12.12 Mechanic's Liens

12.12.1

Definitions

 General

A lien is a charge imposed upon specific property as security for a debt.

For title insurance purposes, mechanic's liens secure the payment of contributions by persons who have furnished material, labor, or skill in the improvement of real property belonging to another.

Statutory (Property Code Sec. 53.001)

               ·                 Improvements - includes but is not limited to:

                      ¨                        abutting sidewalks and streets and utilities in or on those
                                            sidewalks and streets;

                      ¨                        clearing, grubbing, draining, or fencing of land;

                      ¨                        wells, cisterns, tanks, reservoirs, or artificial lakes or pools made
                                            for supplying or storing water;

                      ¨                        pumps, siphons, and windmills or other machinery or
                                            apparatuses used for raising water for stock, domestic use, or
                                            irrigation; and

                      ¨                        planting orchard trees, grubbing out orchards and replacing
                                            trees, and pruning of orchard trees.

               ·                 Labor - labor used in the direct prosecution of the work.

               ·                 Material means all or part of:

                      ¨                        the material, machinery, fixtures, or tools incorporated into the
                                            work, consumed in the direct prosecution of the work, or ordered
                                            and delivered for incorporation or consumption;

                      ¨                        rent at a reasonable rate and actual running repairs at a
                                            reasonable cost for construction equipment used or reasonably
                                            required and delivered for use in the direct prosecution of the
                                            work at the site of the construction or repair; or

                      ¨                        power, water, fuel, and lubricants consumed or ordered and
                                            delivered for consumption in the direct prosecution of the work.

               ·                 Original contractor - a person who contracts with an owner directly.

               ·                 Retainage - an amount representing part of a contract payment that
                              is not required to be paid to the claimant within the month following
                              the month in which labor is performed, materials is furnished, or
                              specifically fabricated material is delivered.

               ·                 Subcontractor - a person who has furnished labor or material to fulfill
                              an obligation to an original contractor or to a subcontractor to
                              perform all or part of the work required by an original contract.

               ·                 Work - any part of construction or repair performed under an original
                              contract.

 

12.12.2

The Constitutional Mechanic's Lien

Article 16, Section 37, of the Texas Constitution provides as follows:

  • Mechanics, artisans and materialmen, of every class, shall have lien upon the building and articles made or repaired by them for the value of their labor done thereon, or material furnished therefor; and the legislature shall provide by law for the speedy and efficient enforcement of said liens."

  • The Supreme Court of Texas in First National Bank of Dallas vs. Whirlpool Corporation, 517 S.W. 2d 263 (Tex. 1975) held that the Constitutional lien is available to a manufacturer only upon articles made especially for a purchaser pursuant to a special order and in accordance with the purchaser's plans or specifications. Therefore, such lien would not encompass items made according to the manufacturer's specifications and for sale to the general public.

  • It has been established that the above constitutional provision is self-executing, and that the constitutional lien exists independently and apart from any legislative act.

  • The constitutional lien claimant must have a direct contractual relationship with the owner.

  • The lien may be enforceable against a purchaser if he has actual or constructive notice that improvements are being made.

12.12.3

The Statutory Mechanic's Lien

 ·               Except for the constitutional provisions, the law is located in
                              Sections 53.001-53.239 of the Texas Property Code.

               ·              A mechanic's lien does not attach to personal property but may
                              attach to fixtures.  See Whirlpool (cited previously) and cases
                              following it for specific items that are included in a mechanic's lien. 
                              Examples of removables are: carport, appliances, stereo systems,
                              doors and windows.  Examples of non-removables are: paint,
                              foundation, framework.

                ·             Priority of a mechanic's lien claim relates back to the
                              commencement of construction or delivery under the original
                              contract. See also Section 12.12.8 of the Texas Property Code.

12.12.4

Persons Entitled to Lien (Property Code Sec. 53.021, 53.024)

