Texas Lien Laws & Frequently Asked Questions

If you want the best shot at getting paid – file a lien! Standing alone, a lien is the most effective means to payment. When you file a lien, you “encumber” the property. When you encumber the property, you create a problem for the owner and the general contractor – and that’s what will get you paid. For example, when you file a lien, it now becomes very difficult for the owner to obtain permanent financing, to refinance, or to sell the property. Most likely these are things that the owner wants to do – you have now made that very difficult. Additionally, if you are a subcontractor, by filing a lien you place a strain on the general contractor’s relationship with the owner; especially if the general contractor has already been paid and is wrongfully withholding payment or has used the funds to pay non-project related debts in violation of the Trust Fund Statute.

You might be thinking that “the owner did not hire me” or “the owner did not promise to pay me,” “so do I really have a right to lien the owner’s property?” Yes you do! It does not matter who hired you. If you provided labor or materials to the property, then you are entitled to file a lien against the property, as long as all of the statutory pre-requisites and post-requisites are satisfied. That’s the law!

The following steps are typically necessary in order to perfect a statutory lien under the Texas Property Code:

Prepare and Serve the Pre-Lien Notice Letter: If you were hired by anyone other than the property owner, before you can file a lien you must serve the owner and general contractor with a Pre-Lien Notice Letter in accordance with Texas Property Code Section 53.056.  Contained within the Pre-Lien Notice Letter you should include a demand for immediate payment and a threat that if payment is not made, that you will move forward with the filing of a lien.  A pre-lien notice letter should be sent by a construction lawyer on law firm letterhead to maximize your opportunity to enforce immediate payment. Click here to Serve A Pre-Lien Notice Letter.

Perform a Property Record Search: Texas Property Code Section 53.054(a)(6) requires the lien affidavit to contain a legally sufficient description of the property sought to be charged with a lien.  To ensure this requirement is fully satisfied, you should research the Texas Real Property Records and/or the County Appraisal District and obtain the actual legal description of the property.

Perform a Registered Agent Search: Although the Texas Property Code only requires the lien documents be served on the owner and contractor(s) at their last known address, you should locate their legal Registered Agent through the Texas Secretary of State and/or the Texas Comptroller and ensure that all legal documents are served on their proper legal representatives and placed in the right hands.

Prepare the Lien Affidavit: A lien is initiated by preparing and filing a “lien affidavit” in accordance with Texas Property Code Section 53.054.  The lien affidavit must include at a minimum the following information: a sworn statement of the amount owed; the name and last known address of the property owner; a general statement of the work performed and when it was performed; the name and last known address of the contractor who hired you; the name and last known address of the general contractor; a legal description of the property; your mailing and physical address; and a statement identifying when and how all pre-lien notices were sent.  The lien affidavit is signed before a notary by the person claiming the lien.  Click here to File A Lien.

File the Lien Affidavit: After you prepare the lien affidavit, you need to prepare a letter to the county clerk’s office to file the lien affidavit.  Send the letter, the lien affidavit, and the filing fee to the county clerk’s office where the property is located before the statutory deadline.

Serve the Filed Lien Affidavit and Send a Second Demand for Payment: Texas Property Code Section 53.055 requires the lien affidavit to be served on the property owner, the general contractor, and the first-tier subcontractor (if applicable) by certified mail within five days after it has been filed with the County Clerk’s Office.  In this notice letter, you should include another demand for payment with a representation that if payment is not immediately made you will move forward with filing a lawsuit to foreclose on the property and seek damages in the principal amount owed, plus interest on that amount, all incurred attorneys’ fees, and cost of suit.  This letter should be prepared and sent by a construction attorney on law firm letterhead to maximize the chances of getting paid.

Prime Contractors, Subcontractors, and Suppliers

If you have labored, provided specially fabricated material, or furnished labor or materials for the construction or repair of a house, building, improvement, then you have a statutory right to file a lien against the property if the labor or materials were provided under or by virtue of an oral or written contract with the owner, the owner’s agent, trustee, receiver, contractor, or subcontractor

Architects, Engineers, and Surveyors

An architect, engineer, or surveyor who prepares a plan or plat under or by virtue of a written contract with the owner or the owner’s agent, trustee, or receiver in connection with the actual or proposed design, construction, or repair of improvements on real property or the location of the boundaries of real property, has a right to lien the real property.

A couple points to take note of:

• The plans or plat only have to be prepared as opposed to actually used to construct the project.
• The contract under which the services were performed must be in writing, an oral contract is insufficient to create a lien right.
• The written contract must be with the owner or the owner’s agent, as opposed to a subcontractor.

Landscapers, Their Employees, Nurseries, and Suppliers

Anyone who provides labor, plant material, or other supplies for the installation of landscaping for a house, building, or improvement, including the construction of a retention pond, retaining wall, berm, irrigation system, fountain, or other similar installation, under or by virtue of a written contract with the owner or the owner’s agent, trustee, or receiver has a right to lien the real property.

Demolishers, Their Employees, and Suppliers

Anyone who performs labor as part of, or who furnishes labor or materials for, the demolition of a structure on real property under or by virtue of a written contract with the owner of the property or the owner’s agent, trustee, receiver, contractor, or subcontractor has a right to lien the real property.

