Commercial Construction: Avoiding Subcontractor Lien Liability
August 24, 2014 by Brown Fox
Under Texas law, a subcontractor enjoys no direct lien rights against the owner’s commercial property. Instead, a subcontractor must rely upon statutory, derivative rights to collect funds due from the general contractor (GC), or failing that, impose a lien on the property. Stolz v. Honeycutt, 42 S.W.3d 305, 310 (Tex. App.– Houston [14th Dist.] 2001, no pet.). An owner of commercial real estate is typically only liable to a subcontractor for an amount equaling “retained” and “trapped” funds. By carefully following the trapping and retainage provisions of the Texas Property Code, an owner can avoid liability to subcontractors and likewise avoid subcontractor liens.
Throughout a construction project, and for 30 days after the work is completed, an owner must retain either 10 percent of the contract price or 10 percent of the value of the work (Retained Funds). Tex. Prop. Code §53.101. The Retained Funds secure the payment of subcontractors and others who provided material, labor and service for any contractor, subcontractor, agent or receiver in the performance of the work. If an owner fails to retain the 10 percent, an owner may become personally liable to the subcontractor, despite payment to the GC.
Furthermore, if the owner receives a notice letter from the subcontractor that he has not been paid by GC, the claimant has “trapped” those funds and the owner may withhold payment to the GC in an amount sufficient to cover the claim for which he received notice.
In the case of a lien by a subcontractor, the owner should determine whether the claimant perfected the lien pursuant to the stringent notice and timing requirements set forth in Chapter 53 of the Texas Property Code.
The property owner should first establish whether he received proper notice. For a supplier to perfect a statutory lien, the first-tier subcontractor must send a letter by certified mail, return receipt requested, to the owner and the original contractor informing them of the unpaid claim not later than the 15th day of the third calendar month following each month in which labor was performed or material delivered. Tex. Prop. Code §53.056(a) and (b). For example, if the subcontractor was not paid from the months of July through December and sent proper timely notices for each of the months except the month of August, the lien was not properly perfected. A claimant is limited in its lien to the amount of funds he is able to trap by providing proper notice to the property owner. Tex. Prop. Code §53.084. An owner is not liable for any amount paid to the GC before the owner is on notice to trap funds under Texas Property Code §53.084.
The property owner should then establish whether the lien affidavit complied with §53.054 of the Property Code and whether notice of the filed affidavit was furnished to the owner or original contractor as required by §53.055. For commercial property, a lien affidavit must be filed not later than the 15th day of the fourth calendar month after the day on which the indebtedness accrues. Tex. Prop. Code §53.052(a). It must include a description that is meaningful and intelligible and meets the substantial compliance test. The property owner should also determine whether the claimant is owed the amount asserted in the affidavit and notice letters.
In order for the claimant to have a lien against the 10 percent of Retained Funds, the claimant must send timely notices and file an affidavit claiming a lien not later than the 30th day after the earliest of the date (a) the work was completed; (b) the original contract is terminated; or (c) the original contractor abandons performance under the contract.Tex. Prop. Code §53.103.
Any non-compliance technicalities with the notice or lien affidavit subject the lien to challenge. A motion for summary judgment to remove invalid or unenforceable lien is a statutory procedural attack. Furthermore, the 2011 amended Texas Property Code §53.156 states “the court shall award costs and reasonable attorney’s fees as are equitable and just,” rather than “may award,” for “any proceeding to declare that any lien or claim is invalid or unenforceable in whole or in part.” (Emphasis added). Every property owner should ensure, and challenge if necessary, compliance of any lien filing.
Sarah B. Sparling is an associate at Brown Fox Kizzia & Johnson PLLC. Lawrence E. Henke is senior counsel at the firm.