Every day, a Texas business enters a contract with a laborer or materialman which could result in a mechanic’s lien filed against the business’ property — whether related to construction, repair or remodel of an office building or retail space, or even related to landscape work. Although these types of contracts may seem innocuous, a properly filed mechanic’s lien brought by an unpaid contractor, subcontractor or supplier can harm a business. Specifically, a properly executed lien can affect the company’s ability to sell, refinance or even use the property as collateral in other lending opportunities. Thus, a basic understanding of the mechanic’s lien process is critical for all Texas in-house counsel and business litigators.
First, lawyers should be aware of the potential risks a properly filed mechanic’s lien can bring, including financial risks, like lien foreclosure or creating hesitance from future lenders. Second, understanding the lien process is key to spotting an invalid lien, thus counsel will know where they have leverage in negotiating (or dispelling) alleged liens. Third, while the right to lien cannot be waived before payment, corporate in-house counsel and business lawyers can obtain waivers and releases to protect their clients from future liens after an alleged debt has been settled — thus avoiding potential additional financial risk and general legal exposure all together.
Potential Harm Resulting from Mechanic’s Liens
There are many issues that a properly filed lien could induce on a business. The most obvious of which is foreclosure and a forced sale of the business’s property. However, simply because a claimant has asserted a lien does not automatically give them the right to foreclose. Rather, Texas courts have held that “the only way a lienholder may foreclose a mechanic’s lien is through a judgment of a court of competent jurisdiction foreclosing the lien and ordering a sale of the property subject to the lien,” as the Dallas appeals court states in Crawford Services, Inc. v. Skillman Intern. Firm, L.L.C. Importantly, the limitations period to file a lawsuit seeking foreclosure is typically one year from the date the claimant is required to assert their lien (through the “lien affidavit”).
The preferential priority status given to mechanic’s liens may also interfere with a business’s future endeavors. Specifically, “[a] properly perfected mechanic’s lien has priority over all other liens, encumbrances, or mortgages upon the property,” as the Houston appeals court held in Suntex Fuller Corp. v. Flint Mortg. Group. However, “a mechanic’s lien will not have priority over liens existing on land at the time of the inception” of the lien, the court noted, citing Texas Property Code § 53.123(b). Thus, an established lien encumbering a property can impact the business’s ability to secure future financing, as lenders may be hesitant to provide construction loans or other funding on properties burdened by liens given their statutory priority. It can also interfere with a business’s plans to sell a property, as some potential buyers may balk due to the “cloud” a lien creates on the property’s title.
Furthermore, aside from general litigation costs for any dispute regarding the validity of an alleged lien, the determination of priority status of liens and to which specific property the lien attaches can lead to greater legal fees. Specifically, the inception of a mechanic’s lien “relates back to when the first work on the site started,” as the Fort Worth appeals court held in Northside Marketplace W.D. %2C97, Ltd. v. David Christopher, Inc. As simple as this sounds, answering the question of when the work began involves careful fact analysis. For example, while preliminary work such as staking, measuring, filling or making test holes is insufficient to define the inception of a lien, substantial excavation for or the laying of the foundations, footings or bases of the new structure may, according to the Texas Supreme Court’s opinion in Diversified Mortg. Inv’rs v. Lloyd D. Blaylock Gen. Contractor, Inc.
Similarly, although a lien “may only attach to land and items that have become annexed to land, such as improvements (including fixtures),” the Houston appeals court held in IQ Holdings, Inc. v. Stewart Title Guar. Co. that certain moveable personal property (i.e. “chattels”) that have been incorporated into an encumbered property may also be subject to the lien. Accordingly, a company may be forced to engage in heated debate to protect property it believes is not subject to a lien’s grasp.
Given the above threats, Texas in-house counsel and business litigators, and their companies, must be sure to give a healthy respect to any asserted lien or risk falling victim to their potential harm.