A lien against land located within a city, town, or village extends to each lot where the house, building, or improvement is situated or on which the labor was provided.

A lien against land not within a city, town, or a village, extends no more than 50 acres on which the house, building, or improvement is situated or on which the labor was performed. The lien also extends to any house, building, fixtures, or improvements and to each lot of land necessarily connected to the real property.  However, a lien may not be claimed on two tracts of land that are not contiguous.

Although a lien will not be deemed invalid for being overly broad in the description of the property, a lien covering excess property may open the lien claimant up to liability for slander of title and possibly payment of attorney fees to remove the lien from the excess property.

The requirements and deadlines for perfecting a lien against residential properties are different than they are for commercial properties.  Therefore, the first step in analyzing your right to a lien is to determine whether you supplied labor/materials to a “residential” property or a “commercial property as defined under the Texas Property Code.  The lien laws are far less stringent on commercial properties than they are on residential properties.  And if the residential property is the owner’s homestead, then the lien laws are even more stringent.  By default, if the project is not “residential,” then it is “commercial.”  It’s not that complicated to determine, however, there are a few instances where you might think the property is residential, when in fact it is commercial.  So what is a “residential” property?

Texas Property Code Section 53.001(10) defines a “residential construction project” as a project for the construction or repair of a new or existing residence, including improvements appurtenant to the residence, as provided by a residential construction contract.”

A “residential construction contract” is a contract between an owner and a contractor, in which the contractor agrees to construct or repair the owner’s residence, including improvements appurtenant to the residence.

So what is a “residence”?  According to the Texas Property Code, a “residence” is a single-family house, a duplex, a triplex, a quadruplex, or a unit in a multi-unit structure that is used for residential purposes and that is: (1) owned by one or more adult persons; and (2) used or intended to be used as a dwelling by one of the owners.

The key to solving the residential versus commercial mystery is to determine whether the property is being occupied by its owner.  If not, it is likely not a residential construction project under the Texas lien laws.  For example, your next door neighbor’s house, if rented, would not be a residential property under the Texas Property Code.  A spec house or a house in a large scale development would not be a residential property if it has not yet been sold and occupied by its owner.   Additionally, an apartment complex is not a residential property if all the units are intended to be leased.  Therefore, just because something looks like a house, it does not mean that the Texas Property Code treats it as a residential property.

If you were hired by the property owner you are not required to serve a pre-lien notice letter before filing a lien.  All other contractors and suppliers must serve a pre-lien notice letter before filing a lien.  If you were hired by a subcontractor on a commercial project, then you actually have to serve two pre-lien notice letters before you can file the lien; however, the two letters can be combined into one letter if sent by the 15th of the second month after providing the labor or materials to the project.

There is very specific statutory language which must be included in a pre-lien notice letter in order to compel the owner to withhold funds from the general contractor and to preserve your lien rights.

If you specially fabricated materials for a project and the owner, general contractor, or a subcontractor is refusing to accept and pay for the materials, then you likely have a right to file a lien against the property even if the materials have not been delivered to the project.  If the order was placed by the property owner, you are not required to serve a pre-lien notice letter and can go straight to filing a lien against the property.

If the order was placed by someone other than the property owner, you must give the owner written notice of the order no later than the 15th day of the second month after the month in which you receive and accept the order for the material.  If the order was placed by someone other than the general contractor, then you must also send the same notice to the general contractor within the same time period.

The notice must contain: (1) a statement that the order has been received and accepted; and (2) the price of the order.

If you failed to provide the above notice and the material was actually delivered to the project, then, you still have a right to file the lien if you timely serve a pre-lien notice letter in accordance with Texas Property Code Section 53.056

The Texas Property Code requires the following specific categories of information to be in a lien affidavit in order for the lien to be valid:

Identification of the Claimant

If the claimant is a registered entity, then the full legal name of the business should be stated.  You will also need to identify the person who will sign the affidavit on behalf of the entity and that person’s title with the company.  If the claimant is a d/b/a, then the person who is using the d/b/a needs to be identified, along with the d/b/a name.  If the claimant is an individual, then simply state that person’s full name.  In addition to the above, the affidavit must include: (1) the mailing and business address for the claimant; and (2) the county of which the person who signs the affidavit is a resident.

Identification of the Owner or Reputed Owner

The lien affidavit must include the name and address of the property owner or the person or entity reasonably thought to be the owner, otherwise known as the “reputed” owner.

A Description of the Work Performed and Materials Furnished

All claimants must include a description of the work or the materials furnished to the project.  Everyone but a general contractor must also state the month(s) in which the work or materials were provided to the project.  Depending upon the information contained in your invoice, you may be able to satisfy this requirement by simply attaching the invoice(s).  However, note that the county clerk’s office will charge you an extra $4.00 for every page filed with the lien affidavit.  Therefore, sometimes it is cheaper and safer, to just describe the work and identify the months the work was performed in the lien affidavit itself as opposed to relying on attached invoices.  The Texas Property Code also permits use of common industry abbreviations to describe the work or materials; however, it is better practice to use complete words/sentences so as to avoid any confusion or miscommunication.

