back to the recording dates of their lien affidavits. All lien claimants, including the general contractor, supplier, or subcontractor have the same priority that relates back to the commencement of work, so typically contractors claim priority over design professionals.
The owner also can clear title to his or her property by posting a lien release bond. The bond must be posted for twice the lien amount (up to $40,000) or one and a half times the amount (for claims exceeding $40,000). For example, if the lien is for $20,000, a $40,000 bond must be posted. If the lien is for $50,000, a $75,000 bond is required. Once the bond is posted, the lien claimant can prosecute his or her claim in court and if successful, he or she can receive the bond money direct from the surety.
A few other issues to consider:
When dealing with a residential contract, be aware that Texas law requires all residential contracts to be in writing and signed by the owner and general contractor prior to commencement of the work. The contract must be filed with the county clerk along with the special “fund trapping” notices (which must include the required statutory warnings). Subcontractors and suppliers without a direct contract with the owner are required to serve both the owner and general contractor with a special letter on all residential projects. The letter must warn the owner that: a) the owner and his or her property will be liable if the bills are not paid, b) the owner is required to withhold funds due to the general contractor after receipt of a timely served prelien notice, and c) the owner must hold the required retention amount for the benefit of the other claimants.
The last issue to discuss is the Notice of Completion. Completion of an original contract means the actual completion of the work, including any extras or change orders reasonably required or contemplated under the original contract, other than warranty work or replacement or repair of the work performed under the contract. This is filed by the owner with the county clerk and must be sent to the general contractor and all lien claimants who previous sent a notice of unpaid claims. Any subcontractor or supplier who requested a copy of the Notice of Completion must also receive one. However, as to the general contractor, copies of the Notice of Completion must be sent within ten (10) days of receiving a subcontractor notice letter (letter requesting copy of Notice of Completion). The notice must be sent in the form of an Affidavit of Completion and served through certified mail. The time to file a mechanic’s lien is not tracked by the date the Notice of Completion is filed. In Texas, all non-residential project lien claimants must file the lien on the 15th day of the fourth calendar month after their designated portion of the work is complete (must be served 15th day of third month for residential claimants).
In conclusion, a mechanic’s lien is a powerful tool for contractors and other labor or material providers to ensure payment through the threat of possible foreclosure on the owner’s property. Additionally, future buyers are normally hesitant about purchasing property subject to a lien and title insurers are reluctant to it. Therefore, property owners have a strong motivation to avoid a lien. Follow the guidelines of mechanic’s lien law outlined in the Texas Property Code (including the filing deadlines and adhering to the proper format for each required document) and a mechanic’s lien can grant a form of protection that will ensure payment for work you completed.
Each case is unique, so contact an attorney with specific questions or for complex situations.