Texas law protects not only original or general contractors; who automatically obtain a lien upon the owner’s property just by providing materials or performing labor (Tex. Const. art. XVI, § 37); but also subcontractors who the owner may never meet and who may have no contracts or business dealings whatsoever with the owner. Property owners can be shocked to find that these people that they have never met can claim a lien upon the property and cloud the title, thus preventing a sale or hypothecation of the property. The original contractor holds an automatically-arising lien by the Texas Constitution, however, the Texas Constitution provides no protection to derivative claimants like subcontractors. Consequently, subcontractors’ rights come solely through compliance with the statutory mechanic’s lien laws. Generally, this means that if a subcontractor fails, in any way, to send out proper notices or file everything correctly, then the subcontractor loses its lien claim. Thus, the claims of subcontractors against the property owners can fail easily, often due to technicalities.
Derivative Claims. The subcontractors’ rights are called “derivative claims” because the rights of the subcontractors are derived from the rights of the general contractor. The general contractor is in privity of contract with the property owner (meaning that the owner and contractor have entered into a contract between the two of them) while the subcontractor is not in privity of contract with the property owner, but is in privity of contract with the general contractor. Under basic contract law, the subcontractor generally has no claim against the property owner for breach of contract when the subcontractor has not been paid because the subcontractor is only in privity with the general contractor, and so, may sue only the general contractor, and not the property owner. An exception to the general rule that only parties in privity with each other can sue for breach of contract exists when a third-party to the contract is an “intended beneficiary,” but intended-third-party-beneficiary law is complex, not specific to the State of Texas, and goes beyond the scope of this article, and the subject of mechanic’s lien and construction law, since it is a matter of general contract law principals.
A subcontractor’s lien is valid only if the correct written notice is given. If the general contractor has actual notice of a subcontractor’s claim, but does not receive timely written notice, then the subcontractor’s lien is invalid. Moore v. Brenham Ready Mix, Inc., 463 S.W.3d 109, 116 (Tex. App.—Houston [1st Dist.] 2015). Even though the mechanic’s lien statutes are “liberally construed” and “substantial compliance” with the statutes can sometimes be sufficient to perfect a lien, derivative claimants tend to have little leeway. Id. at 115, 118 (quoting First Nat’l Bank in Graham v. Sledge, 653 S.W.2d 283 (Tex. 1983). For the most part, the subcontractor who misses notices or sends them late loses its lien. Morrell Masonry Supply, Inc. v. Lupe’s Shenandoah Reserve, LLC, 363 S.W.3d 901, 904–07 (Tex. App.—Beaumont 2012, no pet.). The requirement for mechanic’s liens is generally substantial compliance rather than strict compliance. James Mech. Contractors v. Tate, 647 S.W.2d 347, 349 (Tex. App. 1982).
The Two Main Ways for Subcontractors to Make Claims Against the Property Owner: The “Retainage Statute” (Tex. Prop. Code § 53.101-106; Texas Property Code Title 5, Subtitle B, Chapter 53, Subchapter E) and the “Trapping Statute” (Tex. Prop. Code § 53.081-85; Texas Property Code Title 5, Subtitle B, Chapter 53, Subchapter D). See Stolz v. Honeycutt, 42 S.W.3d 305, 310 (Tex. App. 2001) for a good overview of how the retainage statute and the trapping statute work.
The Retainage Statute. Even unsophisticated Texan homeowners who pay a handyman to do some work on the house need to know about statutory retainage or else face potential derivative liability from unpaid subcontractors of the handyman. Statutory retainage is the amount of holdback funds that are required on every project. Property owners must retain ten (10) percent of the contract price of the work or ten (10) percent of the value of the work (if there is no contract price) for thirty (30) days after the work is completed. Tex. Prop. Code § 53.101. This is called the “required statutory retainage.” Special rules governing contractual retainage claims are found in Section 53.057 of the Texas Property Code. “In order to perfect a statutory retainage lien . . . a subcontractor must file its lien affidavit within thirty days of the time that the original contract is completed, terminated, or abandoned.” Tex. Prop. Code § 53.101; Page v. Marton Roofing, Inc., 102 S.W.3d 733, 734 (Tex. 2003).