Identification of the Person Who Hired the Claimant

This requirement is satisfied by including the name and last known address of the person or company that hired you.

Identification of the General Contractor

Include the name and last known address of the project general contractor.

A Description of the Property

The affidavit must contain a legally sufficient description of the property.  The description must be detailed enough for the tract of land to be identified with reasonable certainty.  A lot-and-block description of the property is preferred, but if not available a lot, block, and subdivision description, or a metes-and-bounds description are also sufficient.  This information can be difficult to obtain and a failure to properly describe the property could result in an invalid lien.

The Amount of the Claim

The lien affidavit must include the amount of which you are owed for the labor and/or materials provided to the project.  Some examples of items that should not be included in calculating the lien amount are: (1) anticipated profits; (2) prejudgment interest; (3) returned materials not incorporated into the project (if not specially fabricated); (4) lien costs; or (5) attorneys’ fees.  Although attorneys’ fees and costs may be recoverable under Texas Property Code Section 53.156, the amount incurred for these items cannot be included in the lien affidavit.

Pursuant to Texas Property Code Section 53.024, the amount of a subcontractor’s lien may not exceed: (1) an amount equal to the proportion of the total subcontract price that the sum of the labor performed, materials furnished, materials specially fabricated, reasonable overhead costs incurred, and proportionate profit margin bears to the total subcontract price, minus (2) the sum of previous payments received by the claimant on the subcontract.

Identification of Statutory Notices

All claimants, other than general contractors must state the date on which each pre-lien notice letter was sent to the owner and general contractor and identify the method by which the notices were sent.

The Affidavit Must be Sworn Under Oath

This is accomplished by concluding the affidavit with what’s known as a jurat, whereby the affiant affirms or swears under oath that the contents of the affidavit are true.  The jurat is made before a notary.  Failure to use a jurat in the affidavit will render it void.

If Your Contract is with the Property Owner

If your contract is with the property owner, then you must send a copy of the filed lien affidavit by registered or certified mail to the owner’s last known business or residential address no later than the fifth day after the date that the lien was filed.

If Your Contract is with Anyone other than the Owner

If you do not have a direct contract with the property owner, then must send a copy of the filed lien affidavit by registered or certified mail to the owner’s and all “upstream” contractor’s last known business or residence address no later than the fifth day after the date that the lien is filed.

Failure to comply with this requirement may render the lien void.

All notices and other documents required to be served under the Texas Property Code are considered properly served, when served, if sent by registered mail, certified mail, or by personal service.

Personal service may be made by the party, the attorney, a member of the attorney’s office staff, an agent for the attorney, or a commercial delivery service.  In person service is deemed complete when the document is delivered to the person or to the office where the document is addressed.

If you have already sent a notice and it was not sent by one of the above-mentioned methods, don’t panic yet, because if you can prove that the intended recipient actually received the notice, then the method by which the notice was delivered is immaterial.  In other words, even if the notice was sent by regular mail, facsimile, or email, you may have still satisfied the notice requirement if you can prove it was actually received by the intended recipient.

The lien laws treat retainage like any other failure to pay.  Therefore, in order to protect your right to file a lien to recover the withheld retainage, you must serve the proper parties with notice that contractual retainage is being withheld.  There are two ways to accomplish the notice requirement:

First, you may treat contractual retainage as unpaid monthly progress payments and for each month retainage is withheld, you can serve the owner (and general contractor if your contract is with a subcontractor) with the standard third and/or second month pre-lien notices.

In the alternative, you can serve just one notice under Texas Property Code Section 53.057 at the outset of the project.  Proper notice is sent under Section 53.057, when you serve the owner and the original contractor with written notice no later than the 15th day of the second month following delivery of materials or performance of labor, of: (1) the contractual sum to be retained; (2) the due dates, if known; and (3) the nature of the agreement.  By sending notice in this manner, you eliminate the need to send monthly fund trapping notices for retainage; however, unlike the fund trapping notices, the Owner is not required to withhold any additional funds until you file the lien affidavit.

When certain prerequisites are satisfied (see below), the owner is authorized to withhold funds from the general contractor in order to satisfy debts owed to a claimant by the general contractor or its subcontractors.  These withheld funds (referred to as “trapped funds”) are in addition to the 10% statutory retainage that the owner is required to withhold from the general contractor until thirty days after the project is complete.

Thus, by satisfying the below prerequisites you can potentially create an additional source of funds from which to possibly satisfy the debt.  More importantly, if you then demand the owner to pay the debt from the trapped funds and the general contractor does not provide written notice to the owner that it disputes the amount being claimed, then the owner is required to immediately pay the debt.

Additionally, if the general contractor disputes the claim and if the claimant satisfies additional prerequisites (see below), then the owner becomes personally liable for the debt and his property is subject to a lien for any money paid to the original contractor after receiving notice of the claim.

To authorize the owner to withhold funds from the general contractor, you must include the following language in the pre-lien notice letter:

If the claim remains unpaid, the owner may be personally liable and the owner’s property may be subjected to a lien unless you withhold payments from the contractor for payment of the claim or if the claim is otherwise paid or settled.

The owner must retain the funds until either: (1) the time for filing the lien affidavit has passed; or (2) if a lien affidavit was timely filed, until the lien claim has been satisfied or released.