·         A person has a lien if:o        The person labors, specifically fabricates material, or furnishes labor or materials for construction or repair in the state of: a house, building, or improvement; a levee or embankment to be erected for the reclamation of overflow land along a river or creek; or a railroad; ando        The person labors, specially fabricates the material, or furnishes the labor or materials under or by virtue of a contract with the owner or the owner’s agent, trustee, receiver, contractor, or subcontractor.·         A person who specifically fabricates material has a lien even if the material is not delivered.·         On or after September 1, 1995: An architect, engineer, or surveyor who prepares a plan or plat under or by virtue of a written contract in connection with the proposed construction or repair of improvements on real property has a lien on the property if:o        The architect, engineer or surveyor prepares the plan or plat pursuant to a written contract, in recordable form that contains a legal description of the real property on which the construction is to be performed;o        The contract is recorded with the county clerk of the county in which the property is located before the date construction is commenced; ando        The plan or play prepared by the architect, engineer or surveyor asserting the lien is used in performing such construction.·         A lien for an architect, engineer or surveyor takes effect on the date construction is commenced.  Neither the filing of the contract nor performance of work under the contract is considered to establish the time of inception of the lien. The person provides labor or materials for landscaping, including retention ponds, retaining walls, beams, irrigation systems, fountains, or other similar items under a written contract with the owner.  The lien relates back to the date of recording of the Mechanic’s Lien Affidavit.Commercial Real Estate Broker’s and Appraiser’s Liens (Chapter 26 Texas Property Code)This lien may be filed to secure payment of earned but not paid real estate commissions.  It applies to property other than 1-4 family property, or land located more than three miles from a city used for farming and ranching.  A waiver of the lien is void.  The broker or appraiser has two years to bring suit to collect the commission.  See Bulletin TX000051.                        Demolition Liens ·         Effective September 1, 2003 Section 53.021(e) of the Texas Property Code provides for a demolition lien in favor of a person who provides labor or material for demolition of a structure under a contract with the owner. Landscaping Services: Creates a mechanic’s lien when a written contract is signed with the owner, the owner’s agent, contractor, trustee or receiver who has a lien on the property.

12.12.5

Property to Which Mechanic's Lien Extends (Property Code Sec. 53.022)

 ·              The lien extends to the house, building, fixtures, or improvements, 
                 but does not extend to abutting sidewalks, streets and utilities on a 
                 public property.

               ·              A lien against land in a city, town, or village extends to each lot on
                              which the house, building, or improvement is situated or on which
                              the labor was performed.

               ·              A lien against land not in a city, town or village extends to not more
                              than 50 acres on which the house, building, or improvement is
                              situated or on which the labor was performed.

12.12.6

Payment Secured by Lien (Property Code Sec. 53.023)

 The lien secures payment for the labor done or materials furnished for the construction or repair; or the specifically fabricated material, even if the material has not been delivered or incorporated into the construction or repair, less its fair salvage value.

12.12.7

Procedure for Perfecting Mechanic's Lien

Homestead - The Texas Constitution Article 16, Section 50 a (5) establishes the matter for filing a construction lien against a homestead. See Section 53.254, Property Code.

  • To perfect the lien on a homestead, the person who is to furnish material or perform labor and the owner must execute a written contract setting forth the terms of the agreement.
  • The contract must be signed before any labor is performed or material is furnished.
  • The contract must be filed with the county clerk of the county in which the homestead is located.
  • If the owner is married, the contract must be signed by both spouses before any work is done.
Homestead - Mechanic's Lien Contract (Property Code Sec. 41.007)
  • The mechanic's lien contract must contain the following warning conspicuously printed, stamped, or typed in a size equal to at least ten point bold type or computer equivalent, next to the owner's signature line on each instrument creating an encumbrance on the homestead property:
    • "IMPORTANT NOTICE: You and your contractor are responsible for meeting the terms and conditions of this contract. If you sign this contract and you fail to meet the terms and conditions of this contract, you may lose your legal ownership rights in your home. KNOW YOUR RIGHTS AND DUTIES UNDER THE LAW.
 
  • If a mechanic's lien contract is executed on or after September 1, 1987, without the above notice, an action may be maintained under the provisions of the Deceptive Trade Practices Act.
Underwriting Standard

When initial construction or additional improvements are to be made on the property intended to be used as or is used as a homestead (even if the homestead, residence, or business is a part of a large building erected or to be erected on the tract) such improvements must be made subsequent to a valid mechanic's lien contract.
  • Mechanic's Lien Affidavit
    • Filing (Property Code Sec. 53.052)

      The person claiming a mechanic's lien must file an affidavit with the county clerk of the county in which the property is located not later than the 15th day of the fourth calendar month after the day on which the indebtedness accrues. (Residential Construction Loans: 15 th day of the 2 nd calendar month).
 
