Mechanic s Lien Law Changes Since 2011 2013 Texas Land Title Institute John Rothermel Senior Vice President, Regional Counsel (SW States), Senior Underwriter Stewart Title Guaranty Company
10615 Perrin Beitel Suite 203 San Antonio Texas 78217 John F. Rothermel, III Phone 1-800-292-5712 Fax 1-210-590-1981 E-mail jrotherm@stewart.com Education 1971 BA 1975 JD Southern Methodist University/ SMU Law School Dallas Texas Professional Publications Stewart Title Guaranty Company Senior Vice President, Regional Underwriting Counsel (Southwest States) ; Senior Underwriter Apparent Authority, or Is It, Insurance Law Journal Judiciary Reports TLTA Magazine- 2 years Co author, Texas Boundary Law, PESI Reviser, Texas portion of Virtual Underwriter (www.vuwriter.com) Publisher, stewarttexas.com Additional professional activities Co Lecturer, Texas Society of Professional Land Surveyors, Seminar From Survey to Title ; Frequent lecturer at Texas Land Title Institute, Land Title School, Texas Land Title Association Regional Seminars, Seminars on TREC Contracts, title insurance, and related real estate matters for lenders and Realtors,Texas Relocation Association and TSPS Convention. Lecturer at various State Bar of Texas seminars, including Advanced Real Estate and the Practice Skills Course. Received TLTA President s Award 1998, TLTA Teaching Excellence Award, 1998 and TLTAProfessional Excellence Award for Agency Support, 2000 Frequent expert witness before both Houses of the Texas Legislature Adjunct Professor University of the Incarnate Word, San Antonio Texas: courses i Texas Politics Professional memberships State Bar of Texas; Dallas Bar Association; San Antonio Bar Association; San Antonio Real Estate Discussion Group; Texas Land Title Association (former Regional Vice President, chair of several committees including Bylaws, Judiciary, Land Title Institute, Technology and Convention. Member of Rates, Rules and Forms, Legislative and Legislative Initiative Committees and Underwriter Section Executive Committee; Member of several study committees for the Texas Insurance Department; State Bar Title Insurance Committee, Title Underwriters of Texas, Inc, (former President, 3 terms); ALTA public records committee
Community activities Chairman Planning & Zoning Commissioner, City of Windcrest, Texas (3 terms) Board Member, San Antonioans Against Lawsuit Abuse. Member, National Federation of Independent Businesses. Steering Committee for Proposition 4, the 1995 Texas Constitutional Amendment authorizing liens to refinance federal tax liens and owelty of partition liens Co-chair Steering Committee for Proposition 6, the 1999 Texas Constitutional Amendment increasing urban homesteads to 10 acres, abolishing the separate business homestead and the doctrine of overburdening of homesteads Co-chair Steering Committee for Proposition 16, the 2001 Texas Constitutional Amendment to authorize refinancing of manufactured home conversion liens. Former President and current Member Texas Society of Texas Pioneers; former President and Board member: Pioneers, Traildrivers and Rangers museum Other Activities SMU Mustang Club; SMU Mustang Alumni Band; travel, reading, swing music plays 1914 Holton Cornet among others. National Mustang Club Board;
Mechanic s Lien Law Changes Since 2011 Land Title Institute 2013 John Rothermel Senior Vice President, Regional Counsel (SW States), Senior Underwriter Stewart Title Guaranty Company 1
Who Gets A Lien? Sec. 53.021. PERSONS ENTITLED TO LIEN. (a) A person has a lien if: (1) the person labors, specially fabricates material, or furnishes the labor or materials construction or repair in this state of: (A) a house, building, or improvement; Who Gets A Lien? (2) 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. (b) A person who specially fabricates material has a lien even if the material is not delivered. 2
Who Gets A Lien? (c) 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 lien on the property. Who Gets A Lien? (d) A person 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, contractor, subcontractor, trustee, or receiver has a lien on the property. 3
Who Gets A Lien? (e) A person 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 lien on the property. What Property Is Subject To An MML? Sec. 53.022. PROPERTY TO WHICH LIEN EXTENDS. (a) The lien extends to the house, building, fixtures, or improvements, the land reclaimed from overflow, or the railroad and all of its properties, and to each lot of land necessarily connected or reclaimed. (b) (c) (d) The lien does not extend to abutting sidewalks, streets, and utilities that are 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. 2013 TEXAS LAND TITLE INSTITUTE 4
Limitation On Subcontractor s Lien Sec. 53.024. LIMITATION ON SUBCONTRACTOR'S LIEN. The amount of a lien claimed by a subcontractor 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. 2013 TEXAS LAND TITLE INSTITUTE Old Issues That Just Never Go Away Sec. 50. HOMESTEAD; PROTECTION FROM FORCED SALE; MORTGAGES, TRUST DEEDS, AND LIENS. (a) The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for: 5