Prerequisites for Personal Liability Against Owner

If the owner fails to withhold the trapped funds from the general contractor after the below requirements have been satisfied, then the owner will be personally liable for the debt:

• The owner must have received proper notice as described above;
• A lien affidavit has been perfected; and
• The claim has been reduced to a final judgment.

If you missed the pre-lien notice letter and subcontractor lien filing deadlines, you may still have a right to a lien if you can demonstrate that there was a “sham contract” between the owner and the contractor who hired you.

If you have labored, provided specially fabricated materials, or furnished labor or materials to a project under a direct contractual relationship with a third party who is not the property owner, the law will infer that you have a direct contractual relationship with the owner, making you a “prime contractor,” if you can demonstrate the owner contracted with the third party for the construction or repair of a house, building, or improvements and one of the following applies:

• the owner controls the third party through ownership of voting stock, interlocking directorship, or otherwise;
• the third party can effectively control the owner through ownership of voting stock, interlocking directorship, or otherwise; or
• the contract between the owner and the third party was made without a good faith intention that the third party would perform the contract.

What is a payment demand letter?  In theory, it could be any written communication by anyone on behalf of the creditor to the debtor, wherein a demand for payment is made.  However, that is not the type of demand letter that you want or the type of letter that will get you paid!  In order for a demand letter to be an effective tool to enforce payment, it should be prepared by a lawyer who understands Texas construction law and sent to the debtor on law firm letterhead by certified mail.  When done right, a payment demand letter can be an extremely effective tool to enforce payment and it is typically less expensive than filing a lien or a lawsuit.  Additionally, it is less confrontational.  Moreover, if you have missed the deadline for filing a lien, then this is your last opportunity to demand payment before filing a lawsuit or just walking away from collecting the debt all together.  In some situations, a demand letter is the starting point to enforce payment.  A demand letter can be sent independently, or in conjunction with any of the other enforcement methods described in this section.

A forceful demand letter should include the following information: (1) identification of the contractual provisions breached by the failure to pay; (2) a demand for immediate payment; (3) a representation that a lawsuit will be filed if payment is not made within a set number of days; (4) if applicable, a representation that a lien will be filed against the property if payment is not immediately made; (5) a brief description and notice of any potential statutory violations as a result of the failure to pay, such as Property Code Chapter 28  which imposes an annual 18% interest penalty on unpaid construction debts, Property Code Chapter 162  which imposes both civil and criminal penalties for diverting construction funds from a project, and Civil Practice and Remedies Code Section 38.001 (statutory right to attorneys’ fees); and (6) a representation that the principal amount owed, interest on that amount, attorneys’ fees, statutory penalties, and cost of court will be sought if payment is not immediately made and a lawsuit is filed.

A competent construction lawyer should be able to review the pertinent projects documents and prepare/serve the payment demand letter in approximately two to three hours.

Serving a pre-lien notice letter is a pre-requisite to filing a lien for anyone who was not hired directly by the property owner. However, it can also be an excellent tool to enforce payment all on its own.

The primary purpose of the pre-lien notice letter is to put the owner and upstream contractors on notice that a debt is owed.  Another statutory purpose of the pre-lien notice letter is to force the owner to set aside project funds to pay the debt in the event the debtor does not.  Under Texas Property Code Section 53.081, this is known as “Fund Trapping.”  This gives you another source of funds to look to for payment in the event the debtor cannot pay or if there are other liens ahead of you.  Additionally, if the owner fails to set aside project funds to cover the debt, then the owner may become personally liable for the debt at a later date if the debt remains unpaid.

If done correctly, there is a third benefit to the pre-lien notice letter that can actually result in forcing the owner to pay the debt now! Pursuant to Texas Property Code Section 53.083, if the general contractor fails to inform the owner in writing within 30 days after receiving the pre-lien notice letter that it intends to dispute the claim, then the general contractor is deemed to have assented to the demand and the owner must pay the debt from the project funds.

The deadlines for serving pre-lien notice letters are strictly enforced by the courts. A failure to comply with the deadlines will likely result in a waiver of your right to lien the property.

In addition to the above statutory benefits, a pre-lien notice letter is a fantastic opportunity to once again demand payment and inform the debtor what will happen if they do not pay.  The pre-lien notice letter should include: (1) a demand for immediate payment; (2) a representation that a lien will be filed against the property if payment is not immediately made; (3) a representation that a lawsuit will be filed to foreclose on the lien; (4) a brief description and notice of any potential statutory violations as a result of the failure to pay, such as Property Code Chapter 28  which imposes an annual 18% interest penalty on unpaid construction debts, Property Code Chapter 162  which imposes both civil and criminal penalties for diverting construction funds from a project, and Civil Practice and Remedies Code Section 38.001 (statutory right to attorneys’ fees); and (5) a representation that the principal amount owed, interest on that amount, attorneys’ fees, statutory penalties, and cost of court will be sought if payment is not immediately made and a lawsuit is filed.