  • Accrual of Indebtedness (Property Code Sec. 53.053)

    The date the indebtedness accrues is defined by statute and varies depending upon the circumstances:
    • Generally, for an original contractor the date is the last day of the month in which the original contract has been completed, finally settled, or abandoned.
    • Generally, for a subcontractor who has furnished labor or material to an original contractor or to another subcontractor, the indebtedness accrues on the last day of the last month in which the labor was performed or the material furnished.
    • Generally, the date of the accrual for specially fabricated material is the last day of the last month in which the materials were delivered.
    • Further specifics are provided in the statute.
  • Contents (Property Code Sec. 53.054)
    • The affidavit must be signed by the person claiming the lien or by another person on the claimant's behalf.
    • The affidavit must contain:
      • a sworn statement of the amount of the claim;
      • the name of the owner or reputed owner;
      • a description of the kind of work done and/or materials furnished;
      • the name of the person who employed the claimant or to whom materials or labor were furnished;
      • the name of the original contractor;
      • a legal description of the property sought to be charged with a lien; and
      • the claimant's business address.
  • Unnecessary Information

    It is not necessary, even though it is informative, that the affidavit set forth individual items of work done or material furnished or specifically fabricated.
  • Attachment of Contract

    The mechanic's lien claimant may attach a copy of any applicable written agreement or contract.
  • Additional Requirements on Homestead Property (Property
    Code Sec. 53.059)

    A mechanic's lien affidavit that relates to a homestead must contain the following notice conspicuously printed, stamped, or typed in a size equal to at least 10-point bold face or computer equivalent, at the top of the page:
"NOTICE: THIS IS NOT A LIEN; THIS IS ONLY AN
AFFIDAVIT CLAIMING A LIEN."
  • Notice

    Certain notice requirements are imposed by the Property Code. For underwriting purposes, it should be assumed that notice as prescribed by law was given. Section 53.255, Probate Code, provides the form of notice required for a residential construction contract. Section 53.256 Probate Code requires that the contractor provide the owner with a list of sub-contractors and suppliers. The residential construction rules apply only to new construction and not to remodeling jobs.

12.12.8

Priority of Mechanic's Liens

Other Creditors of the Original Contractor (Property Code Sec. 53.121) All subcontractors, laborers, and materialmen who have a mechanic's lien have preference over other creditors of the original contractor.

  • Equality of Mechanic's Liens (Property Code Sec. 53.122)
    • Except as provided in Property Code Sec. 53.101, et seq. for required retainage, perfected mechanic's liens are on equal footing without reference to the date of filing the affidavit claiming the lien.
    • If proceeds of a foreclosure sale of property are insufficient to discharge all mechanic's liens against the property, the proceeds shall be paid pro rata on the perfected mechanic's liens on which suit is brought.
  • Priority Over Other Liens (Property Code Sec. 53.123)
    • A mechanic's lien attaches to the house, building, improvements, or railroad property in preference to any prior lien, encumbrance, or mortgage on the land on which it is located.
    • However, the mechanic's lien does not affect any lien,encumbrance, or mortgage on the land or improvement at the time of the inception of the mechanic's lien, and the holder of the lien, encumbrance or mortgage need not be made a party to a suit to foreclose the mechanic's lien.
  • Time of Inception of Lien - "Relation Back" (Property Code Sec. 53.124)
  • The time of inception of a mechanic's lien is:
    • the commencement of construction of improvements, or
    • delivery of materials to the land on which the improvements are to be located and on which materials are to be used.
  • The construction of improvements or materials delivered must be visible from inspection of land.
  • Regardless of the date of a lien claimant's contribution of labor or material was begun, the priority of all mechanic's liens relate back to the date of the commencement of the work of the improvement as a whole. 

    In determining the date of "commencement of a work of improvement "reliance is usually made upon the "visible to the eye" test. 

    Deeds of Trust recorded prior to the commencement of work of improvement or prior to the filing of a mechanic's contract are superior in priority to mechanic's liens.

    Deeds of Trust recorded subsequent to the commencement of a work of improvement or subsequent to the filing of a mechanic's lien contract are inferior in priority to mechanic's liens.
  • Removables - Whirlpool Doctrine
    • The Supreme Court of Texas in First National Bank in Dallas vs. Whirlpool Corporation, 517 S.W. 2d 262 (Tex. 1975) held that mechanic's and materialman's liens on improvements are superior to a prior recorded Deed of Trust lien when such improvements can be removed without material injury to the land and pre-existing improvements, or to the improvements removed.
    • The Court held that disposals and dishwashing machines could be removed from the project without injury to the project, the realty, the remaining improvements, or materials themselves, and ordered foreclosure of the lien.
    • Courts have determined that the following materials are "removable "improvements:
      • windows and doors;
      • air conditioning and heating units;
      • carpets, appliances, smoke detectors, burglar alarms, light fixtures, and door locks;
      • an entire structure installed or set on a foundation;
      • a motion picture screen and frame, ticket booths, neon sign, and speaker pole;
      • plumbing fixtures;
      • pumps attached to existing machinery.
    • Courts have determined that the following materials are not "removable" improvements:
      • plaster and paint;
      • lumber used in the construction of a house;
      • roof repairs;
      • window frames;
      • bricks used in a fireplace and chimney;
      • concrete roofing tiles;
      • new roof;
      • shell home;
      • garage.
    • Thus, the priority of a prior Deed of Trust lien does not affect a subsequent valid mechanic's lien for materials furnished which are removable items.
Underwriting Standard

