Magazine article Business Credit

Don't Mess with Texas' Mechanic's Lien Law: Proposed Bill Would Be Net Negative for Suppliers

Magazine article Business Credit

Don't Mess with Texas' Mechanic's Lien Law: Proposed Bill Would Be Net Negative for Suppliers

Article excerpt

Texas mechanics liens are not easy. Following the process to secure payment on a job can lead to multiple steps that must be strictly followed. Notice filing deadlines can be confusing, particularly for the novice. For example, notices for commercial projects have to be sent to the owner and prime contractor no later than the 15th day of the third calendar month following each month in which materials or services were furnished.

"Texas lien law is commonly known as having some of most onerous requirements in the country to perfect a lien on real property," said Jason Walker, Esq., shareholder and director of litigation at Andrew Myers in Houston. One reason for this is that, historically, Texas has always been a strong property rights state, and the law reflects the deep respect the state has for property owners.

Generally, the current law has worked well to secure the payment rights of material suppliers and subcontractors, noted Randall Lindley, Esq., partner with Bell Nunnally in Dallas. "It requires a lot of effort on a monthly basis, but they're usually very happy with the results they get," he said. That's why he and other professionals who represent or advocate for suppliers and subcontractors are not pleased with the current bills in the Texas House of Representatives (HB 3065) and State Senate (SB 1506).

The bills would essentially upend the current law and replace it with one that seems to favor general contractors (GCs) over other parties to construction projects by removing the notice letter requirements sent to both GCs and owners. "These notice letters have the practical effect of making money flow down the chain," Lindley said. "GCs as a group do not like it when their subs and suppliers report to owners their failure to pay." (To pass this year, the bill would need to be approved in the legislature by May 29. If made into law, it would become effective next year.)

Kathleen Quill, CBA, CAE, and president of NACM Gulf States, said that while Texas' law could be made easier to use--one of the factors many like about the bill is its mandate of an electronic filing system--supplier members are not supportive on balance and don't like the fact that it would take away fund trapping as a leverage to get paid. Statutory retainage will also be taken out of the statute. And while she's seen efforts in the Texas legislature to introduce a new mechanic's lien bill come and go over the past 20 years, the effort to pass this one--the House and Senate bills are essentially the same--has never been more organized, particularly without the support of supplier input.

The bill would also "result in more liens getting filed, because the pressure won't be on upstream parties to make sure suppliers get paid timely," said Walker. "Certainly there are things about the current lien statute that can be changed and modernized, but this is a throwing the baby out with the bathwater approach," he said.

The Important Proposed Changes

A major difference the proposed law would inculcate is changing Texas to a preliminary notice state; current law is geared toward a past due or debt notice system, Walker said. That means that suppliers and others would no longer have to understand or handle the issues of statutory retainage, fund trapping, accrual of indebtedness, special notices of contractual retainage/ special fabrication and calculating most of the timelines to send notices.

Statutory retainage. Current Texas lien law can confuse construction creditors as to when to notice for funds withheld on projects related to Texas' retainage of 10% of the contract amount until the project is completed. The proposed law would do away with such confusion as retainage would no longer be required by statute, he said. However, specific contracts could still reintroduce the concept of retainage, so the new law doesn't eliminate the possibility going forward.

Fund trapping. …

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