If you want the best shot at getting paid – file a lien!  Standing alone, a lien is the most effective means to payment.  When you file a lien, you “encumber” the property.  When you encumber the property, you create a problem for the owner and the general contractor – and that’s what will get you paid.  For example, when you file a lien, it now becomes very difficult for the owner to obtain permanent financing, to refinance, or to sell the property.  Most likely these are things that the owner wants to do – you have now made that very difficult.  Additionally, if you are a subcontractor, by filing a lien you place a strain on the general contractor’s relationship with the owner; especially if the general contractor has already been paid and is wrongfully withholding payment or has used the funds to pay non-project related debts in violation of the Trust Fund Statute.  If you provided labor or materials to the property, then you are entitled to file a lien against the property as long as all of the statutory pre-requisites and post-requisites are satisfied.  That’s the law!

If you can afford to, you should always use a Texas construction lawyer to prepare your lien documents.  You only have a limited number of opportunities to demand payment.  Don’t waste them!  Two such opportunities arise during the lien process: the pre-lien notice letter and service of the filed lien.  You must use each of these opportunities to maximize your chances of recovery.   When you use a construction lawyer, the owner and contractor will take you serious and that is what you want!  By using a construction lawyer, you convey the message that you are in this to get paid and that you will not go away until you do!  When you do it yourself the opposite is true.  Owners and general contractors receive self-prepared demand letters and liens from contractors, subcontractor, and suppliers all of the time.   They are used to it and they simply ignore them.  Don’t make the mistake of falling into this crowd.

Additionally, the Texas lien laws are complex and can be very difficult to understand.  Our courts strictly enforce these rules and any failure to comply with them may result in an invalid lien.  When you use a Texas construction lawyer, you can rest assured that the legal documents have been properly prepared and timelyfiled/served in accordance with the Texas Property Code, and that is what you want!

Most AIA construction contracts contain a binding arbitration clause. These contract clauses come in many variations, but typically state that the parties agree to waive their right to a civil lawsuit and agree to have their dispute decided by an arbitrator. If your contract contains such a provision, it is likely enforceable and you may be required to resolve the dispute through arbitration as opposed to a civil lawsuit.

Arbitration has its benefits and detriments. Those who favor binding arbitration over civil litigation usually state the following reasons: (1) arbitration is usually speedier than the civil court system allowing the parties to argue their case before an arbitrator as early as several months after the demand for arbitration is filed; (2) the cost of arbitration is less expensive than civil court; (3) the parties can select an arbitrator who is well versed in construction law, as opposed to a jury who may have no experience with construction disputes; (4) the rules of evidence are more relaxed in arbitration than in civil trial and thus result in more facts coming into evidence; and (5) other than a few exceptions, arbitration is binding and non appealable, resulting in a quicker final decision than a trial court where the award can remain on appeal for years.

However, these days, the above rationale is less true than it used to be. For example, more often than not, parties are finding that it may take as long, if not longer to get through arbitration than it does trial. Second, the cost of arbitration is usually very expensive at the outset of the case. For example, if the arbitration provision requires the arbitration to be filed with the American Arbitration Association, you will quickly discover that the filing fee alone may be in the several thousands of dollars, as opposed to just a few hundred dollars to file in district court. Third, although the arbitrator may know construction law, he or she may be biased toward a particular trade or profession, which leaves the parties questioning whether the arbitrator can truly be neutral. Typically, a lot of time and money is spent in just trying to agree upon a “neutral” arbitrator.

Regardless of whether arbitration is or is not more efficient than a civil lawsuit, before you can decide which route to take to enforce payment, you need to read your contract to determine if you are bound to arbitrate your claim. If you are required to arbitrate, you can ask the arbitrator to determine the validity of your lien (if you are going to file one); however, the arbitrator is without the authority to foreclose on the lien, which rests solely with the district court and in counties with a population over 2 million, the county court as well (for matters less than $100,000.00). All other construction claims and remedies can typically be decided and awarded by an arbitrator.

Mediation can be a great way to enforce payment if both parties are willing to compromise.  Mediation is a process wherein the parties meet with a mutually selected (unless appointed by the court) impartial and neutral person who assists them with negotiating their differences.  Mediation leaves the decision power totally and strictly with the parties, not the mediator. The mediator does not decide what is fair or right, does not assess blame nor render a formal or binding opinion on the merits of the case, or chances of success if the case were litigated; however, the mediator will typically offer an opinion as to the strengths and weaknesses of both parties’ case in an attempt to reach a compromise.  The mediator will seek concessions from each side during the mediation process.  If the dispute is not resolved during the mediation, the statements, documents created for the mediation, and any concessions made during the mediation, typically cannot later be used against any of the parties as admissions of liability or introduced as evidence if the matter proceeds to trial.

Mediation generally begins with a joint session to set an agenda, define the issues, and ascertain the position and/or concerns of the parties.  The joint session is then followed by a separate caucus between the mediator and each individual party or their counsel. This allows each side to confidentially explain their position to the mediator.

Mediation can be voluntary, ordered by the court, or contractually agreed to by the parties when their relationship was initially formed.  If you file a lawsuit in district court mediation is mandatory and will be ordered by the court.  The parties typically split the cost of mediation; fees alone can range anywhere from $300.00 to $1,000.00 an hour depending upon the mediator’s level of experience, expertise, and demand.  Mediations are typically scheduled for a half or full day session, but in more complex construction cases involving multiple parties, can last several days or involve multiple sessions spread out over a longer period of time.