Include an exception to all such removable items which do not lose their priority to a previously recorded Deed of Trust lien or require releases from all mechanics and materialmen involved with the construction.In 2011, Section 53.053(e) Property Code was amended to read as follows:(e) A claim for retainage accrues on the earliest of the last day of the month in which all work called for by the contract between the owner and the original contractor has been completed, finally settled, terminated, or abandoned.Comment: The language here is awkward but means that the claim accrues on the last day of the month in which the work is done or terminated or abandoned or the parties agree as to the amount owed.The bill makes several changes to Section 53.057 Property Code:(a)     A claimant may give notice under this section instead of or in addition to notice under Section 53.056 or 53.252 if the claimant is to labor, furnish labor or materials, or specially fabricate materials, or has labored, furnished labor or materials, or specially fabricated materials under an agreement with an original contractor or a subcontractor providing for retainage.(b)     The claimant must give the owner or reputed owner notice of contractual retainage not later then the earlier of:1.       The 30th day after the date the claimant’s agreement providing for retainage is completed, terminated, or abandoned; or2.       The 30th day after the date the original contract is terminated or abandoned.Comment: This section extends the time for providing the owner with notice of a claim for retainage from 15 to 30 days.(b-1) If an agreement for contractual retainage is with a subcontractor, the claimant must also give the notice of contractual retainage to the original contractor within the period prescribed by Subsection (b).(c)     The notice must generally state the existence of a requirement for retainage and contain: 1.       The name and address of the claimant; and2.       If the agreement is with the subcontractor, the name and address of the subcontractor(d)     The notice must be sent to the last known business or residence address of the owner or reputed owner or the original contractor, as applicable.Comment: The section requires a subcontractor to a subcontractor to provide notice in the manner set out.(e)     A claimant has a lien on, and the owner is personally liable to the claimant for, the retained funds under Subchapter E if the claimant:1.       Gives notice in accordance with this section and:A.                        Complies with Subchapter E; orB.                        Files an affidavit claiming a lien not later than the earliest of:                                                                                                         i.            The date required for filing an affidavit under Section 53.052;                                                                                                       ii.            The 40th day after the date stated in an affidavit of completion as the date of completion of the work under the original contract, if the owner sent the claimant notice of an affidavit of completion in the time and manner requested.                                                                                                      iii.            The 40th day after the date of termination or abandonment of the original contract, if the owner sent the claimant a notice of such termination or abandonment in the time and manner required; or                                                                                                      iv.            The 30th day after the date the owner sent to the claimant to the claimant’s address provided in the notice for contractual retainage, as required under Subsection ©, a written notice of demand for the claimant to file the affidavit claiming a lien; and2.       Gives the notice of the filed affidavit as required by Section 53.055.(f)       The written demand under Subsection (f)(1)(B)(iv):1.       Must contain the owner’s name and address and a description, legally sufficient for identification, of the real property on which the improvement is located;2.       Must state that the claimant must file the lien affidavit not later than the 30th day after the date the demand is sent; and3.       Is effective only for the amount of contractual retainage earned by the claimant as of the day the demand was sent.Comment: While this section is quite detailed, the main point to remember is that a claim for retainage may now be made at any time up to 40 days (increased from 30 days) after the work is done.What you should do: Even when the construction contract calls for retainage, you should not remove the P-8 exceptions from the policy until at least 40 days have passed from the end of construction.  Read and understand Bulletins SLS 2009007 and TX2010008.A subcontractor who does not receive proper notices as required under this bill may file a mechanic’s lien claim in the usual manner.  What you should do: Require a release of any MLA filed against the property being insured.  The bill is effective as to any contracts entered into after September 1, 2011.

12.12.9

Affidavit of Commencement of Construction (Property Code 53.124)

An owner and original contractor may jointly file an Affidavit of Commencement with the county clerk - not later than thirty (30) days after the date of actual commencement of construction or delivery of materials.

This affidavit must contain

  • the name and address of the owner;
  • the name and address of each original contractor;
  • a legal description of the property;
  • the date the work actually commenced; and
  • a general description of the improvements.