The Trapping Statute and Funds-Trapping Letters. “The statutory fund-trapping provision allows subcontractors to ‘trap, in the owner’s hands, funds payable to the general contractor if the owner receives notice from the subcontractors that they are not being paid.’ First Nat’l Bank v. Sledge, 653 S.W.2d 283, 286, 26 Tex. Sup. Ct. J. 463 (Tex. 1983). Specifically, the statute provides that an owner who receives such notice ‘may withhold from payments to the original contractor an amount necessary to pay the claim for which he receives notice.’ Tex. Prop. Code § 53.081(a). The statute further provides a remedy if the owner fails to withhold funds from the original contractor: ‘the owner is liable and the owner’s property is subject to a claim for any money paid to the original contractor after the owner was authorized to withhold funds under this subchapter.’ Id. § 53.084(b).” Page v. Marton Roofing, Inc., 102 S.W.3d 733, 734-35 (Tex. 2003). The main difference between residential and nonresidential claims is that residential claims only involve one notice, while nonresidential claims involve two sets of notices. In the nonresidential context, both notices must be sent by the deadlines for the lien to be valid. Morrell Masonry Supply, Inc. v. Lupe’s Shenandoah Reserve, LLC, 363 S.W.3d 901 (Tex. App.—Beaumont 2012, no pet.).
The property owner can be liable for both the amounts successfully trapped under the trapping statute and the statutory retainage under the retainage statute. Hadnot v. Wenco Distributors, 961 S.W.2d 232, 235 (Tex. App. 1997). If the property owner fails to retain the 10% for the 30 days, then the truncated 30-day lien filing deadline may not apply due to a Texas Supreme Court modification to the statute. Gen. Air Conditioning Co. v. Third Ward Church of Christ, 426 S.W.2d 541, 544 (Tex. 1968, writ refused NRE); but see Texas & N. Ry. Co. v. Logwood, 401 S.W.2d 886, 890 (Tex. Civ. App. 1966) (apparently overturned by the Gen. Air case). If the property is a homestead, then there cannot be a lien on the property, but the subcontractor can impose personal liability on the homeowner. Donahue v. Rattikin Title Co., 534 S.W.2d 156, 159 (Tex. Civ. App. 1976). In mechanic’s lien litigation, the court “shall award costs and reasonable attorney’s fees as are equitable and just,” which essentially gives the court discretion over whether to award attorney’s fees and which side should be awarded fees. Tex. Prop. Code Ann. § 53.156 (Added in 1984, 68th Leg., 2nd C.S., ch. 18, § 4(a)). Before the foregoing statute, subcontractors would not be entitled to attorney’s fees in lien litigation with the property owner because they lack privity of contract with the owner, which precludes attorney’s fees under Chapter 38 of the Texas Civil Practice and Remedies Code. First Nat. Bank in Graham v. Sledge, 653 S.W.2d 283, 288 (Tex. 1983).
Protections for Homeowners. Subchapter K of Chapter 53 of the Texas Property Code protects unsophisticated homeowners from some of the pitfalls of statutory retainage and funds-trapping law. These rules, in Sections 53.251 to 53.260 of the Texas Property Code, apply to properties “used or intended to be used as a dwelling by one of the owners.” See Tex. Prop. Code § 53.001(8)–(10). Generally, Subchapter K notice deadlines for subcontractors on residential projects are one month shorter than the non-residential deadlines. Also, the homeowner must be provided with a list of subcontractors and suppliers. See Tex. Prop. Code § 53.256. Keep in mind that even though a contractor is supposed to provide a homeowner with the disclosure from Tex. Prop. Code § 53.255 that the failure to do so does not invalidate the contractor’s lien, it only gives rise to damages against the contractor if the failure to provide the lien causes damages. Tex. Prop. Code § 53.255(c); See 1997 Texas House Bill 740, Committee Report, April 10th, 1997 (“In connection with the disclosure and disbursement statements, there are no specific remedies provided against the contractor or the lender who fails to provide these statements because the Committee believes that there are sufficient statutory causes of action available to consumers who are injured as a result of the failure to comply with a statutory disclosure requirement.”). The contractor is also required to provide funds disbursal statements, with subcontractors listed, under Tex. Prop. Code § 53.258, but again, the failure to comply does not invalidate a lien. Tex. Prop. Code § 53.258(e).