If you filed a lien and did not receive payment, then filing a lawsuit to foreclose on the lien is simply just the next step. If you did not file a lien and have missed the deadline to do so, then a lawsuit is your first step (other than sending a formal Payment Demand Letter) to enforcing payment.

When you file a Lawsuit, you force the debtor to defend against the claim. This is something they do not want to do if there is not a legitimate basis for withholding payment–it is cheaper (and easier) to just pay the amount owed. Second, even if there is a legitimate dispute over the amount owed, filing a Lawsuit will bring out the disputed facts and may speed up resolution of the dispute. Third, if you are suing to foreclose on the lien, the law mandates that you sue the Property Owner. This usually not good for the debtor; especially if the Property Owner has already paid the debtor for your work and the debtor has diverted the funds to pay Non-Project debts in violation of the Trust Fund Statute.

Depending upon your specific circumstances, the Petition (which is the document that initiates the lawsuit) should include a cause of action for breach of contract, fraudulent inducement to enter into a contract (if applicable), violation of the Trust Fund Statute (if applicable), violation of the Prompt Payment Act, and foreclosure of the lien (if a lien has been filed). The Petition should request the court to award money damages in the amount owed, interest on that amount, costs, attorneys’ fees, and statutory penalties (when applicable).

If you do not want to spend money on attorneys’ fees and you have the time to prosecute your own case, a small claims court or justice court might be the right place for you to enforce payment.  The purpose of these courts is to provide an informal, uncomplicated proceeding to resolve small disputes which do not involve enough money to warrant the expense of formal litigation.  All claimants, including corporations, have the absolute right to represent themselves in these courts, unlike in all other courts, where the corporate claimant must be represented by counsel.  Claims in these courts get resolved fast, unlike in district court where it can take anywhere from 12 months to 24 months to reach trial.  In either small claims or a justice court, a trial will typically be held within three to six months from the date of filing the lawsuit.  Claimants have the right to have the matter heard by a judge or a jury.  Either party has the right to appeal the final judgment to the county court, wherein the entire matter will be reheard before a new judge.  The appeal is a little more complicated and as such, it may be necessary to retain counsel to assist with an appeal.  The right to appeal can actually be a down-side to filing one of these type of actions because you might spend a lot of time and effort preparing and prevailing, only to have the debtor appeal to a higher court and cause the matter to be re-litigated.

There are two primary restrictions to filing in these courts:

One, the amount in controversy (the amount owed) cannot exceed $10,000.00, inclusive of interest and attorney fees in small claims court, and inclusive of attorney fees (but not interest) in justice courts.  Thus if you are owed more than $10,000.00, you cannot file in either of these courts.  Moreover, a claimant may not voluntarily reduce the amount of the claim in order to gain access to these courts.  For example, if a Claimant alleges that the suit is for $10,000.00 and the evidence shows that damages are actually greater than $10,000.00, the court loses jurisdiction of the case, and the lawsuit must be dismissed and refilled in a court of competent jurisdiction.

Second, neither of these courts have jurisdiction to enforce foreclosure of a lien.  Therefore, if you also intend to file a lien against the property, then you will want to file your lawsuit in district court, with the assistance of a Texas construction lawyer.

Texas Property Code Section 162, referred to as “The Trust Fund Statute” is another powerful tool that you have in your arsenal (independent from a lien) to enforce payment for providing labor or materials to a construction project.

In summary, an owner, contractor or subcontractor violates the statute when it intentionally, knowingly, or with the intent to defraud, retains, uses, disburses, or diverts trust funds without first fully paying all obligations incurred or owed for labor or materials furnished to the project.  The statute imposes both civil and criminalliability on any individual who violates it.

How Does a Trustee Violate the Trust Fund Statute?

A trustee violates the Trust Fund Statute when it intentionally, or knowingly, or with the intent to defraud,, directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all “current or past due obligations” incurred by the trustee and owed to the beneficiaries of the funds.

A “current or past due obligations” is defined under the statute to include those obligations incurred or owed by the trustee for: (1) labor or materials furnished in the direct prosecution of the work; (2) under the construction contract; (3) prior to the receipt of the trust funds; (4) and which are due and payable by the trustee no later than 30 days following receipt of the trust funds.

A trustee acts with the requisite “intent to defraud” by doing any of the following: (1) by retaining, using, disbursing, or diverting trust funds with the intent to deprive the beneficiaries of the trust funds; (2) in a residential construction setting, by failing to establish or maintain a construction account or an account record for the construction account for which the trust funds are to be maintained; or (3) by obtaining trust funds through a false payment affidavit pursuant to Texas Property Code Section 53.085 and then using, disbursing, or diverting those funds away from the beneficiaries of the funds.

What are the Penalties for Violating the Trust Fund Statute?

A trustee who violates the Trust Fund Statute is subject to both civil and criminal liability.

In the civil context, the officers, directors and agents of an owner, contractor, or subcontractor who are deemed to be trustees under the statute, are personally liable for misapplication of trust funds.  In other words, they can be individually sued in civil court and criminally prosecuted by the state.