Such affidavit is "prima facie" (assumed correct until overcome by further proof) evidence of the date of the commencement of construction of the improvements described in the affidavit. 

The time of inception of a mechanic's lien which arises from work described in an Affidavit of Commencement is the date of the commencement of the work stated in the affidavit.

Underwriting Standard 

An Affidavit of Commencement should be a requirement in all appropriate construction commitments for interim construction binders and policies. The affidavit increases the protection to the title company in claims involving loss of priority upon issuance of final policy.

12.12.10

Affidavit of Completion (Property Code, Sec. 53.106)

 Note: See 53.259 for residential construction projects).

  • An owner may file with the county clerk an Affidavit of Completion which must contain:

    • the name and address of the owner;
    • the name and address of the original contractor;
    • a legal description of the real property;
    • a description of the improvements;
    • a statement that the improvements have been completed;
    • the date of the completion; and
    • a conspicuous statement that the claimant may not have a lien on retained funds unless the claimant files the affidavit claiming a lien not later than thirty (30) days after the date of completion.

  • A copy of the affidavit is required to be sent to all interested parties according to statute.

  • If the affidavit is filed on or before the tenth (10th) day after the date of completion of the improvements, such affidavit is "prima facie" (assumed correct until overcome by further proof) evidence of the date on which work under the original contract is completed.

  • If the affidavit is filed after the tenth (10th) day after the date of completion, the date of completion is the date the affidavit is filed.

  • "Completion" means the actual completion of the work, including any extras or change orders reasonably required or contemplated under the original contract, other than warranty or repair work.

Underwriting Standard

Require the affidavit on all construction transactions to be insured after construction is completed. Require verification that all bills have been paid. A seller must provide an affidavit stating that all bills have been paid or those who haven't been paid. (Section 53.255, Property Code).

12.12.11

Release of Claims or Liens (Property Code Sec. 53.152)

·         When a debt for labor or materials is satisfied or paid by collected funds, the person who furnishes the labor or material shall, not later than ten (10) days after the date of receipt of a written request, furnish to the requesting persona release of the indebtedness and any lien claimed, to the extent of the indebtedness paid.·         An owner, original contractor or any person making the payment may request a release.·         Such release of lien must be in a form that would permit it to be filed of record.·         The statute does not have a provision for penalties in the event such a release is not timely furnished as requested.·         Rule of Practice If such indebtedness is paid through a closing, exchange payment of the claim for an executed release. The 2011 Legislation made changes to payment provisions, effective January 1, 2012, for all contracts entered after that date. Subcontracts were concerned that they were being required to sign lien waivers stating that they had been paid in full whether they were seeking partial or full payment for their labor or materials.  Of course, if they were seeking payment, they had not been fully paid and the affidavits were false.  This bill creates statutory forms for seeking payment.  The forms are not mandatory but any release or waiver must comply substantially with them. The statue provides forms for conditional and unconditional waivers/releases of such liens. Sec. 53.281.  WAIVER AND RELEASE OF LIEN OR PAYMENT BOND CLAIM. (a)     Any waiver and release of a lien or payment bond claim under this chapter is unenforceable unless a waiver and release is executed and delivered in accordance with this subchapter.(b)     A waiver and release is effective to release the owner, the owner’s property, the contractor, and the surety on a payment bond from claims and liens only if:1)       The waiver and release substantially complies with one of the forms prescribed by Section 53.284;2)       The waiver and release is signed by the claimant or the claimant’s authorized agent and notarized; and3)       In the case of a conditional release, evidence of payment to the claim exists.Comment: Copies of the statutory form or waiver and release are set out in Section 12.12.11.2Sec. 53.282. CONDITIONS FOR WAIVER, RELEASE, OR IMPAIRMENT OF LIEN OR PAYMENT BOND CLAIM.(a)     A statement purporting to waive, release, or otherwise adversely affect a lien or payment bond claim is not enforceable and does not create an estoppel or impairment of a lien or payment bond claim unless:1)       The statement is in writing and substantially complies with a form prescribed by Section 53.284;2)       The claimant has actually received payment in good and sufficient funds in full for the lien or payment bond claim; or3)       The statement is:A.                        In a written original contract or subcontract for the construction, remodel or repair of a single-family house, townhouse, or duplex or for land development related to a single-family house, townhouse, or duplex; andB.                        Made before labor or materials are provided under the original contract or subcontract.Comment: It is important to note here that the bill seeks mostly to impact commercial contracts and allows a waiver in a single-family contract.  Note: the language does not use the customary 1-4 family designation.Sec. 53.283. UNCONDITIONAL WAIVER AND RELEASE: PAYMENT REQURIED.A person may not required a claimant or potential claimant to execute an unconditional waiver and release for a progress payment or final payment amount unless the claimant or potential claimant received payment in that amount in good and sufficient funds.NOTE: You may rely on the accuracy of the release document as long as it is fully completed and is executed by the proper parties and contains the notice provisions in at least 10 point type and you have no information that would lead to a conclusion that the document is false.

