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HB 2237: Changes to Texas Mechanic’s Lien Laws
Following 2021’s session of the Texas Legislature, Governor Abbott signed into law House Bill 2237, which amends several provisions in Chapter 53 of the Texas Property Code governing statutory liens. These changes took effect on January 1, 2022, and are not retroactive, meaning that the amendments will only apply to liens arising from Original Contracts[1] executed on or after January 1, 2022. This article provides an overview of the amendments we see as most relevant to our clients in the construction and design industry.
I. Amendments to Definitions
House Bill 2237 made the following changes to key definitions in the Property Code:
“Improvement” now specifically includes “a house, building, structure, parking structure, physical appurtenance, pool, utility, railroad, well, storage facility,” and “a design, drawing, plan, plat, survey or specification provided by a licensed architect, engineer, or surveyor.” Courts have defined improvement to include an “entire house, building or other improvement.” Hayek v. W. Steel Co., 478 S.W.2d 786, 790–91 (Tex. 1972). The amended definition provides clarity on the type of projects and design work covered by the Property Code.
“Labor” now encompasses “direct preparation for the work of a design, drawing, plan, plat, survey, or specification.” This amendment expands lien rights for design professionals because under the previous version of the Property Code, design professionals were only entitled to a statutory lien if they had a written contract with the owner—effectively leaving sub-consultants without recourse.
“Subcontractor” is now defined as anyone who furnishes labor or materials to the original contractor or to a subcontractor “of any tier.” This amendment resolves the ambiguity on whether lower-tier subcontractors are entitled to statutory lien rights, as the current definition only references subcontractors and sub-subcontractors.
“Purported original contractor” is a new term in the Property Code, which means “an original contractor who can effectively control the owner or is effectively controlled by the owner . . . .” This change in terminology was made to clarify that “owner” does not include a person who only has or claims a security interest. Texas Bill Analysis, H.B. 2237, 2021.
II. Monthly Notice Requirements
Section 53.003 of the Property Code will no longer allow USPS Registered Mail as a method of delivery for required lien notices. Instead, lien claimants must provide notice by one of the following methods: (1) in-person service, (2) USPS Certified Mail, or (3) other traceable forms of private mail that include proof of receipt. We recommend the continued use of Certified Mail, Return Receipt Requested, as the preferred method of sending notices, but the availability to use private delivery methods is a welcome change in the event that notice by Certified Mail is not feasible.
Importantly, the amendments also provide that if a notice deadline falls on a Saturday, Sunday, or legal holiday, the period extends to the next day that is not a Saturday, Sunday, or legal holiday. Under the former version of the statute, a deadline that fell on any one of these non-business dates required notice to be sent by the prior business day.
The Property Code amendments will streamline notice requirements for subcontractors and lower-tier subcontractors and suppliers. Under the former version of the statute, lower-tier subcontractors and suppliers needed to send notice to the original contractor no later than the 15th day of the second month following each month in which all or part of the labor or material was provided. Derivative claimants needed to send the same notice to the owner (or reputed owner) no later than the 15th day of the third month following each month in which all or part of the labor or material was provided. The amended Property Code provisions now only require derivative claimants to send one notice to the original contractor and the owner no later than the 15th day of the third month following each month in which all or part of the labor or material was provided.[2] This change eliminates the requirement of the second month notice.
Also, the third-month notice has been standardized in that the Property Code now provides a statutory form for the notice, similar to the statutory lien waivers.
III. Statute of Limitations to File Suit to Foreclose on a Lien
Under the previous version of Chapter 53, there were two different limitations schemes under which lien claimants could file suit to foreclose on a lien. For residential construction, the limitations period was the later of one year after (i) the last day the claimant could file a lien affidavit under the Property Code, or (ii) the completion, termination, or abandonment of the Original Contract. For commercial construction, the limitations period was the later of (i) two years after the last day the claimant could file a lien affidavit under the Property Code, or (ii) within one year of the completion, termination, or abandonment of the Original Contract.
Under the amended version of Chapter 53, the limitations period for both residential and commercial construction projects is one year from the last day a claimant may file the lien affidavit under the Property Code. The lien claimant and the property owner subject to the lien may agree in writing to extend the limitations period to two years, but the written agreement must be recorded in the property records of the county in which the real property at issue is located.
Under the Texas Civil Practice & Remedies Code, a counterclaimant or cross-claimant in a lawsuit could theoretically file a lien foreclosure action after limitations has run if the original lawsuit is based on the same transaction or occurrence as the counterclaim or cross-claim (i.e., the foreclosure action). In other words, if a contractor filed suit against a lien claimant whose limitations period on a foreclosure action had already run, the lien claimant could still assert its foreclosure action as a counterclaim, because the Civil Practice & Remedies Code would “revive” the claim. However, under the revised version of the Property Code, if a contractor or landowner files suit solely to discharge a lien claim on the basis that the applicable limitations period has run, the lien claimant’s ability to bring a foreclosure action is not “revived” by operation of the lawsuit.
IV. Expanded Lien Rights for Design Professionals, Landscapers, Surveyors, and Demolition Contractors
Under the previous version of the Property Code, design professionals were required to have a written contract directly with the owner to have lien rights. The revised version of the Property Code now grants these lien claimants the same rights as subcontractors and suppliers (derivative claimants) by removing the requirement for privity of contract with the owner.
V. Changes to Retainage Terminology and Form of Notice
Under the revised version of the Property Code, the term “statutory retainage” (referring to the owner’s obligation to withhold 10% of each payment from the general contractor) has been replaced with the term “reserved funds.” Consequently, the term “retainage” is now connected to “contractual retainage,” or the contractual requirement that retainage is withheld between a contractor and subcontractor in an amount to be determined by the applicable subcontract.
As with the third-month notice, the notice of contractual retainage has been standardized into a statutory form located at § 53.057 of the Property Code.
VI. New Deadlines to Perfect a Claim for Contractual Retainage
The previous version of the Property Code contained four different notice deadlines under which a claimant could send notice to perfect a claim for contractual retainage. Under the revised version, an exclusive claim for unpaid contractual retainage is timely if the lien claimant (i) sends the new § 53.057 notice (referenced above), and (ii) records its lien affidavit in the real property records on or before the 15th day of the third month after the date the Original Contract was completed, terminated, or abandoned.
VII. Lien Waivers No Longer Required to be Notarized
A very welcome change under the revised version of the Property Code is that the statutory conditional and unconditional lien waivers no longer require notarization.
VIII. Residential Disclosure Provision Updates
The change in terminology throughout the Property Code requires residential disclosures to be updated to reflect the new defined terms.
IX. Conclusion
These amendments to the Property Code provide much-needed clarity on the statutory mechanic’s lien framework in Texas. The amendments, however, will be subject to further judicial interpretation. Therefore, parties asserting or defending lien claims should consult counsel in interpreting the effects of the new legislation.
[1] The Property Code defines “Original Contract” as “an agreement to which an owner is a party either directly or by implication of law.” It is very important for subcontractors and vendors to receive a copy of the Original Contract between the owner and the original contractor for the project at issue, so that a determination can be made as to whether the pre- or post-January 1, 2022 Property Code provisions apply.
[2] This applies to commercial construction projects. Residential construction projects require notice no later than the 15th day of the second month following each month in which all or part of the labor or material was provided.