Texas Mechanic's & Materialmen's Liens and Bond Claims: TYPES OF PROJECTS

There are a few steps contractors should go through at the very beginning of the lien and bond claim process before any notices are sent.  Why?  Before you get started, you need to know the type of project, property and your status (as general contractor, subcontractor or sub-subcontractor).  These factors will establish whether you are following the lien claim or bond claim process and will largely determine the deadlines you must meet and the procedures to be followed to perfect your claim.

Private Property v. Public Property = Lien Claim v. Bond Claim

Private property is subject to a lien while public property is not. 

Accordingly, if property is owned privately, contractors should follow mechanic’s and materialman’s lien procedures. 

If property is public, contractors should follow bond claim procedures.

Private Projects = Lien Claim

Private projects are construction projects on property owned by individuals or companies, not owned by governmental entities.  Chapter 53 of the Texas Property Code addresses claims arising out of work on private projects / property.

                       

Private projects may be further classified as commercial, residential, or homestead.

Commercial Projects

Commercial projects are construction projects that do not involve residences.  Examples would include office buildings, restaurants, and warehouses.

Residential Projects

A residence is defined as a “single-family house, duplex, triplex, or quadruplex, or a unit in a multiunit structure used for residential purposes, that is owned by one or more adult persons and used, or intended to be used, as a dwelling by one of the owners.” 

A residential construction project is a project for the construction or repair of a new or existing residence, including improvements appurtenant to the residence.

Residential Homestead Projects

Generally, homestead property is property that an individual intends to use as his or her residence.  See Texas Property Code § 41.002 and article 16, section 51 of the Texas Constitution.

Texas Public Projects = Bond Claim

Public property is owned by governmental entities and public projects are those in which governmental entities make public works contracts.  In other words, the General Contractor has its contract with a governmental entity. 

Governmental entities include but are not limited to the following: a governmental or quasi-governmental authority authorized by state law to make a public work contract, the state, a county, or a municipality, a department, board, or agency of the state, and a school district or a subdivision of a school district.

Federal Public Projects = Miller Act

Federal projects are those projects on US government property or projects on behalf of the US government.  The Miller Act governs claims on federal public work projects

By Sarah F. Berry, Attorney

If you are interested in attending a lien and bond claim workshop please contact Sarah Berry for more information.  Sarah@LPVLaw.com or (512) 472-2300.

Who can claim a Texas mechanic's and materialmen's lien?

Many different types of laborers and material suppliers are entitled to liens in Texas for labor and materials provided.   The Texas Property Code and Texas Constitution describe who may be entitled to liens. 

To be entitled to a lien, the claimant must have a contract with the Owner of the real property.  The contract can be made with an agent of the Owner such as a trustee, receiver, general contractor, or subcontractor. 

The contract must be in writing if:

         1.         the labor and materials were provided to a residential homestead project

         2.         an architect, engineer, or surveyor prepares a plan or plat

The following is a list of persons entitled to statutory liens under the Texas Property Code:

General Laborers & Material Suppliers …

… who labor, specially fabricate materials, and furnish labor or materials for construction or repair of:

1. a house, building, or improvement
2. a levee or embankment to be erected for the reclamation of overflow land along a river or creek
3. a railroad

Architects, Engineers & Surveyors …

… who prepare a plan or plat in connection with

1. the actual or proposed design, construction, or repair of improvements on real property
2. the location of the boundaries of real property

*** Must have contract in writing.

Landscapers & Others …

… who provide labor, plant material, or other supplies for the installation of landscaping for a house, building, or improvement.  This includes construction of a retention pond, retaining wall, berm irritation system, fountain, or other similar installation

Demolition … Persons who labor or furnish labor or materials for the demolition of a structure on real property.

“Mechanics, Artisans and Material Men, of every class”

The Texas Constitution states that “mechanics, artisans and material men, of every class” shall have lien rights.  Constitutional liens are discussed in detail later in this article.

By Sarah F. Berry, Attorney 

If you are interested in attending a Texas lien and bond claim workshop please contact Sarah Berry for more information.  Sarah@LPVLaw.com or (512) 472-2300.