Constitution Art. 16 Sec 50 (a) (5) 5) work and material used in constructing new improvements thereon, if contracted for in writing, or work and material used to repair or renovate existing improvements thereon if: (A) the work and material are contracted for in writing, with the consent of both spouses, in the case of a family homestead, given in the same manner as is required in making a sale and conveyance of the homestead; {Note: same requirement for change orders} (B) the contract for the work and material is not executed by the owner or the owner's spouse before the fifth day after the owner makes written application for any extension of credit for the work and material, unless the work and material are necessary to complete immediate repairs to conditions on the homestead property that materially affect the health or safety of the owner or person residing in the homestead and the owner of the homestead acknowledges such in writing; {Note: we probably wouldn t accept such statement for new construction or simple remodeling} Texas Constitution Art. 16 Section 51 Sec. 51. AMOUNT OF HOMESTEAD; USES. The homestead, not in a town or city, shall consist of not more than two hundred acres of land, which may be in one or more parcels, with the improvements thereon; the homestead in a city, town or village, shall consist of lot or contiguous lots amounting to not more than 10 acres of land, together with any improvements on the land; provided, that the homestead in a city, town or village shall be used for the purposes of a home, or as both an urban home and a place to exercise a calling or business, of the homestead claimant, whether a single adult person, or the head of a family. 6
Rural or Urban? (c) (d) A homestead is considered to be urban if, at the time the designation is made, the property is: (1) located within the limits of a municipality or its extraterritorial jurisdiction or a platted subdivision; and (2) served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality or under contract to a municipality: (A) electric; (B) natural gas; (C) sewer; (D) storm sewer; and (E) water The definition of a homestead as provided in this section applies to all homesteads in this state whenever created Texas Constitution Art. 16 Section 51 (C) (D) the contract for the work and material expressly provides that the owner may rescind the contract without penalty or charge within three days after the execution of the contract by all parties, unless the work and material are necessary to complete immediate repairs to conditions on the homestead property that materially affect the health or safety of the owner or person residing in the homestead and the owner of the homestead acknowledges such in writing; and the contract for the work and material is executed by the owner and the owner's spouse only at the office of a third-party lender making an extension of credit for the work and material, an attorney at law, or a title company; 7
2011 Legislative Changes HB 1456 deals with releases and waivers. The bill takes effect January 1, 2012, for all contracts entered after that date. Subcontractors 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 statute provides forms for conditional and unconditional waivers/releases of such liens. Waiver and Release of Lien or Payment Bond Claim Sec. 53.281. WAIVER AND RELEASE OF LIEN OR PAYMENT BOND CLAIM. (a) (b) 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. 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; and (3) in the case of a conditional release, evidence of payment to the claimant exists 8
Conditions for Waiver, Release, or Impairment of Lien or Payment Bond Claim Sec. 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; or (3) 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; and (B) 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. Unconditional Waiver and Release: Payment Required Sec. 53.283. UNCONDITIONAL WAIVER AND RELEASE: PAYMENT REQUIRED A person may not require 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: Our position is to 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. 9
Extends MLSAs to Landscaping Services HB 2525: Extends MLAs to Landscaping Services - Original Bill was too expansive - STG objected as did TLTA - Simply allows a written contract with the owner or the owner's agent, contractor, subcontractor, trustee, or receiver who has a lien on the property. - Amended to be acceptable. Attached to HB 1456 (see above) in Senate and was thus passed. What we recommend: Require a release of any recorded MLA for landscaping or yard service. Deals With the Time Periods Applicable to Retainage HB 1390 Deals With the Time Periods Applicable to Retainage. SECTION 1. Section 53.053(e), Property Code, is 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. 10
More on Retainage The bill makes several changes to Section 53.057 Property Code: (a) (b) 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 The claimant must give the owner or reputed owner notice of contractual retainage not later than the earlier of: (1) the 30th day after the date the claimant's agreement providing for retainage is completed, terminated, or abandoned; or (2) 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. More on Retainage (b-1) If an agreement for contractual retainage is with a subcontractor, the 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; and (2) if the agreement is with a 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. 11
More on Retainage (f) 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; or (B) 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 required; (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 (c), a written notice of demand for the claimant to file the affidavit claiming a lien; and (2) gives the notice of the filed affidavit as required by Section 53.055. More on Retainage (g) 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; and (3) 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. 12
