Lien Law Online eLert for 7/28/2011 - Texas

July 28, 2011

The Texas Legislature has made the following important changes:

Retainage Notice Requirements—HB 1390

The Legislature made significant changes to the means and timing to record a lien to secure payment of contractual retainage. Initially, prior to the passage of HB 1390, there were two, distinct types of retainage recognized under Texas law: (i) contractual retainage in prime contracts and subcontracts and (ii) a statutory opportunity for an owner to withhold 10% of the prime contract amount and create a “drop dead” date to file a lien. If this statutory retainage was withheld and no notices of indebtedness were sent from a claimant to an owner, an owner could release the remaining 10% on the 31st date after completion, relatively secure in knowing that it would not be liable to lien claims filed thereafter. These two, separate retainage concepts had separate provisions for notice and separate deadlines. Now, these concepts have been comingled.

Subcontractors and suppliers have two means to preserve the right to claim a lien for unpaid, contractual retainage. First, they can send notice letters as contractual retainage is withheld from their periodic draws. This process has not been changed. Second, they can now wait to the conclusion of their work scope and send notice of a retainage provision within 30 days of the completion or termination of their subcontract. However, the statutory change does not require the lien claimant to advise the owner of the amount of any contractual retainage, it merely requires notice that a subcontractual retainage obligation exists.

If timely notice is provided to an owner that a subcontract calls for retainage (timely meaning within 30 days after the subcontracted work is completed), the claimant can later file a lien to create a direct liability against an owner. The deadline to file the lien is a moving target, but generally ranges from 40 days after a notice of completion or a notice of termination is recorded by the owner on the entire project, to 4 months after completion of the entire project if no notices are recorded. The new HB 1390 also allows an owner to accelerate this lien-filing obligation by allowing an owner to send a written demand that the claimant file its lien (putting the claimant on a 30-day deadline to file). Unfortunately, the statutory amendment now comingles the notion of contractual retainage, statutory “safe harbor” retainage, and personal liability to an owner for debts – something that may require future legislative clarification or court interpretation to resolve.

Finally, the amendment now provides that if subcontractors have requested information of an owner during the course of a project (essentially information on completion, termination, or legal descriptions of the property), and the owner fails to provide the information in accordance with the statute, the deadline to file a lien to secure payment of contractual retainage reverts to 4 months after completion of the entire project.

The new retainage notice requirements will take effect on September 1, 2011.

HB 1456—Standardized Statutory Lien Waiver Forms

House Bill 1456 had two significant changes to existing Texas law. Initially, it prohibited the use of contractual waivers of lien rights for commercial construction projects. Further, it mandated the use of uniform statutory lien waiver forms, for both conditional and unconditional lien waivers. These are the forms to be used during the payment process on all construction projects in Texas. The residential construction industry can be exempted from the prohibition on contractual waivers of lien rights.

While the use of these standard, statutorily-worded lien waiver and release forms may reduce litigation and payment delays in the construction process, the primary goal of the statute was to invalidate contractual lien waivers and to preserve the rights of subcontractors and suppliers to file liens in the event of a failure of payment. If the lien waiver and release is not drafted and executed in a form that “substantially complies” with the language found in House Bill 1456, then it is not enforceable and does not create an estoppel or impairment of a lien or payment bond claim. However, if a subcontractor or supplier has actually been paid, a deficiency in a form would be irrelevant, as there would be no outstanding indebtedness for which a lien would be filed. In addition, this legislation prohibits a person from requiring a claimant to execute an unconditional waiver and release for a progress payment or final payment amount unless the claimant or potential claimant actually received payment in that amount in good and sufficient funds. The requirement for the use of the uniform statutory lien waiver and release language takes effect on January 1, 2012.

Mandatory Attorney’s Fees on Suit to Foreclose a Lien—SB 539

Prior to the enactment of Senate Bill 539, courts had discretion to determine whether to award costs and attorney’s fees to a successful party in a suit to foreclose on a lien or to enforce a claim against a construction-related bond. Senate Bill 539 amended the Property Code to make the award of reasonable legal fees mandatory for a successful lien claimant.

Gregory A. Harwell, Esquire (Contributing Author)

Gardere Wynne Sewell, L.L.P