12.12.12

Foreclosure of Mechanic's Lien (Property Code Sec. 53.154)

A mechanic's lien may be foreclosed only on judgment of a court of competent jurisdiction foreclosing the lien and ordering the sale of the property subject to the lien.The 2011 Legislature made changes with the payment of costs and attorney’s fees in a foreclosure.Sec. 53.156.  COSTS AND ATTORNEY’S FEES.In any proceeding to foreclosure a lien or to enforce a claim against a bond issued under Subchapter H, I, or J in any proceeding to declare that any lien or claim is invalid or unenforceable in whole or in part, the court shall [may] award costs and reasonable attorney’s fees as are equitable and just.  With respect to a lien or claim arising out of a residential construction contract, the court is not required to order the property owner to pay costs and attorney’s fees under this section.Comment: This bill makes court costs and attorney fees mandatory in proceedings to foreclose a lien or enforce a claim against a bond in cases dealing with commercial property.  For residential construction contracts, the court is not required to order the property owner to pay costs and attorney fees.What you should do: Require a release of the lien for court costs and attorney fees any time you find a court case foreclosing a lien or enforcing a lien against a bond.

12.12.13

Statute of Limitations

 ·              Suit must brought to foreclose the lien within two (2) years after the
                              date of filing the Lien Affidavit or, within one (1) year after
                              completion of the work under the original contract under which the
                              lien is claimed, whichever is later. (Property Code Sec. 53.158)

               ·                 On matters pertaining to original contracts entered into prior to
                              September 1, 1989, suit to foreclose mechanic's liens must be
                              commenced and prosecuted within four (4) years after the cause of
                              action accrued. (Vernon's Ann. Civ. St. art. 5527)

12.12.14

Discharge of Lien (Property Code Sec. 53.157)

 A mechanic's lien or affidavit claiming a mechanic's lien may be discharged of record by the following:

               ·                 recording of a lien release duly signed by the claimants;

               ·                 failing to institute suit to foreclose a lien within the period prescribed
                              by statute;

               ·                 recording a final judgment or decree of a court of competent
                              jurisdiction providing for the discharge;

               ·                 filing a bond, notice, and return in compliance with Property Code
                              Sec. 53.171 et seq.; or

               ·                 filing a bond in compliance with Property Code Sec. 53.202 et seq.

12.12.15

Bond to Indemnify Against Lien (Property Code Secs. 53.171 ? 53.175)

 ·                 Bond; Recording
                      
                              The owner, contractor, or subcontractor, through whom a lien is
                              claimed by a recorded instrument, other than a lien granted by the
                              owner, may file a bond with the county clerk to indemnify against the
                              lien. (Sec. 53.171)

               ·                 Requirements
                      
                              The bond must

                      ¨                        describe the property;

                      ¨                        adequately describe the lien claimed;

                      ¨                        be in an amount that is double the amount of the liens referred
                                            to in the bond unless the total amount claimed in the liens
                                            exceeds $40,000, in which case the bond must in an amount
                                            that is the greater of one and one-half times the amount of the
                                            liens or the sum of $40,000 and the amount of the liens;

                     ¨                        be payable to the parties claiming the liens;

                      ¨                        be executed by a principal and an authorized corporate surety;
                                            and

                      ¨                        be conditioned that principal and sureties will pay the named
                                            obligees or their assigns the amount of the valid liens claimed,
                                            plus cost, if the claims are proved to be liens on the property.
                                            (Sec. 53.172)

               ·                 Notice

                      ¨                        Upon filing, the county clerk shall issue notice to the named
                                            obligees.

                      ¨                        The notice shall be delivered to each obligee by any means
                                            authorized for the service of an original petition under the Texas
                                            Rules of Civil Procedure.

