A Contractors, Subcontractor’s & Supplier's Step-By-Step Guide to Getting Paid - Texas - Webinar

This article is taken from a webinar hosted by SunRay Construction Solutions and features Emily A. Pendleton, an associate at Porter Hedges LLP in the construction litigation practice group. In this article we will discuss a step-by-step guide on how to get paid on Texas construction projects.

Before getting started, we will discuss some housekeeping rules.

On the applicability of the step-by-step guide below, in order to preserve your right to payment, you are first going to have to evaluate the type of project that you are working on.

Types of Construction Projects

In Texas, there are private projects, public projects, etc. The different types of projects are:  

• Commercial, private project (bonded/unbonded)
• Residential, private project
• State public project (must be bonded)
• Federal public project (must be bonded)  

Primarily, the focus is on preserving your right to payment on private commercial projects in Texas. It will not be on residential projects, or any sort of public projects that are required to be bonded. You will learn how to get paid when you provide labor or materials on a private commercial project.  

Another key point is to understand that there are numerous changes made to the statutes that are applicable to Texas lien laws. They were implemented at the beginning of the year 2022 in order to streamline the lien perfection process and make things easier.

But in doing so, that creates another understanding that you have to know before and you implement these rules because it is important to understand when the project started.  

What Lien Perfection Rules Apply To

If you are providing labor or materials to a Texas commercial construction, private project, and you are unpaid, but the project started prior to 2022, the step-by-step guide will be slightly different.  

This article is focused on projects that started on January 1, 2022, or any time after. ‘Project started’ in January of 2022 or after, the original contract is being spoken about. The original contract is the contract between the property owner and the general contractor.  

So, the step-by-step guide is for projects starting January 1, 2022, or sometime after. So just be sure and cognizant of where you fall in the timeline of the big picture of the construction project that you are working on.  

How to Perfect a Statutory Lien 

Now we will discuss the steps on how to perfect a statutory lien and get paid. There are four steps you need to be aware of.  

a. Notice before recording the lien affidavit

First, you need to send a pre-lien notice.

b. Record lien affidavit

Second, you want to record your lien affidavit.  

c. Notice after recording the lien affidavit

The third step is to send your notice after recording your lien affidavit.  

d. File suit to foreclose  

Finally, if those steps do not get you paid, you are going to want to file suit to foreclose on your lien.  

Now we will further break down information on satisfying each of these steps to get you paid.  

Step 1: Pre-Lien Notice

a. What Is a Pre-Lien Notice?  

Step 1 is the pre-lien notice. The recent changes to Chapter 53 discussed above make the pre-lien notice super simple. It is simply a statutory form under §53.056 of the Texas property code.  

Below is the form in which you simply need to fill in the blanks in order to satisfy the notice requirements needed for a pre-lien notice in order to satisfy the requirements needed for a pre-lien notice.

b. Who Needs to Send a Pre-Lien Notice?  

So who needs to send a pre-lien notice? You have to evaluate where you fall in the construction players, like the owner, the general contractor, the subcontractor, a second-tier subcontractor, or a third-tier subcontractor.

i. Pre-lien notice mandatory for a ‘subcontractor’ but not required for ‘original contractor  

You are going to need to evaluate your upstream contractual relationship to determine whether you need to send a pre-lien notice. Pre-lien notices are required for anyone classified as a subcontractor under the statute but are not required for an original contractor.  

ii. Original contractor vs. subcontractor  

Under the statute, you will understand what an original contractor and subcontractor is.  

Original contractor

An original contractor is anyone who is in privity with the owner or the owner’s agent and in this article, they will be referred to as an original contractor, prime contractor, or general contractor.  

Subcontractor 

Under the statute, a subcontractor is anyone who performs work subject to a construction contract or obligation to the original contractor or to a subcontractor of any tier. This includes material suppliers, vendors, second-tier subcontractors, and third-tier subcontractors. These are the entities that are going to be required to send out that pre-lien notice under Step 1.

c. Required pre-lien notice

In the image above, everybody highlighted in red is required to send a pre-lien notice.  

d. Who Must Receive Pre-Lien Notice? 

Whom do you need to be noticed to? You need to send your pre-lien notice to the owner and to the original contractor. But the general tip in order to satisfy your pre-lien notice is just to go ahead and send it to all up-stream parties.

To the extent you find yourself as a second- or third-tier subcontractor on the job, go ahead and send it to everybody you are aware of upstream of you. This includes the subcontractor you are in privity with as well as the general contractor and the owner.  