Why is Texas mechanic's and materialman's lien process so complicated?

The Texas lien process seems a little complicated, and it is.  Why do Texas contractors have to comply with notice and filing requirements and deadlines to perfect a lien?  The lien claim process was designed to protect property owners as well as contractors.  The requirements for Texas General Contractors who have made their agreement directly with the Owner of property are less onerous than the requirements on Subcontractors who have their agreements with the General Contractor.  The rationale behind the varying requirements and deadlines is that the Owner should be given the opportunity to protect his property.

It is the Owner’s responsibility to pay the General Contractor.  There is no doubt that the Owner will know if the General Contractor has not been paid and may ultimately claim a lien.  Accordingly, the process for a General Contractor to claim a lien is not very complicated.

On the other hand, it is not the Owner’s responsibility to pay Subcontractors.  It is the General Contractor’s responsibility to pay Subcontractors according to their contracts.  Without notice, the Owner may not ever know that a Subcontractor has been hired, what the terms of their agreement with the General Contractor are, and whether or not Subcontractors have been paid by the General Contractor.  Accordingly, Subcontractors in Texas are required to provide certain notices to the Owner in order to perfect their lien rights, which is where it can get complicated.

By Sarah Berry, attorney 

Check our blog next week for the next post on mechanic's and materialmen's liens.

Our firm regularly hosts what we like to call "Texas Lien & Bond Claim 101" workshops with small groups of contractors.  If you are interested in attending a workshop please contact Sarah Berry for more information.  Sarah@LPVLaw.com or (512) 472-2300.

How will perfecting a lien claim help me collect?

Why should you go through the trouble of perfecting a lien?  There are several reasons that going through the lien claim process may be beneficial to you and your business. 

As will be discussed in later blog posts, in most situations, contractors must send out notices of their unpaid claims very early on in the process.  This is helpful for several reasons.  For one, the notices must be sent within a few months after the labor and/or materials were provided to the project, and, consequently, you aren’t allowing your AR to become seriously delinquent.  Additionally, the notices serve as a reminder that your invoice has not been paid, and sometimes a reminder may be all it takes.  Some notices must also be sent to the Owner of the property.  Once the owner becomes aware that you as a subcontractor are not being paid by the General Contractor, the Owner may intervene with the General Contractor on your behalf or retain funds from the General Contractor for your benefit.  Furthermore, timely sending out the proper notices demonstrates that you understand the lien process and are a competent and professionally run business that will have no problem perfecting and enforcing your lien rights if necessary.

If sending the required notices does not result in payment, you have set yourself up to claim a lien on the property.  Perfecting a lien claim is beneficial from a legal and negotiation standpoint.  Legally, if you have followed the proper procedure and perfected your lien, you can file suit to foreclose on the lien if necessary.

From a negotiation standpoint, you have more power when you’ve perfected a lien.  If you have perfected your lien, it will be reflected in the real property records and will put third parties on notice.  This can be helpful in several situations.  For example, if the Owner of the property would like to refinance a loan on the property or sell the property to a third party, most lenders and third parties will require a release of lien from you before proceeding with the transaction.  This could mean that the Owner or the third party buyer may offer to pay you all or some portion of your claim to release the lien.  For new construction, continued financing may be contingent upon keeping the property lien free, and if your lien claim will make financing more difficult, you may be more likely to get paid.  Additionally, many property Owners will not release retainage until the General Contractor can provide lien releases and/or affidavits that all bills have been paid, which can motivate the General Contractor to pay Subcontractors.

By SarahF. Berry, Attorney  

If you are interested in attending a lien and bond claim workshop please contact Sarah Berry for more information.  Sarah@LPVLaw.com or (512) 472-2300.

What is a lien under Texas law?

A lien is the legal claim of one person upon the property of another person to secure the payment of a debt or the satisfaction of an obligation.  In the case of mechanic’s liens, the lien is intended to secure payment for labor or materials supplied in improving, repairing or maintaining real property.

