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Legal - Lien law fundamentals every contractor should know

image West W. Winter, Attorney, The Winter Law Firm, PLLC, San Antonio TX

SAN ANTONIO - Arguably one of the most significant remedies in construction law is the Mechanic’s and Materialman’s Lien. Governed by Chapter 53 of the Texas Property Code and the Texas Constitution, mechanic’s and materialman’s liens, if timely and properly perfected, secure a contractor’s right to payment against the project. This article discusses some general fundamental concepts of Texas mechanic’s and materialman’s liens.

 

Mechanic’s and Materialman’s Lien Basics
    While the specifics of proper statutory lien perfection are complicated and beyond the scope of this article (in fact, Texas has often been said to have some of the most complicated lien laws in the entire country), perfection of a statutory lien claim generally requires timely and proper written notice of the unpaid debt, timely recording of a proper lien affidavit in the real property records in the county in which the project is located, and timely giving notice of the filed lien to the owner and general contractor.  While the mechanic’s lien statutes are to be liberally construed for the purpose of protecting laborers and materialmen, the deadlines and requirements for proper lien perfection should be closely followed to ensure that this powerful remedy is not lost.  It is also critical to know that a lawsuit must actually be filed to enforce/foreclose the lien claim within the limitations period mandated by Chapter 53 (typically one or two years, depending on the type of project) or the lien will be extinguished.  Significantly, Section 53.156 of the Texas Property Code mandates an award of costs and attorney’s fees “as are equitable and just” in any proceeding to foreclose a lien or to declare that any lien is invalid, in whole or in part.
    Contractors having an agreement directly with the project’s owner may, depending on the type of work involved, further possess constitutional lien rights which exist independently of any notice or recording requirements.  Rights may alternatively exist under a payment bond if work is performed on a public or bonded private project.  Strict time and notice requirements also exist for the proper perfection of a bond claim and will differ depending on whether the project is state or federal. 

A Sham May Save You if You Missed the Notice Deadlines

    There are some nuances in the law which may apply to salvage mechanic’s lien rights in certain situations where a subcontractor or supplier has missed the required pre-lien notice deadlines.  One such situation involves Sham Contracts where the purported owner and general contractor are essentially one in the same.  As set forth in Section 53.026 of the Texas Property Code, when a person contracts with another, and that other person controls or otherwise is controlled by the owner “through ownership of voting stock, interlocking directorships, or otherwise”, the person performing the labor or furnishing materials is deemed to be in a direct contractual relationship with the owner and has a lien as an original contractor.  The same result occurs when the contract was made by the owner “without the good faith intention of the parties that the other person was to perform the contract.” 
    When the Sham Contract provision applies, the unpaid subcontractor or supplier should be considered to be in a direct contractual relationship with the owner and gains original contractor status.  Along with original contractor status, the unpaid subcontractor or supplier also has lien rights as if it were an original contractor.  Accordingly, the mandatory notice requirements generally applicable to subcontractors and suppliers for perfecting statutory mechanic’s liens should not apply, and the unpaid subcontractors or suppliers may be able to perfect their lien rights as original contractors despite a failure to comply with the Property Code notice requirements.  According to recent case law, another benefit which can be derived from the Sham Contract statute is the potential availability of a constitutional lien to a person performing work or supplying materials to a sham contractor if such work or materials are covered by Article XVI, Section 37, of the Texas Constitution (i.e. buildings and articles).  

Lien Preferences and Removeables
    While Chapter 53 of the Texas Property Code grants a preference to mechanic’s liens, the preference granted is limited to “removeables”.  A mechanic’s lien on removeable improvements has priority over a deed of trust lien.  “Removeables” are improvements that can be removed from the property without material injury to the land and pre-existing improvements, or to the improvements removed.  Some examples of removeables include carpets, appliances, air conditioning and heating components, and light fixtures. 

Leasehold Liens
    If your company provides labor or materials to tenants, it is essential to understand that your lien rights are generally limited to the leasehold estate.  A mechanic’s and materialman’s lien attaches to the interest of the person contracting for construction.  As such, if a lessee contracts for construction, a mechanic’s and materialman’s lien arising from that construction attaches only to the leasehold interest and not to the fee interest of the lessor.

Fraudulent Lien Statute
    Caution should be taken when asserting mechanic’s and materialman’s liens as a law exists which provides a cause of action against someone who records a fraudulent lien with the intent to defraud.  Codified in Chapter 12 of the Texas Civil Practice and Remedies Code, the “Fraudulent Lien Statute” provides for liability for asserting a fraudulent lien with the intent to defraud for the greater of (A) $10,000; or (B) the actual damages caused by the violation, plus court costs, reasonable attorney’s fees, and exemplary damages in an amount determined by the Court.
    West W. Winter, a LEED Green Associate, serves on the board of the Construction Law Section of the San Antonio Bar Association and has been listed as one of the Best Lawyers in San Antonio for Construction Litigation.  The Winter Law Firm represents general contractors, subcontractors, and suppliers, in all phases of the construction process, from contract formation through dispute resolution, litigation, and collection.  West may be reached via email:  west@thewinterlawfirm.com.


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