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Texas mechanics lien law applies to both non-residential and residential construction projects. Non-residential projects have different filing deadlines than residential projects.
Changes to Lien Laws Effective January 1st, 2022
Major changes to Chapter 53 of the Texas Property Code went into effect on January 1, 2022 (House Bill 2237), which made significant changes to the Texas property code. It is important to note that, while the changes went into effect on January 1, 2022, the changes apply only to original contracts on or after January 1st, 2022. Therefore, it will be important to review the original contract. The date on which the original contract was entered into will dictate the applicable law. Even if the contract was signed after January 1, 2022, if the original contract pre-dates January 1, 2022, then the old law will apply. Please read the entire Texas statute to understand which areas are impacted by contracts predating the January 1st, 2022 changes.
Holdback Requirements
During the course of construction disbursements the owner, lender, and/or owner’s agent must reserve 10 percent of the contract price of the work to the owner; or 10 percent of the value of the work, measured by the proportion that the work done bears to the work to be done, using the contract price or, if there is no contract price, using the reasonable value of the completed work (Texas State Statute 53.101).
The law provides that either method is acceptable and a lender can vary from loan to loan, however, it is recommended that the practices remain consistent simply to avoid mistakes.
Since the law provides two methods the lender may:
Releasing of Funds
During the course of construction disbursements by the owner, lender, or owner’s agent reserved 10% of the funds (reserve funds) to the contract as required by Sec. 53.101 of the states statute. These funds must be held:
Failure to comply provides that all lien claimants who complied with the section shall have a lien, at least to the extent of the amount that should have been reserved.
Upon completion of the work, the owner can file an Affidavit of Completion to service as evidence that construction has been completed and to begin the 30-day time period that is required to withhold the reserve funds.
Lien Waiver Summary
Texas statutes provide that lien waivers are only enforceable when executed and delivered in accordance with the statutory requirements and on the statutory form. See Tex. Prop. Code § 53.284.
Statutory Form
Required
Notary
Date dependent*
Electronic Signature
Acceptable
*Due to changes that were made to the statute in January 2022. Notarization of the Lien Waiver may be required under the statute when the original construction contracts executed before January 1, 2022. For contracts executed after January 1st 2022 they are not required to be notarized.
Statutory Forms
There are four waiver and release forms set forth in Tex. Prop. Code § 53.284 that must be used in order to establish a conditional or unconditional waiver or release of lien or bond claim. Depending on the date of the construction, contract may require the form to be notarized.
Conditional Waiver and Release on Progress Payment: Use this form if a contractor is required to execute a waiver and release in exchange for or to induce payment of a progress payment and is not paid in exchange for the waiver or release; OR if a single payee check or joint payee check is given in exchange for the waiver and release.
Unconditional Waiver and Release on Progress Payment: Use this form if a contractor (or other potential lien claimants) is required to execute an unconditional waiver and release to prove the receipt of good and sufficient funds for a progress payment and the claimant or potential claimant asserts in the waiver and release that they have been paid the progress payment.
Conditional Waiver and Release on Final Payment: Use this form if a contractor (or other potential lien claimants) is required to execute a waiver and release in exchange for or to induce the payment of a final payment and is not paid in good and sufficient funds in exchange for the waiver and release or if a single payee check or joint payee check is given in exchange for the waiver and release.
Unconditional Waiver and Release on Final Payment: Use this form if a contractor (or other potential lien claimants) is required to execute an unconditional waiver and release to prove the receipt of good and sufficient funds for a final payment and the claimant or potential claimant asserts in the
waiver and release that the claimant or potential claimant has been paid the final payment.
If the owner finances the construction that advances loan proceeds directly to the contractor, the lender shall:
The lender shall provide to the owner the lender’s disbursement statement and the disbursement statement the lender obtained from the contractor before the lender disburses the funds to the original contractor. See Tex. Prop. Code § 53.258.
Contractor’s Disbursement Disclosure. Upon requesting payment from the owner or owner’s lender, an original contractor must provide the owner a disbursement statement (the Contractor’s Disbursement Disclosure) that at least includes the name and address of each person who subcontracted directly with the original contractor and who the original contractor intends to pay from the requested funds. The disclosure must be sent using any of the following methods:
As a party making disbursements (lender or lender’s agent) you should review the contractor’s disclosure statement to previous statements to monitor suspicious activity. Use the disclosure statements as a tool to ensure that parties are being paid as stated by the contractor.
Lender’s Statement of Funds Disbursed. See Tex. Prop. Code § 53.258. If the lender facilitates disbursements to the contractor for the owner, then the lender must:
The lender is not responsible for the accuracy of the information contained in the Contractor’s Disbursement Disclosure obtained from the original contractor, and the lender’s failure to provide these statements does not invalidate a lien, a contract lien, or a deed of trust. A person found guilty of intentionally, knowingly, or recklessly providing false or misleading information in a disbursement statement will be punished by a fine of up to $4,000, up to one year in jail, or both (See Tex. Prop. Code § 53.258(f)).