In regard to criminal liability, a trustee who intentionally or knowing misapplies trust funds amounting to $500 or more, commits a Class A misdemeanor.  A trustee who misapplies trust funds amounting to $500 or more with an “intent to defraud” commits a felony of the third degree.

What are “Trust Funds”

Construction payments are considered trust funds if they are made to a contractor by an owner, or to a subcontractor by a contractor, under a construction contract for the improvement to real property.

For example, progress payments from an owner to a general contractor would generally be considered trust funds for the benefit of everyone under the general contractor who is providing labor or materials to the project.

Who is Not a “Trustee”?

Banks, saving and loan entities, lenders, title companies, closing agents, corporate entities who issue a payment bond all are not trustees under the Trust Fund Statute.

Who is a “Trustee”

A contractor, subcontractor, or an owner who receives trust funds or who has control or direction of trust funds is a trustee.  Additionally, an officer, director, or agent of a contractor, subcontractor, or owner are also considered to be trustees under the Trust Fund Statute.

How do You Enforce Trust Fund Violations?

The are two primary ways to enforce Trust Fund Statute violations: (1) through a Payment Demand Letter; or (2) by Filing a Lawsuit. Through a payment demand letter, you advise the debtor of the statute, penalties for violating the statute, that you have information in which to believe they violated the statute, and that if payment is not immediately made a lawsuit will be filed to enforce a violation of the statute.  Through a lawsuit, you allege a violation of the statute as a “cause of action” and you request the court to award monetary damages in the form of penalties against the defendants for violation of the statute.  Additionally, since the statute imposes personal liability against those individuals who violate the statute, you can name those persons in the lawsuit as individual defendants; of which you would not otherwise be allowed to do on a simple breach of contract claim.

How would you like to earn 18% annually on the unpaid balance owed to you for the labor or materials provided to a construction project?  You will not find anyone offering that kind of interest rate in today’s economy!  However, if you can prove that the debtor violated Texas Property Code Chapter 28, “The Texas Prompt Payment Act,” then you are entitled to recover this amazingly high interest rate as a penalty for nonpayment.

How is the Prompt Payment Act Violated?

VIOLATION BY THE PROPERTY OWNER

When a property owner receives a timely and allowed written payment request from a contractor, then the owner must pay the amount to the contractor by the thirty-fifth (35th) day after the owner receives the request; failure to do so is a violation of the statute.

VIOLATION BY THE GENERAL CONTRACTOR (THOSE WHO HAVE A DIRECT CONTRACT WITH THE PROPERTY OWNER)

When a general contractor receives payment from an owner, the general contractor must pay each of its subcontractors the portion of the owner’s payment attributable to the subcontractors’ work performed under its contract with the contractor within seven (7) days of receiving the payment from the owner; failure to do so is a violation of the statute.

VIOLATION BY A SUBCONTRACTOR (THOSE WHO DO NOT HAVE A CONTRACT WITH THE PROPERTY OWNER OR GENERAL CONTRACTOR)

When a subcontractor receives payment from a contractor, the subcontractor must pay each of its subcontractors and suppliers the portion of the contractor’s payment attributable to its subcontractors and suppliers for work performed under its contract with them within seven (7) days of receiving the payment from the contractor; failure to do so is a violation of the statute.

What is the Penalty for Violating the Prompt Payment Act?

Any unpaid amount that is required to be paid pursuant to the Act begins to accrue interest the day after the date that payment becomes due at 1.5 percent each month (or 18% a year).  Interest stops accruing on the earlier of: (1) the date payment is made; (2) the date of mailing if payment is received within three days of being mailed; or (3) the date a judgment is entered by a court for a violation of the Act.

If you file a lawsuit and prove a violation of the Act, then in addition to the interest rate penalty, the court is also authorized to award costs and reasonable attorneys’ fees.

Right to Suspend Work for Non-Compliance of the Prompt Payment Act

If the project is ongoing, and if the owner fails to pay the contractor the undisputed invoiced amount within the timelines set forth under the Act, then the contractor or any subcontractors may suspend contractually required performance on the tenth (10th) day after the contractor or subcontractor gives the owner (and the owner’s lender under certain circumstances) written notice of the nonpayment and the intent to suspend performance.

Pursuant to the Act, a contractor or subcontractor who suspends performance as permitted under the Act is not: (1) required to perform until paid the amount allowed under the Act, plus any costs incurred for demobilization and remobilization.  Further, the Act states that the contractor/subcontractor will not be responsible for damages resulting from the suspended work if he is not first notified in writing before the suspension that payment has been made or that a good faith dispute exists for withholding the payment.

Note that a notification that a “good faith” exception exists must be in writing and contain a list of specific reasons for the nonpayment.  If one of the specific reasons for withholding payment includes labor, services, or materials provided by a subcontractor that are not provided in compliance with the contract, then the subcontractor is entitled to a reasonable opportunity to (1) cure the listed item; or (2) offer a reasonable amount to compensate for the listed item that cannot be promptly cured.