It does not hurt to let more people know that you have performed work and have an unpaid amount. Let everyone know.  

e. When to Send Pre-Lien Notice By  

When do you need to send a pre-lien notice by?  

Send 15th day of third month after labor or materials provided

You need to send the pre-lien notice by the 15th day of the third month after the labor or materials were provided. Below is a hypothetical chart.

Say you performed work in April, May, and June of 2022 and you remain unpaid. When is your deadline going to be in order to perfect a lien? For unpaid April work, you are going to need to make sure you send your pre-lien notice by July 15.  

Within that notice, you want to include what the outstanding amounts are for the work you performed back in April that remains unpaid. In general, you are just going to want to send out the notice on July 15 for unpaid work in April.  

But you have performed work in May and June that also remains unpaid. You want to go ahead and include that in your pre-lien notice. Be sure and be all-inclusive of the amounts of work that you have performed when they were performed.  

For May and June, you perform that work, it remains outstanding so your pre-lien notice from July 15 should be all-inclusive of all work performed that remains unpaid.  

f. How to Send a Pre-Lien Notice 

Now, how do you send a pre-lien notice?  

Certified mail, return receipt requested 

You are going to want to send it via certified mail with return receipt requested. That is the recommended means for sending it out in Texas. Because once that pre-lien notice gets into the hands of the United States Postal Service, it is deemed as delivered regardless of whether the postal service loses your mail or otherwise.  

That is always going to be the recommended method for sending out your pre-lien notice. Now it is also recommended to send via FedEx and/or UPS. The reason is because these methods tend to be faster than certified mail. It can take 5-7 days for certified mail sometimes whereas with FedEx or UPS you can get it overnighted.  

When you send it faster, you get it into the hands of the owner that much quicker, which is going to be important when you do ‘fund trapping,’ and trapping funds in the hands of the owner is going to be critical.  

It is also recommended to make sure you keep a copy of your certified mail receipts just to be able to confirm in the event that you have to file for foreclosure on your lien. You have a copy since you sent it by certified mail.  

Step 2: Record Lien Affidavit  

The statute is very clear on what needs to be included in your lien affidavit. This is generally a list of the information that needs to be included in your lien affidavit when you record it.  

1. a sworn statement of the amount of the claim;
2. the name and address of the owner or reputed owner;
3. a general statement of the kind of work done and materials furnished;
4. the name and address to whom the claimant furnished materials or labor;
5. the name and address of the original contractor;
6. a description, legally sufficient for identification, of the property sought to be charged with the lien;
7. the claimant’s name, mailing, and physical address; and For a claimant other than an original contractor:
8. each month in which the work was done, and materials furnished for which payment is requested;
9. the date each notice of the claim was sent to the owner and method by which the notice was sent;
10. Each month in which the work was done, and materials furnished for which payment is requested,
11. the date each notice of the claim was sent to the owner and the method by which the notice was sent.  

a. When must lien affidavit be recorded?

Your lien affidavit has to be recorded by the 15th day of the fourth month after your work is completed.  

Going back to the old hypothetical, if you performed work in April, May, and June of 2022, that remains unpaid. So you complete your work in June. Your deadline for recording your lien affidavit is going to be October 15th of 2022.

b. Where must the lien affidavit be recorded?  

The lien affidavit needs to be recorded in the real property records of the county in which the property is located. Be cognizant of as well of the location of the project, specifically if you are a material supplier, and you are just shipping the materials to the job site.  

But the job site is very rural. In those instances, the county clerks do not authorize electronic recording. So when you have that 15th day of the fourth month deadline in a county where there is no electronic recording, you have to make sure you are acting well in advance in order to mail off an original copy of your lien affidavit that is notarized in order to meet your deadline.

That is why you need to be cognizant of the location of the project. In most Texas counties that will not be the case and there is electronic recording permitted which can be done the same day.  

Step 3: Notice after Recording the Lien Affidavit  

Step 3 is to send your notice after recording your lien affidavit. So this is just a notice that advises everyone that you have recorded a lien affidavit in the real property records.  

a. To whom must notice be provided?  

Whom does this notice need to be provided to? It is the same as the pre-lien notice. It needs to go to the owner and the general contractor by law.  

Practice Tip 1: Send notice of recorded lien to everyone

But the practice tip you need to remember here is to send it to all the upstream parties in the event that you find yourself as a second-tier subcontractor or lower.

b. By when must notice be sent?