                      ¨                        A copy of the bond must be attached to the notice. (Sec. 53.173)

               ·                 Recording
                      
                              The clerk shall record the bond notice and return of notice in the real
                              property records. (Sec. 53.174)

               ·                 Insuring Title
                      
                              In acquiring an interest in or insuring title to real property, a
                              purchaser, insurer of title, or lender may rely on and is absolutely
                              protected by the record of the bond, notice and return to the same
                              extent as if the lien claimant had filed a release of lien in the Real
                              Property Records. (Sec. 53.176)

Underwriting Standard

1) After the title person has determined that the procedure for recording the bond and notice have been properly completed, no exception is required to be made for the lien described in the bond notice and return.

2) No consent to insure around is required.

12.12.16

Bond to Pay Liens or Claims (Property Code Sec 53.201 ? 53.211)

                ·                 Bond; Recording
                      
                              An original contractor who has a written contract with the owner may
                              furnish a bond which shall be filed with the county clerk together with
                              the contract, copy of the contract or memorandum of the contract for
                              the benefit of claimants. (Secs. 53.201 - 53.203)

               ·                 Requirements
                      
                              The bond must

                      ¨                        be equal to at least the total of the original contract;

                      ¨                        be in favor of the owner;

                      ¨                        have the written approval of the owner endorsed thereon;

                      ¨                        be executed by the original contractor as principal and a Texas
                                            authorized and admitted corporate surety; and

                      ¨                        be conditioned on prompt payment for all labor, contract
                                            materials, specifically fabricated materials and normal and usual
                                            extras not exceed 15% of the contract price. (Sec. 53.202)

               ·                 Insuring Title
                      
                              A purchaser, lender, or other person acquiring an interest in the
                              owner's property or an insurer of title is entitled to rely on the record
                              of the bond and contract as constituting payment of all claims and
                              liens for labor, subcontracts, materials or specially fabricated
                              materials incurred by the original contractor as if the purchaser,
                              lender, or other person acquiring an interest in the owner's property
                              or an insurer of title or the owner who approved, accepted, and
                              endorsed the bond and as if each person furnishing labor or
                              materials for the work performed under the original contract, other
                              than the original contractor, had filed a complete release and
                              relinquishment of lien of record. (Sec. 53.204)

Underwriting Standard

1) A bond meeting the requirement of the Property Code and duly filed may be recognized as a prohibition against a claim of a mechanic's lien against the owner's property filed by a subcontractor to the contract filed of record with the bond and as constituting payment of such claims and liens, if any.

2) Verification of payment by owner and a release or waiver from a general contractor must always be obtained.

3) If the title person is unable to

a) secure proper documentation and verification or

b) any mechanic's lien affidavit has been filed or

c) other circumstances indicate a dispute resulting in a possible claim,

d) then, no reliance on the bond should be made without underwriter approval.

               ·                 Procedural Rule 8
                      
                              On all occasions, when a mortgagee's policy or interim construction
                              binder is issued prior to completion of improvements, the usual
                              pending disbursements and mechanic's lien exceptions are
                              appropriate as provided in the binder and Procedural Rule 8, and
                              may not be deleted.

12.12.17

Payment Affidavits of Contractor and Seller (Property Code Sec. 53.085)

 ·              Any person who furnishes labor or material as a condition of final
                              payment for construction of improvements on real property shall,
                              upon request, provide an affidavit stating:

                      ¨                        such contractor has paid his subcontractors, materialmen, and
                                            laborers in full, or

                      ¨                        shall state the amount owed and the name of the person or
                                            entity entitled to payment.

               ·                 A seller, on request or purchaser, prior to closing of the purchase of
                              real estate, shall provide to such purchaser an affidavit:

                      ¨                        stating full payment to each contractor, and that the seller is not
                                            indebted to such person or entity, or

                      ¨                        shall state the amount owed and the name of the person or
                                            entity entitled to payment.

               ·                 A person commits a Class A misdemeanor if the person intentionally
                              and knowingly makes a false or misleading affidavit.

               ·                 Rule of Practice
                      
                              The title person should require payment affidavits of contractor and
                              seller.

12.12.18

Original Contractor

An original contractor may not require a residential owner to convey property to the contractor as a condition of the performance of a residential construction project.

12.12.19

Claims Indicators

Claims on mechanic's liens continue to be one of the highest risk areas in the title insurance industry. Occurrence of any of the following does not necessarily indicate that a mechanic's lien claim exists or is eminent, however, when one appears, the title person should closely scrutinize the transaction so that a claim may be avoided. Mechanic's lien "red flags" are:

  • Information and knowledge of community economic conditions and, in particular the building industry, indicates monetary problems exist;

  • A building contractor on any prior occasion has executed a false affidavit purportedly verifying payment of all mechanics and materialmen. A subsequent affidavit would be unacceptable without additional verification and underwriter approval;

  • Affidavits of Mechanic's Liens are repeatedly filed against the builder signifying slow payment practices, disputes, or cash flow problems.