A lien may be provided for in a contract, the Texas Constitution, or by a statute.  Constitutional liens are provided for in Article 16 Section 37 of the Texas Constitution.  Statutory liens are provided for in Chapter 53 of the Texas Property Code.  The Constitution and Property Code provide similar protections to lien claimants; however, the two procedures are distinct and independent of one another.  A contractual lien is provided for in an agreement between the parties in which they agree that the contractor is secured by a right of foreclosure and sale.  Contractual liens are not discussed further in this series of blog postings.

The text of the Texas Constitution and Texas Property Code is provided online by the Texas Legislature and may be found at the following link: http://www.statutes.legis.state.tx.us/

By Sarah F. Berry, Attorney  

If you are interested in attending a lien and bond claim workshop please contact Sarah Berry for more information.  Sarah@LPVLaw.com or (512) 472-2300.

Debtors, Taxes and Bankruptcy

If you're a creditor and you wondered how taxes are handled in a bankruptcy, there is a good article on taxes and debtors in bankruptcy in the Texas Lawyer.  The link is here: http://www.law.com/jsp/tx/PubArticleTX.jsp?id=1202542728986&rss=tx&slreturn=1

Austin Lawyer: "Produce the Note" Claims in Foreclosure

There have been many news reports making the rounds about ways to avoid foreclosure, and many Texas residents are believing such news reports to be a "magic bullet" to stave off foreclosure. One needs to realize that different states have different laws related to foreclosure of real estate, particularly residential real estate foreclosures, and one should not get their legal advice from such news reports.

So, what is all of this "produce the note" craze? What does it mean?

The basics of the idea is, when a debtor is desperate and their house is ready to be foreclosed upon, some lawyers (usually in other states) tell homeowners to request that the bank "produce the promissory note" related to the transaction. As many real estate lenders have acquired the promissory notes through sometimes hundreds of large portfolio transfers, often these are done electronically and the original closing paperwork gets lost in the mix, or so the theory goes. So if you need an extra two or three months to get finances back in order, so sayeth the news reports, this will provide the debtor with the time to do just this while the lender "scrambles" to find the promissory note signed at closing.

Sounds great, right? We never have to pay our mortgages again! Hooray!

Well, in Texas, as you can well imagine, it is not nearly that simple. Under Texas law, lenders hardly ever file a lawsuit to foreclose on residential real estate, choosing instead to do what's called a "non-judicial foreclosure". This is a procedure whereby notices are mailed and posted and ultimately the lender holds an auction on the courthouse steps on the First Tuesday of a month to foreclose their interest in the real estate and filing what's called a "Trustee's deed" (often a Substitute Trustee's Deed). Which means, unless the DEBTOR files a lawsuit PRIOR to the foreclosure and auction sale, there is never a time to demand that a lender "produce the note". Which means it ain't no magic bullet without litigation.

The other problem with the buy time theory is that by the time the foreclosure sale is posted, usually a lender has "accelerated" the note. Meaning, the debtor does not just owe the lender the three missed $1200 house payments. Now the debtor actually owes the lender the ENTIRE balance of the promissory note. So if a debtor waits until the foreclosure sale to try to block all of these things, they are usually not in a position to come up with the, say, $187,000 owed on the Note in order to stop foreclosure. Three months delay asking the lender to produce the note may not even matter, even if the debtor could then make all of their payments current.

Now, this is not to say that there are no ways to delay even a proper lender from foreclosing on a property. Bankruptcy filings and litigation can be used to delay foreclosure proceedings, as every lender knows. In fact, if there are legitimate reasons to believe that the lender has misapplied or failed to apply payments, or if there are other reasons to challenge the acceleration of the note (due to waiver or unlawful behavior by the lender), it is a very effective tool necessary to sort through these issues.

In such situations, a lawyer representing a homeowner, or the homeowner pro se (although this is not advised, but may be a financial reality), can seek injunctions against acceleration and foreclosure, as well as seek discovery that can be very time consuming and costly for the lender which may lead to settlement by negotiation. But they will first need to get a judge to so order prior to foreclosure in order for the note production to be relevant in most circumstances.