Exception to Making Full Payment When There is a “Good Faith” Dispute

If a “good faith” dispute exists concerning the amount owed, then the party withholding payment can withhold not more than one hundred percent (100%) of the difference between the amount it believes is due and the amount the invoicing party claims is due.  For example, if the invoicing party claims that it is owed $100,000.00 and the withholding party believes only $75,000.00 is due, then the withholding party may withhold up to $25,000.00 of the invoice amount and no more.

Owner’s Exception for Lender’s Failure to Disburse Funds

The owner is excused from making payment to its contractors on projects where the owner has obtained a loan for the construction if: (1) the owner has timely and properly requested disbursement of proceeds from the loan; and (2) the lender is legally obligated to disburse such proceeds to the owner, but has failed to do so within thirty-five (35) days after the date the owner received the contractor’s payment request.  Under these circumstances the owner is not obligated to make payment to the contractor until the fifth (5th) day after the date that the owner receives the loan proceeds.

How Do You Enforce Prompt Payment Act Violations?

There are two primary ways to enforce Prompt Payment Act violations: (1) through a Payment Demand Letter; or (2) by Filing a Lawsuit.  Through a payment demand letter, you advise the debtor of the Act, penalties for violating the Act, that you have information in which to believe they violated the Act, and that if payment is not immediately made a lawsuit will be filed to enforce a violation of the Act.  Through a lawsuit, you allege a violation of the statute as a “cause of action” and you request the court to award monetary damages in the form of penalties against the defendants for violation of the Act.

On public projects you cannot file a lien against the property to secure nonpayment.  However, there should be a payment bond in place that was obtained by either the owner or the general contractor to protect you when you have not been paid.  The deadlines for making a claim against a payment bond are similar to those for perfecting a lien.   In fact, you can satisfy the payment bond requirements by timely perfecting a lien claim.  To learn more about how to make a payment bond claim read below.

Who May Furnish a Payment Bond and What is the Effect of a Valid Payment Bond

Anyone original contractor who has a written contract with the owner may furnish a payment bond prior to or during the construction of the project.  A valid payment bond prevents the claimant from filing suit against the owner or his property for nonpayment for labor or materials supplied to the project.

What are the Requirements for a Valid Payment Bond

The bond must be: (1) in the penal sum of at least equal to the total of the original contract amount; (2) be in favor of the owner; (3) have the written approval of the owner on its face; (4) be executed by the original contractor and an authorized surety; (5) be conditioned on prompt payment for all labor, subcontracts, materials, specially fabricated materials, and normal and usual extras not exceeding 15% of the contract price; and (6) clearly display the identity of the surety or the toll free number of the Texas Department of Insurance.  The bond and the contract between the original contractor and the owner must be filed with the county clerk of the county in which the project exists.  The clerk is required to provide a copy of the bond and contract upon request and payment of a reasonable fee.

How Does a Valid Payment Bond Protect the Owner

A valid payment bond insulates the owner from personal liability and protects his real property from a mechanic’s lien.  A valid payment bond also benefits claimants who have properly perfected their claim by timely providing the proper notices to the proper parties.

What Are the Notice Options for Perfecting a Claim Against a Payment Bond

A claimant has two options for perfecting a payment bond claim: (1) comply with the notice requirements for perfecting a lien pursuant to Texas Property Code Section 53.051, et. seq. for non-residential projects or Section 53.251, et. seq. for residential projects; or (2) by complying with the notice requirements of Texas Property Code Section 53.206, for perfecting a payment bond claim.

How Does a Claimant Perfect a Payment Bond Claim Using the Lien Perfecting Requirements

If the Claimant follows the requirements for perfecting a non-residential or a residential statutory lien, he will simultaneously perfect a claim against a payment bond if a valid bond exists.  If the claimant is not absolutely positive as to whether a valid payment bond has been furnished by the original contractor, it is good practice to perfect the bond claim by following the requirements to perfect a lien claim.  That way, if it later turns out that the bond was not obtained, it is later rendered to have been invalid, or if the surety becomes insolvent, the claimant will have protected its right to foreclose the lien and pursue its claim against the owner.

How Does a Claimant Perfect a Payment Bond Claim Under the Bond Claim Statute

The claimant must give all applicable notices to the original contractor that are required under the lien statutes and must serve the surety, instead of the owner, with all applicable notices under the lien statutes that are required to be given to the owner.  In other words, the claimant is still required to timely comply with the notice requirements; however, the content of the notices are more lenient in substance and are directed to the surety instead of the owner.  Some notable differences are the following: (1) the claimant is not required to provide the surety with notice of a contractual retainage agreement under 53.057 to protect a claim against retainage, unless the retainage to be withheld exceeds 10%; (2) the claimant is not required to provide the surety with notice that it has accepted an order for specially fabricated materials under 53.058; or (3) file a lien affidavit.

When and Where Must a Claim Against the Bond be Filed

A claimant may sue the principal and the surety on the bond either jointly or severally in the county where the work was performed if the claim remains unpaid for sixty (60) days after the bond claim has been perfected.  The claimant may seek the amount of the claim and court costs.  If the bond is recorded before a lien is filed, then the claimant must file his lawsuit against the bond within one year from the date it was perfected.  If a lien is filed before a bond is filed, then the claimant has two years from the date of perfecting the claim to file suit against the bond.