Foundation of Lien Perfection Process and Common Pitfalls Contractors Make
Receiving a lien notice or lien affidavit can be sobering to any business that owns affected property. Especially considering that the business may not even be aware of a payment dispute, such as when a subcontractor asserts a lien against the property for lack of payment from its general contractor. However, when armed with a basic understanding of the process to perfect a lien, Texas in-house counsel and business litigators may be able to spot invalid liens and relieve the pressure they cause on a company which owns the property.
Mechanic’s liens are governed by Chapter 53 of the Texas Property Code. Subchapter C provides the procedures claimants must substantially comply with in order to perfect a lien. However, this process varies depending on whether the claimant is an original contractor or a subcontractor and whether the project is a residential or a commercial project.
According to Section 53.001 (7), an original contractor is one who has a direct contractual relationship with the property owner or their agent. Under Section 53.001 (13) a subcontractor is a person who labors or has furnished labor or materials to fulfill an obligation to an original contractor or to a subcontractor. Thus, subcontractors do not have direct contractual relationships with property owners or their agents. For purposes of this article, all of the following procedures concern the process for perfecting a statutory lien on a commercial project — which, in short, are those where the property owner does not intend to use the property as their residence, as described in Section 53.001 (8), (9) and (10). Examples of commercial projects include office buildings, retail spaces, and apartment complexes.
The process for perfecting a mechanic’s lien is generally the same for original and subcontractors, but subcontractors have one added step. See Figure One below.
| Original Contractor | Subcontractor |
| 1. File Lien Affidavit 2. Send Notice of Filed Lien Affidavit. | 1. Send Pre-Lien Notice 2. File Lien Affidavit 3. Send Notice of Filed Lien Affidavit. |
Subcontractors Must Send Timely Pre-Lien Notice
Subcontractors have the added requirement of pre-lien notice pursuant to Section 53.056. This section states that a subcontractor must send pre-lien notice to the property owner and the original contractor. This notice must be in writing and substantially contain the information provided by the form within the statute. Additionally, the notice must be sent “not later than the 15th day of the third month after the month during which: (1) the labor or materials were provided; or (2) undelivered specially fabricated materials would have been delivered.” For example, if a subcontractor provides work in January and does not receive payment, the deadline to send its pre-lien notice for the January services would be April 15. Notably, a subcontractor must send a pre-lien notice for each month for which it provided labor or materials and went unpaid.
If the subcontractor fails to send its pre-lien notice by the required deadline, it very likely cannot establish a valid lien. Knowledgeable counsel can also catch improper lien notices where a subcontractor attempts to notify the recipient of unpaid amounts for multiple months but the deadline for the earlier month where work was performed has passed. For example, if a subcontractor provides work in January and February for which it goes unpaid, the subcontractor can combine the notices as long as they are both sent before the deadline for the January work (i.e., April 15). If they attempt to send notice for both the January and the February work after April 15 but before the February work notice deadline (i.e., May 15), the January notice will be ineffective.
The Lien Affidavit
The first step for an original contractor or the second step for a subcontractor in perfecting any lien is to file a lien affidavit in the county where the property is located. Section 53.054(a) provides a list of information that must be included in every lien affidavit. However, a subcontractor’s affidavit will contain additional information such as a statement of each month in which its work was provided for which it went unpaid, a statement identifying the date each pre-lien notice was sent to the property owner and the last known address of the original contractor. Thus, a subcontractor’s failure to timely send the pre-lien notice(s) can result in an ineffective lien affidavit.
As with the pre-lien notice requirements, the Texas Property Code provides strict timeliness requirements for filing lien affidavits. These deadlines depend on whether the contractor is an original contractor or a subcontractor.
Under Section 53.052(a)(1) an original contractor must file its lien affidavit “not later than the 15th day of the fourth month after the month in which their work was completed, terminated, or abandoned.” Thus, this deadline focuses on the time that the contractor ceases providing labor or materials on the entire project. Importantly, the language within the statute leaves room for experienced attorneys to chip away at the validity of a lien by arguing a factual dispute exists concerning the date the termination or abandonment occurred — another pitfall contractors fall victim to. Thus, as soon as a lien affidavit is filed by an original contractor, counsel must communicate with their client to obtain the facts necessary to determine if the affidavit was timely filed.