If there is litigation, certainly part of this process will be to determine by what authority the lender seeks to foreclose its interest, and burdens will be on the lender to prove a contract exists and they are the lawful holder of said note contract and security interest in the form of a deed of trust. When there have been hundreds of transfers, this is certainly more time consuming and difficult for a lender. Unfortunately for the "magic bullet-ers" out there, often these deeds of trusts securing the note and transfers are done in the real property records and it is simply a matter of getting the documents from the county clerk's office as certified copies. Certified copies of public records are usually automatically considered authentic under Texas Rules of Evidence 901(7) and are exempt from hearsay typically under Texas Rules of Evidence 803(14).

Also, as far as the Note goes, the lender does not need to have the original signature in pen ink to foreclose or get summary judgment. To prevail on a motion for summary judgment to enforce a promissory note, a plaintiff/lender must only establish that (1) a note exists, (2) the plaintiff/lender is the legal owner and holder of the note, (3) the defendant is the maker of the note, and (4) a certain balance is due and owing on the note. Scott v. Commercial Servs. of Perry, Inc., 121 S.W.3d 26, 29 (Tex. App.—Tyler 2003, pet. denied). If no genuine issue of material fact exists as to any of these elements, the plaintiff is entitled to summary judgment as a matter of law. See Tex. R. Civ. P. 166a(c). The lender can establish existence of the notes by attaching true and correct copies of the notes as exhibits to its motion and filing a sworn affidavit in verification of the copies. A photocopy of a promissory note, attached to an affidavit in which the affiant swears that the photocopy is a true and correct copy of the original note, is proper summary judgment proof which establishes the existence of the note. Johnson, 610 S.W.2d 143; Town N. Nat'l Bank v. Broaddus, 569 S.W.2d 489, 490 (Tex. 1978); Blankenship v. Robins, 899 S.W.2d 236, 238 (Tex. App.—Houston [14th Dist.] 1994, no writ). If the documents show that the plaintiff is the legal owner of the note and that a balance is owed, then the debtor must raise a fact issue as to one of the elements, and must do so by sworn testimony (and verified pleadings).

It is our guess that the lawyers discussing the "produce the note" claims do not practice in Texas. If you are an Austin or Texas lender with a "produce the note" debtor, give us a call at 512-472-2300.

Texas Foreclosure Procedures

In order to set up a non-judicial foreclosure, the lender must do several things in order to have the ability to foreclosure their security interest, or what we call a Deed of Trust. First, the loan papers (or "documentation") must include an obligation to pay (usually called a Note, Real Estate Lien Note, Promissory Note, or Note with Vendor's Lien) and should also include the security agreement (usually referred to as a Deed of Trust). The Deed of Trust gives the lender the right to "foreclose" its security interest if the Obligor fails to pay. The Deed of Trust should appoint a "trustee" and must contain a "power of sale." The Deed of Trust should also give the lender the right to designate "Substitute Trustee." In Texas, the foreclosure is usually by way of a "non-judicial" foreclosure, or by way of the posting of the property for sale on the first Tuesday of the month.

The following steps contain the basic procedures that the lender must go through in order to get to the point where they may foreclose the lien:

1) Demand for Payment - once the Obligor defaults in the making of one or more payments, the lender must give notice of the default and demand the overdue payment or payments.

2) Notice of Intention to Accelerate - prior to being able to foreclose its lien, the lender must give notice of intention to accelerate. The Notice of Intention to Accelerate is usually combined with a demand for payment. The notice should give at least ten (10) days within which the Obligor can cure the default. If the property is the Obligor's "residence," then the Notice of Intention to Accelerate should give the Obligor at least twenty (20) days notice. After the appropriate time period has expired, then the lender is free to "post" the property for a non-judicial foreclosure.