Final Bills—Paid Affidavit. Homeowners should also be aware that original contractors are required by Section 53.259 of the Texas Property Code to submit a “Final Bills—Paid Affidavit.” In this affidavit, the original contractor should either state that he has “paid each person in full for all labor and materials used” or give the names and amounts owed of anyone who remains unpaid. Additionally, the statute makes it a crime to submit a false final bills-paid affidavit and imposes personal liability on the person signing the affidavit for any incorrect information in the affidavit. Since most homeowners do not know about this law, they probably would not even think to ask for this affidavit.
The following Matrix shows the funds-trapping notice rules for statutory and contractual retainage claims (known colloquially as “funds-trapping” notices). Please note that Tex. Prop. Code. § 53.058 and § 53.253 contain other rules for specially-fabricated items.
Subcontractor’s Notice Matrix
||Statutory Retainage Claim
||Contractual Retainage Claim
||If homestead, then also comply with Tex. Prop. Code § 53.254, including giving the homeowner the statutory notice in subsection (g).
Written notice to the owner and the original contractor of the unpaid balance. Deadline is the fifteenth (15th) day of the second (2nd) month following each month in which all or part of the claimant’s labor was performed or material delivered.
Notice must state that “if the claim remains unpaid, the owner may be personally liable and the owner’s property may be subjected to a lien unless: (1) the owner withholds payments from the contractor for payment of the claim; or
(2) the claim is otherwise paid or settled.” Tex. Prop. Code § 53.252.Must be sent registered or certified mail and be addressed to the last known address for the recipient.The notice should include “A copy of the statement or
billing in the usual and customary form.” Tex. Prop. Code § 53.252(e).
|The subcontractor can either follow the rules for statutory retainage claims, or follow the rules for contractual retainage claims. Either are effective. Tex. Prop. Code § 53.057(a).
Notice of a contractual retainage agreement must be given to the owner “not later than the earlier of (1) the thirtieth (30th) day after the date the the claimant’s agreement providing for retainage is completed, terminated, or abandoned; or (2) the thirtieth (30 th) day after the date the original contract is terminated or abandoned.” Tex. Prop. Code § 53.057(b).
If the contractual retainage agreement is with the original contractor, then the notice must go to both the owner and the original contractor by the deadline. The notice must generally state the existence of a requirement for retainage and contain the name and address of the claimant and the subcontractor, if different. The notice must be sent to the last known business or
residence address of the owner or contractor.
Tex. Prop. Code § 53.057(e) through (g) contain rules for filing of lien affidavits in lieu of following the statutory retainage claim rules.
||Subcontractor must give notice of unpaid balance to the original contractor “not later than the fifteenth (15 th) day of the second (2nd) month following each month in which all or part of the claimant’s labor was performed or material delivered.” Tex. Prop. Code § 53.056(b).
Subcontractor must give the same notice to the owner, with a copy to the original contractor, not later than the fifteenth (15 th) day of the third (3rd) month following each month in which all or part of the claimant’s labor was performed or material delivered. Id.
The notice to the owner must state “if the claim remains unpaid, the owner may be personally liable and the owner’s property may be subjected to a lien unless: (1) the owner
withholds payments from the contractor for payment of the claim; or (2) the claim is otherwise paid or settled.” Tex. Prop. Code § 53.056(d).
Must be sent registered or certified mail and be addressed to the last known business or residential address for the recipient.The notice should include “A copy of the statement or
billing in the usual and customary form.” Tex. Prop. Code § 53.252(e).
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