When does that post-lien need to be sent by? It needs to be sent within five days of recording the lien affidavit. But generally, in order to satisfy Step 3 is to just go ahead and send your post-lien notice on the same date that you record your lien affidavit. Then you will avoid the risk of forgetting to send your post-lien notice.

c. Calculation of time  

Something new in the statute as of 2022 is the calculation of time as it applies to each of the deadlines spoken about for Steps 1, 2, and 3. It is that if your deadline of the 15th day of the third month for your unpaid materials in labor, your preliminary notice needs to go out.  

If that deadline happens to fall on a Saturday, Sunday, or legal holiday, essentially dates in which the United States Postal Service is not working, the statute permits that the deadline is extended to the following day that is not a Saturday, Sunday, or legal holiday.  

That provides a great benefit. If you realize that the 15th is a Sunday and you cannot send out your notice, send it out earlier.  

Practice Tip 2: Do not delay in sending your notice  

The general practice tip here is to not delay in sending your notice. Even though there are the above deadlines, there is no harm in doing any of this early. So to the extent you see that the 15th falls on the weekend. It is recommended that you go ahead and get it done the Friday before.  

Only utilize this extension of time permitted under statute in a pinch. But to the extent you know that there are payment issues. There is no harm in doing things early; there is only harm if you miss any of these deadlines.  

d. Available claims

Now that you know how to perfect your lien, generally speaking, you have two types of claims available to you. You have a claim against the contracting entity for nonpayment and then your perfected mechanic’s lien gives you a claim against the owner.  

e. Owner’s liability is limited  

But the owner’s liability is limited, and it is limited to two separate types of funds. The first is called reserved funds, and the second is called trapped funds. Sometimes knowing the type of liability that the owner has will change the way in which you go about evaluating the time in which you have to send out your pre-lien notice and record your lien affidavit.  

f. Reserved funds  

Now we will discuss reserved funds.  

Fund the owner is required to retain from general contractor throughout project 

The reserved fund is a fund that the owner is required to retain on all Texas projects from the general contractor throughout the course of the project.  

Equal to 10% of original contract price, or if project not complete, 10% of value of work

It is equal to 10% of the original contract price or if the project is ongoing, it is going to be 10% of the value of the work performed.  

Owner must withhold funds until 30 days after contract is completed 

The owner by law is required to withhold these funds until 30 days after the contract is completed.  

Send proper pre-lien notice  

Knowing that if you want to perfect a lien against the reserved fund that the owner is going to be liable for, you are going to need to send proper pre-lien notice.  

Record lien affidavit by 30th day after project is completed, terminated, or abandoned  

Then you are going to need to record your lien affidavit by the 30th day after the project is completed, terminated, or abandoned. That makes sense because the owner is permitted to release the reserve funds to the general contractor 30 days after the project is completed.  

So you want to make sure and record your lien affidavit no later than 30 days after the project is completed, terminated, or abandoned.  

But I thought I had 4 months?

You might be thinking you just read that you read until the 15th day of the fourth month after completing your work to get your lien recorded. That is not always going to be the case when you perform your work near the completion of the project.  

You are not going to want to wait three months to send out your premium notice or wait the four months to record your lien affidavit. You need to act quickly to the extent that you perform your work that remains unpaid towards the completion of the project in order to ensure that you are able to go after the owner for reserved funds.  

’Trapped’ funds 

The second liability of an owner is for trapped funds which was referenced earlier. These funds are funds that the owner pays to the general contractor after receiving a pre-lien notice and without withholding the funds sufficient to satisfy the amounts claimed in the pre-lien notice.  

That goes back to why it is recommended to send your pre-lien notice via FedEx or UPS because getting that pre-lien notice into the hands of the owner is critical to trap those funds there and not let them release those funds to the general contractor.  

Practice Tip 3: If owner has paid all contract funds when they receive pre-lien notice, no contract funds are ‘trapped’

If the owner has already paid out all the contract funds when it receives the pre-lien notice, there will be no contract funds ‘trapped.’ It is always to your advantage to send your pre-lien notice out to the owner as soon as the payment problem becomes evident.  

Step 4: File Suit to Foreclose

Step 4 is to file suit to foreclose to the extent that perfecting your lien and sending your post-lien notice does not get you paid. You want to file suit to foreclose. When do you need to do that by  

a. When to file suit to foreclose  

You are going to need to file suit to foreclose within one year after the last day that the claimant can file the lien affidavit. So generally speaking, you have until the 15th day of the fourth month after you complete your work to record your lien affidavit.  

You need to file suit within one year after that last day in which you could have recorded your lien affidavit.