3) Notice of Foreclosure - assuming that the Lender has a valid Deed of Trust and that the lender has appropriately moved to foreclose through the designated trustee or its "substitute" trustee, then after the expiration of time on the Notice of Intention to Accelerate, the lender can "post" the property for foreclosure. This is done with the giving of Notice of Foreclosure. The Notice must be posted at the Courthouse and must be send via Certified Mail, Return Receipt Requested to the last known address of the debtor. Because only the sending of the certified mail is required, it does no good to attempt to refuse delivery. You are only denying yourself the information contained in the Foreclosure Notice. The Notice must give the debtor at least 21 days notice of the foreclosure, and must inform the debtor of the time, date, and place of the foreclosure sale. Foreclosure sales take place at the location designated by the Commissioner's Court for each County in which the property (or any part of the property if the property is located in more than one County) is located.

4) Posting of the Property - the Notice of Foreclosure should then be "posted" at the designated location where notices are given at the County Courthouse (or other designated location). The Notice should be posted for the full twenty one (21) days prior to the sale and must be filed with the County Clerk's office.

5) Foreclosure Sale - The foreclosure sale should take place on the designated date between the hours of 10:00 a.m. and 4:00 p.m., that date being the first Tuesday of the month of the foreclosure sale. The sale must begin within three (3) hours of the time stated in the notice of foreclosure. At the foreclosure sale, the trustee or substitute trustee must "strike off" or sell the property to the highest bidder. The trustee is not required to sell the property for any particular price. For this reason, if your property is being foreclosed upon you should at least attend the sale.

6) Substitute Trustees / Trustee's Deed - the final step in the process is for the Trustee (or Substitute Trustee if one was appointed) to prepare and file a Trustee's or Substitute Trustee's Deed to reflect that the property was sold. The Deed will then transfer title of the property to the purchaser or back to the lender, as the case may be. You should check the Deed to be sure that it accurately reflects what happened at the foreclosure sale.

Due to the complexity of these proceedings and the possibility of many pitfalls (or loopholes as many call them), if you have questions about the validity of any foreclosure sale, you should seek the advice of an attorney who is experienced in foreclosure litigation and foreclosure sales.

Changing Locks on Residential Tenants in Texas: A Dangerous Business

Texas Property Code Section 92.0081 sets out the procedures for the removal of property and lockouts on residential property. Here are some practical tips:

1. A landlord may not remove a door, window, or attic hatchway cover unless it is done pursuant to a prompt repair of the premises. In other words, you can't just take a door off to "encourage" a tenant to leave. See Texas Property Code Sec. 92.0081(a).

2. If a landlord changes the door lock of a tenant that is delinquent in rent, it must be done according to the procedures set out in Texas Property Code Sec. 92.0081(c). Namely, the landlord must place a notice that (1) states an on site location where the tenant can go 24 hours a day to obtain the new key or a telephone number that is answered 24 hours a day that the tenant may call to have a key delivered within two hours after calling the number; (2) states the fact that the landlord must provide the new key to the tenant at any hour, regardless of whether the tenant pays any of the delinquent rent; and (3) the amount of rent and other charges for which the tenant is delinquent. The landlord must also, prior to changing the locks, send a warning, either mailed five days before the lock change, or hand delivered three days before the lock change, that states the date of the anticipated lock change, the amount of rent owed that must be paid to prevent the lock out, and the name and street address of the individual to whom, or the location of the onsite management office, at which the delinquent rent may be paid during the landlord's normal business hours. The lock change may not occur on a day or day before the landlord is not available or the onsite management office is not open for the tenant to pay the delinquency. The key must be provided to the tenant whether or not the tenant pays the rent. If the tenant doesn't show, the landlord must leave a notice of the day/time they showed up, along with the address for the location of the key during normal business hours. See Texas Property Code Sec. 91.0081(d)-(g).

3. If a residential landlord violates Texas Property Code Sec. 91.0081, the tenant may recover possession of the premises or terminate the lease, and a civil penalty of one month's rent plus $500, actual damages, court costs and reasonable attorney fees, less any delinquent rent or other sums owed to landlord. If the landlord does not allow tenant to use the key to enter the property regardless of paying the rent, the tenant is entitled to one month's rent as a civil penalty.

Thus, residential property lockouts are very risky endeavors and should be done with the consultation of an attorney after reviewing sections of the Texas Property Code.