Change Orders. Although not specifically required by statute, amendments to the construction plans and specifications that adjust the contract scope, amount, or completion date should be documented by a change order. Many documents, statements, and affidavits will be relied on and documentation of the changes is necessary to avoid conflict between these other related documents. Additionally, other statutory practices, such as the Affidavit of Completion will reference changes within the affidavit.
Are Title companies required by law to manage construction loan disbursements?
No
Can a mechanics lien have priority over a pre-existing mortgage in Texas?
Texas is a first-in-time jurisdiction. Mechanics liens will take priority over liens that attach after the inception of the mechanics lien.
The “inception” of a mechanics lien is when construction begins or materials to be used in the project are delivered to the construction site. See Tex. Prop. Code §53.124(a) (“inception” is different for some design professional mechanics’ liens as described below). “commencement of construction of improvements or delivery of materials to the land on which the improvements are to be located and on which the materials are to be used” time.
A mechanics 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, and the person enforcing the lien may have the house, building, improvement, or any piece of the railroad property sold separately. See Tex. Prop. Code §53.123(a)
All subcontractors, laborers, and materialmen who have a mechanics lien have preference over other creditors of the original contractor. Tex. Prop. Code §53.121. [Some courts have construed this provision to only apply to contests between mechanics lien claimants only (i.e., not mechanics lien claimants vs. secured creditors)].
Perfected mechanics liens are on equal footing without reference to the date of filing the affidavit claiming the lien. Tex. Prop. Code §53.122(a). As between equal competing mechanics liens, all lien claimants will share proceeds pro-rata if the sale of the property is insufficient to satisfy all claims. Tex. Prop. Code §53.122(b).
A mechanics lien does not have priority over any lien, encumbrance, or mortgage already on the land or improvement at the time of the inception of the mechanics lien. See Tex. Prop. Code §53.122(b).
Design professionals (architects, engineers, surveyors, landscapers, etc.):
For original contracts entered into on or after January 1, 2022, Design professionals with mechanics’ liens share the same preferences and priority as all other laborers and materialmen. See Tex. Prop. Code §§53.001(3) and 53.021 (revised definition of “labor” to include certain design services; and revised to equally include design professionals and to remove direct contract with owner requirements for design professionals). For original contracts entered into before January 1, 2022, mechanics’ liens perfected by Design professionals are prioritized by the date of filing of the affidavit of lien required by section 53.052. See Tex. Prop. Code §§ 53.123 and 53.124(e).
Obtaining First Lien Priority on a Homestead
Failure to close a construction or renovation that is in compliance with the Texas Constitution and Statutory Requirements of the State Property Code will result in the lender not having a valid lien on a Texas Homestead.
Texas is a very unique and complicated state as it addresses lien rights on residential construction projects (construction and renovation). The loan closing is an instrumental part of making a construction loan and should not be done without trained professionals that adhere to the Texas State Constitution Article XVI, Section 50(a)(5) and Texas Property Code 53.254
A homestead is defined in Texas as the place of residence for a family or individual and is secure from forced sale by general creditors. The Texas Constitution guarantees the only way a person can lose his or her homestead rights is by death abandonment sale of property or foreclosure of a lien against the homestead. Texas’s State Constitution Article 16 Section 50(a)(5).
Texas residential construction projects require the party contracting with the owner to have a residential construction contract to secure mechanics lien rights on a homestead property.
The original contractor must deliver the Residential Construction Contract disclosure statement to the owner before the owner executes the residential construction contract. See Tex. Prop. Code § 53.255. Failure to provide the statement does not invalidate the lien.
The original contractor is required to provide the owner, before construction begins, a written list with the name, address, and telephone number of each subcontractor and supplier the contractor intends to use in the work to be performed. During the course of construction, the contractor must provide an updated list of suppliers and subcontractors no later than the 15th day after one is added or deleted. An owner may waive this requirement in writing, either within the residential construction contract itself or by a separate waiver that is set forth by statute. See Tex.Prop. Code § 53.256. Although this practice is required by statute, violation by the contractor does not invalidate their lien rights and we are unable to identify any implications to the parties if the contractor does not comply. This can be used as a tool to compel to the contractor to provide the list before or during construction.
The Texas State Constitution Article 16 Section 5(a)(5) provides the legal power for lenders to make construction and renovation loans on a homestead in Texas. The loan closing documents on these loans must meet critical constitutional and statutory legal requirements for the lender to have a lien.
Failure to close a construction or renovation that is in compliance with the Texas Constitution and Statutory Requirements of the State Property Code will result in the lender not having a valid lien on a Texas Homestead.