By Linda Johnson White, Associate Attorney at The Cromeens Law Firm, PLLC
Construction industry professionals may or may not be aware that there is currently a bill pending in committee in the Texas House of Representatives that would completely overhaul the mechanic's and materialman's lien process in Texas. Those who are aware may be asking themselves and their colleagues whether they should give this bill their support. Read on for an in-depth summary of the most sweeping changes proposed by HB 3065 and how those changes could affect the lien process and rights of contractors, subcontractors, and material suppliers.
HB 3065 primarily does two things: it provides clarification of various provisions of Chapter 53 of the Texas Property Code by cleaning up much of the confusing language currently found there and proposes amendments that will significantly change the lien process in Texas. The biggest, and perhaps best known change to the current lien process proposed by HB 3065 is the creation of a new website where owners, contractors, and subcontractors will be able to search for notices related to construction projects within the state and post notices to owners and original contractors. The current version of the bill requires that the website allow claimants to post notices free of charge and also that the website provide free forms to claimants to use for all notices required under Chapter 53. The only fees currently authorized by HB 3065 are those charged to owners when they file a notice of commencement for a project. The filing of a notice of commencement by owners would be mandatory, and so far, the requirement is not qualified as applying only to projects of a certain value, as is the case in some other states. Proposed amendments to Texas Property Code 53.003, would allow notices from subcontractors to be posted on the new lien website or sent to the owner by email to the email address provided, in addition to by certified mail. The effective date of a notice would be the date the notice is posted on the lien website or the date the email is sent.
While the lien website may be the biggest proposed change to current lien law in Texas, it is not the only significant change. As will be appreciated by lien claimants and their attorneys, the deadline for notices and liens would be extended to the next business day when the 15th of the month falls on a weekend or holiday. HB 3065 also proposes to simplify the notice requirements for a subcontractor's lien claim from requiring multiple notices to requiring only one notice, known as a notice of furnishing. The notice of furnishing would be posted on the lien website, emailed, or mailed to the owner. Under the proposed new rule, a subcontractor would want to file their notice of furnishing as soon as they are hired on a project, because there would be limitations on claims for work/material furnished prior to its filing. The notice of furnishing would preserve lien rights on work/material furnished no more than 45 days before the notice is posted/filed if an owner does not file a notice of commencement, but only 15 days before the notice of furnishing is posted/filed if the owner does file a notice of commencement for the project. Also, subcontractors working on the same project for more than one original contractor would need to file a notice of furnishing for each original contractor to whom it provided work.
HB 3065 additionally proposes to change the deadline for filing a lien with the county clerk to the 15thday of the 4th month after the work under the original contract is completed or terminated for commercial projects (and the third month for residential projects), instead of the current rule which is the 15th day of the 4th month after the work/material is furnished. Owners would be required to either post a notice of termination on the lien website, or to send a copy to every person who filed notice of furnishing. This amendment would eliminate the potential need for a subcontractor who is working on the same project for an extended period of time to file multiple liens on the same property. One proposed rule that could use some revision is that providing for a notice of completion to be posted and filed by the owner. As currently proposed, that rule states that owners "may" file a notice of completion with the county clerk and post it on the lien website if a notice of commencement was filed. It does not provide for the owner providing a notice of completion when it has failed to file a notice of commencement, and does not make the filing of the notice of completion mandatory. However, as you can see, this bill in its current form would provide the construction industry with much more simplified lien notice and filing requirements: each subcontractor would only be required to file one notice and one lien for each project to which they provide labor/materials.
Owners would be benefited by HB 3065's proposed opportunity for owners accelerate the filing of liens by claimants once a project is complete or an original contract is terminated. Since the time for filing a lien has been extended for subcontractors, HB 3065 offers owners the option of sending via certified/registered mail to all subcontractors who have filed a notice of furnishing, a notice of completion/termination providing the date of completion/termination and demand that any subcontractor who intends to file a lien on the project do so within 30 days. The 30-day deadline would begin on the date the notice was sent from the owner, and would only be effective as to those who have actually completed their work at the project. The downside to this rule for subcontractors, is that any subcontractor who didn't comply with the demand would waive any lien rights they have on the project.
One proposed change that is not as far-reaching as some of those discussed thus far, but is nonetheless beneficial to lien claimants, is the proposed extension of the deadline for sending a copy of a filed lien affidavit to the owner and original contractor from 5 days to 10 days.
