How to Avoid Mechanic’s Liens

Usually, the lawyer gets a phone call when a problem with a mechanic’s lien has already arisen. However, there are preventative measures that property owners can take to avoid getting into mechanic’s lien situations in the first place. One method is to obtain advance or periodic mechanic’s lien waivers from your contractors. Another is to bond around any potential mechanic’s liens. Both methods require strict compliance with the relevant sections of the Texas Property Code to ensure effectiveness.

Waiver:

Residential Advance Waivers. Statutory mechanic’s liens generally cannot be waived in advance by the contractors. See Tex. Prop. Code § 53.286. However, a big exception to this rule exists for single-family homes. Under Tex. Prop. Code § 53.282(a)(3), a waiver of mechanic’s lien is enforceable if it is in a “written original contract . . . for the construction, remodel, or repair of a single-family house . . .” and is “made before labor or materials are provided under the original contract.” So, generally you can have your contractors waive their rights to file mechanic’s lien affidavits to cloud your title if it is a single-family residential project and the waiver is in the original contract signed before labor or materials or provided. Developers doing residential rehabs should consider including this waiver language in their original contracts with each of their contractors to avoid mechanic’s liens.

Statutory Progress Payment Waivers. Another waiver worth mentioning here is the statutory form waivers for progress payments. In Section 53.284 of the Texas Property Code, property developers can find a form for waiving mechanic’s liens upon the making of a progress payment. In a multi-stage development project, use of these forms contemporaneously with the payment of each draw is a best practice. Keep in mind that you cannot tell the contractor that you will not pay the contractor unless the contractor signs the waiver. You have to pay the contractor first, and then get the waiver signed. See Tex. Prop. Code § 53.283. You could tell the contractor that the contractor may not do any additional work or receive any additional payment until the contractor signs the waiver for the draws that have already been completed and paid. This way, you are waiving liens in stages as the project nears completion so that you do not get stuck with a large lien claim at the end of the project.

Fraudulent Lien Law Issues. One final note on waivers, filing a mechanic’s lien affidavit despite a valid waiver does violate the Texas Fraudulent Lien Law (Tex. Civ. Prac. & Rem. Code § 12.002), but only if the property owner sends “a written explanation of the basis for nonpayment, evidence of the contractual waiver of lien rights, and a notice of request for release of the lien to the claimant at the claimant’s address stated in the lien affidavit” and “the lien claimant does not release the lien affidavit” within fourteen (14) days. See Tex. Prop. Code § 53.282. If the reason for the lien being fraudulent does not relate to waiver, then the Fraudulent Lien Law is violated at the time that the lien claim is filed, not when the claimant refuses to release it. Vanderbilt Mortg. & Fin. v. Flores, 692 F.3d 358 (5th Cir. [Tex.] 2012).

Prompt Payment Act. It should also be noted that liability for 18% interest on unpaid amounts under the Texas Prompt Payment statute cannot be waived in a residential construction contract, but can be limited to payments not made by 60 days after the date that the owner receives the written Tex. Prop. Code. § 28.002(a) request from the contractor. Also, on residential contracts, the prompt pay good faith withholding allowed is 110%, not 100%. Tex. Prop. Code § 28.003.

Bonding Around Mechanic’s Liens:

An appropriate preventative bond will keep mechanic’s liens from arising during a project. After a dispute arises and a lien has already been filed or attempted, however, the cloud on title can still, generally, be cleared with a remedial bond.

The Texas Department of Insurance can be a good place to start looking for the right bonding company:

http://www.tdi.texas.gov/commercial/pcbond.html#type

Preventative Bonds:

Though rarely used for small residential projects, mechanic’s and materialman’s liens can be stopped with a bond that complies with Sections 53.201–53.211 of the Texas Property Code. Under § 53.201 of the Texas Property Code, “If a valid bond is filed, a claimant may not file suit against the owner or the owner’s property . . . .” “If a payment bond meets the statutory requirements, a claimant may not file lien claims against the property owner or seek foreclosure of the claimant’s lien on the owner’s property. Tex. Prop. Code § 53.201. Instead of looking to the property, claimants must look to the payment bond.” Laughlin Envtl., Inc. v. Premier Towers, L.P., 126 S.W.3d 668, 671 (Tex. App.—Houston [14th Dist.] 2004). Furthermore, “For a property owner to reap the benefits of Tex. Prop. Code § 53.211 and thereby enjoy the protections it affords, there must be a bona fide attempt to comply with the statutory requirements. Id. Under Section 53.211 of the Texas Property Code, attempted compliance with the bonding requirements of Section 53.202 of the Texas Property Code and other applicable law may be sufficient even if technical compliance is not present. Regardless, the prudent property owner or original contractor will try to strictly comply with the requirements of Section 53.202 of the Texas Property Code.

Remedial Bonds:

Remedial bonds, under Section 53.171 of the Texas Property Code, do not prevent mechanic’s liens from arising. Remedial, or indemnity, bonds can, however, clear title as to a specific lien after the claim has been filed.

Copyright 2017, Ian Ghrist, All Rights Reserved.

Disclaimer: This blog is for informational purposes only. Do not rely on any part of this blog as legal advice. Instead, seek out the advice of a licensed attorney. Also, this information may be out-of-date.