  • The builder has a greater than usual inventory of unsold projects, or unfinished projects (usually residential homes);

  • Known disputes exist between the builder and any subcontractor;

  • Substantial cost overruns have occurred in the project to be insured;

  • The general business reputation of the builder is unfavorable or, the builder is new to the community or industry and his business practices and reputation are unknown.

The above list is not exhaustive of all possible indicators of claims in this area. Any unusual business practice may suggest to the title person a potential claim, whether a mechanic's lien problem or otherwise, and should be investigated.

12.12.20

Texas-Mechanics' Liens

Priority

  • Can the Construction Loan Mortgage have initial priority over mechanics' liens?

    In Texas, construction loan mortgages have priority as of recording date over all mechanics' liens, except those for removable items (i.e., those items which may be removed from the structure without damage to the items or to the structure itself).

  • Will initial priority as to future disbursements be retained only if certain procedures are followed?

    Once priority is lost, no change occurs subsequent to that date (i.e., theory is based upon date of inception of lien).

  • If priority is lost, can it be regained?

    Once priority is lost, it is not regainable (see previous answer, above).

  • Is there a difference between on-site and off-site work?

    No difference between on-site and off-site work.

  • Is priority the same for all contractors and subcontractors on the same project?

    Texas takes an "inception of lien theory" position and a "relation-back doctrine" application which places all contractors and subcontractors supplying under the same "contract" in the same lien position.

Time Limits

  • What are the time periods for recording lien claims by original contractors and subcontractors?

    Lien claims must be recorded by original contractors and/or subcontractors by the "15th day of the fourth month following the accrual date" of the lien claim; 2 nd month for residential construction projects. Typically, in an original contractor situation, a lien claim will accrue when the project is completed. In a subcontractor situation, the lien claim will accrue when the last material is supplied or the last labor is performed pursuant to which the lien claim is filed.

  • After what period of time can you waive a mechanics' liens if no suit is filed?

    There is a two (2) year statute for brining suit to enforce Mechanic and Materialmen's Lien Claims (an MLA) in Texas. (One (1) year for a residential construction project.) The Statute of Limitations to enforce a Mechanic's Lien Contract (MLC) is 4 years.

Removing or Waiving Liens

  • Is there a statutory procedure for affidavits of completion or notices of completion?

    There is a statutory procedure for Affidavits of Completion contained within the Texas Property Code. Stewart Title Guaranty Company does not require that this be completed, as it only creates a presumption as to date of completion; however, we do recommend that our agents comply.

  • Can a statutory bond terminate the mechanics' liens as an encumbrance on the title)

    Yes. A properly drafted statutory bond served upon a mechanics' liens claimant will eliminate any lien claim which may be filed which is covered by the bond.

  • Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanics' liens by general contractor and/or subcontractors?

    The only waiver available in Texas, to my knowledge, is one which would be personally executed by the claimant in contemplation of the specific payment of either the amounts owed or a negotiated settlement amount in connection with the particular lien being claimed/waived. Enforcement of waivers as to anticipated claims is suspect.

  • Can a bona fide purchaser or bona fide lender take free of mechanics' liens later filed for earlier work?

    A bonafide purchaser or a bonafide lender cannot take free of mechanics' liens later filed for earlier work if the liens are, in fact, properly perfected and filed.

Title Company Requirements

  • What are the customary requirements for issuing Loan Policies on construction loan mortgages?

    The Texas Department of Insurance requires that completion of improvements and pending disbursement exceptions included within any construction policy(ies) pursuant to Procedural Rule P-8 of the Texas Department Rules and Regulations.

  • Is it customary to add a "pending disbursement "clause or mechanics' liens exception in the Loan Policy insuring a construction loan mortgage?

    Yes.

12.12.15.1

The 2011 Legislature Sec. 151.001 and 151.105, Insurance Code

A provision in a construction contract, or in an agreement collateral to or affecting a construction contract, is void and unenforceable as against public policy to the extent that it required an indemnitor to indemnify, hold harmless, or defend another party to the construction contract or a third party against a claim caused by the negligence or fault, the breach or violation of a statute, ordinance, governmental regulation, standard, or rule, or the breach of contract of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor or its agent, employee, or subcontractor of any tier.Other types of indemnity are ok.This bill is effective September 1, 2011 for construction contracts entered into after that date. What you should do: Nothing.  This provision does not impose burdens on title insurance transactions.