Costs and Attorney s Fees SB 539 Relates to the Payment of Costs and Attorney s Fees in a Foreclosure Sec. 53.156. COSTS AND ATTORNEY'S FEES. In any proceeding to foreclose a lien or to enforce a claim against a bond issued under Subchapter H, I, or J or 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. Indemnification Agreements in Construction Contracts Passed as a Rider SB 361: Indemnification Agreements in Construction Contracts Passed as a Rider to HB 2093: Amends 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 requires 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. 13
2013 Legislative Changes Because in large part of the substantial changes made at the request of the suppliers in 2011, no substantial changes were made to Texas mechanic s lien laws in 2013. A couple of bills were filed that are related to the issue and we will take a look at them next. Correction of Instruments SB 887: relates to certain correction instruments in the conveyance of real property. Section 5.028, Property Code, is amended by amending Subsection (a) and adding Subsection (a-1). Subsection (a) A correction affidavit may correct a reference to a plat or other plat information, a lot or block number. Subsection(a-1) A person who has personal knowledge of facts relevant to the correction of a recorded original instrument of conveyance may prepare or execute a correction instrument to make a nonmaterial change that results from an inadvertent error, including the addition, correction, or clarification of: (1) a legal description prepared in connection with the preparation of the original instrument but inadvertently omitted from the original instrument; or (2) an omitted call in a metes and bounds legal description in the original instrument that completes the description of the property. SECTION 2. Section 5.030, Property Code, is amended by amending Subsection (b) and adding Subsection (c) to read as follows: (b) A correction instrument replaces and is a substitute for the original instrument. Except as provided by Subsection (c), a bona fide purchaser of property that is subject to a correction instrument may rely on the instrument against any person making an adverse or inconsistent claim. (c) A correction instrument is subject to the property interest of a creditor or a subsequent purchaser for valuable consideration without notice acquired on or after the date the original instrument was acknowledged, sworn to, or proved and filed for record as required by law and before the correction instrument has been acknowledged, sworn to, or proved and filed for record as required by law. 14
More on Correction of Instruments What you should know: This bill was an important part of the TLTA legislative program in 2013. It clarifies that a correction affidavit may be used to correct incorrect or missing lot and block numbers. It also allows the correction affidavit to provide a legal description when the exhibit containing the legal description was inadvertently left off the recorded document. What you should do: First, make every reasonable effort to double check legal descriptions before recording documents. Especially, check the legal description in the body of the document to see if it refers to a more complete legal description on Exhibit A (or other exhibit). Be sure to attach such Exhibit to the document before recording. Second, if despite your efforts to determine that the legal description is incomplete a document is recorded without a proper legal description, you can file an affidavit which makes the needed corrections. You will still have to follow the notice provisions in the law and that were discussed in our 2011 Legislative Bulletin TX2011009. If you are correcting a missing exhibit, your affidavit should clearly state that the exhibit was inadvertently left off. Signed by the governor 5-24-2013 effective 9-1-2013. Drought Resistant Landscaping Materials S.B. 198 removes a barrier that prevents some property owners from reducing their water use by protecting a homeowner's right to install a drought-resistant landscape or waterconserving turf. The drought of 2011 ranked as the most intense one-year drought in recorded history in many parts of Texas. Maintaining a green lawn and a lush landscape becomes particularly water-intensive and expensive in times of drought. Bans and limits on outdoor watering, while necessary and often mandatory in times of drought, only add to the difficulty. In response to these challenges, many Texas homeowners have become increasingly interested in landscape alternatives that require less water to maintain. Despite some progress, many property owners' association covenants and restrictions continue to present a barrier for homeowners who wish to transition to a drought-resistant and less water-intensive landscape and lawn. While not precluding the ability of a home owners' association or property owners' association to approve or establish parameters for a homeowner's landscape plan, S.B. 198 clearly establishes that an association's covenant or restriction cannot prohibit or restrict a homeowner's use of drought-resistant landscaping or water-conserving turf. As proposed, S.B. 198 amends current law relating to restrictive covenants regulating drought-resistant landscaping or water-conserving turf. 15