When discussing HB 3065 with a material supplier recently, one of the concerns he expressed was that the proposed revisions would eliminate the trapping of funds by owners. However, just as the current law allows owners to withhold payment to an original contractor if that owner receives a notice or lien affidavit from a claimant in the amount necessary to pay that claim/lien, so does the proposed amendment to that rule. Although, as I am sure original contractors will be glad to hear, the proposed amendment would limit the owner's ability to withhold funds to only the amount necessary to pay claims. If the owner is already withholding payment from the original contractor for retainage at the time it receives notice of a claim/lien, then the owner would have to include the amount of retainage withheld in the overall amount withheld from the original contractor to pay the claims/liens. For example, if an owner has withheld $25,000 in retainage from an original contractor and receives a $12,000 lien claim, the owner would not be able to withhold any additional funds from the original contractor. It would only be after the claims/liens exceed the amount of retainage withheld that an owner would be authorized to withhold additional funds from the original contractor. The amount of time an owner could withhold funds from an original contractor to pay claims would be revised to be until payment is made, the claim is settled/discharged or determined to be invalid by final order of a court. The opportunity to release funds to the original contractor once lien deadlines have passed would no longer be available.
Another significant benefit to subcontractors proposed by HB 3065 is the expansion of owner liability. No longer would an owner's liability be limited to retainage; it would instead be limited to the full amount (including change orders) of the original contract. Payments by the owner to the original contractor would also not affect the owner's total liability to claimants. Furthermore, an owner's liability would no longer attach only to the property: the revisions proposed would hold an owner personally liable for a lien claim even after transfer or foreclosure of the owner's interest in the property.
The proposed revisions concerning the liability of purchasers of liened property is another change that could use some additional attention. Though this amendment provides that new purchasers of liened property cannot be held personally liable for the claims/liens on the property, it clarifies that they can be held liable for attorney's fees under Section 53.156. What is not clear, and what could in my opinion use further clarification, is whether the property at issue in these situations could be foreclosed on to pay the claims/liens asserted thereon. The current proposed language seems to imply that it could not, but there is enough ambiguity in the language used that litigation on the issue would be invited.
Though subcontractors seem to be the focus of HB 3065's overhaul of our lien statutes, there are also some benefits for original contractors being proposed. In additional to the above-discussed limitations of an owner to withhold funds from an original contractor for the payment of claims, HB 3065 proposes to eliminate an original contractor's statutory obligation to defend an owner against lien claims when the owner is in violation of its contract with the original contractor.
There are also a few proposed revisions that would more directly affect attorneys litigating in this area of construction law, the first of which is a revision of the deadline to bring suit to foreclose a lien. HB 3065, in its current state, reduces the two-year deadline to bring suit on liens filed on commercial projects to the same 1-year deadline for residential projects. An owner and claimant could extend either deadline to 2 years, but only by written agreement filed with the county clerk. There is also an amendment proposed which would affect the ability of attorneys to bring summary motions to remove liens. The current law allows for seven situations in which a summary motion may be used to remove a lien. HB 3065 proposes that two of those situations be eliminated: when the deadlines for perfecting a lien claim for retainage have expired and when the contested funds have been plead into the registry of the Court. It seems the intention here is to limit the availability of a summary motion to remove a lien to instances where the claimant has somehow failed to comply with the statutory requirements for perfecting its lien.
As we are all aware, sometimes bonds are filed on a project to protect the owner/property from lien claims and potential foreclosure based on those claims. HB 3065 proposes to revise a few of the rules related to the filing of bonds and bond claims. For example, the amount of a claim requiring a bond two times the claim amount has been raised from $40,000 to $60,000, meaning also that claims above $60,000 will require a bond in the amount of one and a half times the claim amount. The sponsors of HB 3065 are also seeking to simplify the notice requirements for bond claims. Bond claimants who contracted directly with the original contractor would not be required to provide any notice of their claim to the original contractor, and those who did not contract directly with the original contractor would only be required to give the original contractor a notice of furnishing. Effective notice to the surety would be achieved by a simple notice stating the amount and nature of the claim, and if required, a copy of the notice of furnishing provided to the original contractor.
In summary, the changes to current lien law proposed by HB 3065 seem to be very subcontractor focused, and have the potential to shift some of the risk and burden currently carried by subcontractors onto owners in a way that is more true to the intentions expressed both in the plethora of court opinions issued by Texas courts over the last century and in the legislative history of our current statutes governing this area of law.
This article is intended as a general educational overview of the subject matter and is not intended to be a comprehensive survey of recent jurisprudence, nor a substitute for legal advice for a specific legal matter. If you have a legal issue, please consult an attorney.