According to 53.052(b), a subcontractor must file its lien affidavit “not later than the 15th day of the fourth month after the later of: (1) the month they last provided labor or materials; or (2) the month they would have been required to deliver specially fabricated materials.” This deadline generally focuses on the last month in which the subcontractor provided services and is not necessarily related to the time period where work on the entire project stops.
When it comes to catching invalid mechanic’s liens, the most common mistake made by contractors is a failure to comply with the above deadlines to file their lien affidavits. Performing the analysis to calculate the above deadlines requires careful consideration and a strong knowledge of the facts.
Notice of Filed Lien Affidavit
The last step contractors must complete to perfect their alleged lien is to timely send notice of their filed lien affidavits to the correct parties, per Section 53.055. This notice must include a copy of the filed lien affidavit. Original contractors must send the notice only to the property owner, while subcontractors must send the notice to the property owner and the original contractor. Notably, the deadline for both original contractors and subcontractors to send this notice is incredibly short: “not later than the fifth day after the date the affidavit is filed with the county clerk.” Again, failure to timely send this notice is a common mistake made by contractors.
Lien Waiver and Release
Unfortunately, contractual waivers of a contractor’s right to lien prior to work being performed are prohibited in Texas. Nonetheless, once an alleged debt has been paid, a company may require its contractors — and their subcontractors — to execute a release and waiver, thus ensuring no future liens may be asserted for the same labor or materials provided. Waivers and releases can provide peace of mind in a few ways. For instance, an executed release provides clear indication that a contractor or a subcontractor has been paid and thus will not file a lien (or another lien) for work or materials that are subject to the waiver. Simply put, payment alone — without a waiver — does not entirely shield the property owner from future liens if a subsequent dispute arises concerning the amount that was paid. Furthermore, lien releases and waivers provide assurance to potential buyers and lenders that there are no outstanding liens on the property by demonstrating that all debts related to any services provided have been resolved.
Nonetheless, general release language is insufficient. Rather, the Texas Property Code provides that “[a] waiver and release is effective to release the owner, the owner’s property, and the contractor only if” three requirements are met.
First, Section 53.281(b)(1) states that the waiver and release must substantially comply with one of the forms provided by Section 53.284. Within Section 53.284, there are two types of lien waiver forms — conditional and unconditional lien waivers — for both progress payments (i.e., periodic payments made while the project is ongoing) and final payments (i.e., payment after completion). Ideally, unconditional waivers afford the most protection to the property owner, as the waiver becomes effective once signed and payment is delivered. In other words, unconditional lien waivers are used after payment has been made and indicate that the claimant waives the right to file a lien regardless of whether payment clears or not. Conditional lien waivers, on the other hand, are typically used before payment is made and condition the claimant’s lien waiver on actual receipt of payment (i.e., once payment clears, the lien is waived).
Second, the waiver and release must be signed by the claimant or the claimant’s authorized agent, according to Section 53.281(b)(2).
Third, in the case of a conditional release (whether for progress payments or final payment), Section 53.281(b)(3) states that evidence of payment to the claimant must exist.
In conclusion, understanding the associated risks of mechanic’s liens is essential for corporate counsel and business litigators who have clients that enter contracts for labor or materials. By recognizing the potential financial damages mechanic’s liens may cause a business, and by arming themselves with a solid grasp of the mechanic’s lien process, counsel can better safeguard their clients interests. Finally, while the right to file a lien cannot be preemptively waived, securing waivers and release post-payment, can minimize both future financial and legal exposure. By staying informed and proactive, corporate counsel and business litigators can protect their clients from unnecessary risk or insure peace of mind after that risk has been resolved.
Kaedan Watts works at the Pettit Law Firm in Dallas. He received his undergraduate degree from Stephen F. Austin State University, where he double majored in Philosophy and Criminal Justice. Kaedan then went on to study law at Louisiana State University. While there he interned at the Louisiana First Circuit Court of Appeal and also briefly interned for Judge Martin Hoffman of the Dallas 68th Judicial District Court.
