Proposed Changes to Texas Lien Law: Personal Liability and Priority

We have previously written about how changes to Texas lien law may be on the horizon and how construction groups have lobbied for changes to Texas lien law. Well, it looks like some of those changes may be might be in the works. Earlier this month, House Bill 3065 and Senate Bill 1506 were introduced in the Lone Star State. The bills are identical, and would go into effect in May of 2018 if passed. This week, we will discuss the litany of changes that would occur under these proposed changes to Texas lien law. Because there are so many proposed changes to Texas lien law, we had to break them up into sections: The BasicsLien Website and Filing a LienNotices; Liability and Priority; Waiver, Foreclosure, and Bonding Off a Lien; and finally Repealed Revisions and Recap.

This series will largely discuss the ways in which lien law will change. For more background on the current state of Texas lien laws, check out our Texas Construction Payment Resources.

Personal Liability for Liens (53.0841)

One of the changes included under the proposed changes to Texas lien law is the institution of personal liability for liens. Under 52.0841(a), an owner is personally liable for the aggregate amount of liens perfected on their property. This personal liability is not affected by a subsequent foreclosure or other transfer of the owner’s interest in all or part of the property. 53.0841(a).

One of the most basic benefits of mechanics lien law is that the debt owed a laborer or materialman does not exist merely as a personal liability- it is secured by the property. However, if there are other creditors with priority ahead of a mechanics lien, a claimant will only be paid after those other creditors get paid. The options of subcontractors, suppliers, and other parties down the chain are limited outside of a mechanics lien because they are not in direct contract with the owner. A subcontractor or supplier might have contract claims against a general contractor, but there are a slurry of reasons these claims might fail.

Under the proposed bill, a lien that has been perfected on the property also exists as a personal liability for the owner. So claimants get the best of both worlds – their lien attaches to the property and as a personal liability of the owner. The owner’s liability is not affected by a subsequent foreclosure or other transfer of the property. 53.0841(a). This section could benefit from some clarification. For example, there is no prescribed resolution for a situation where the lien exists both as a charge on the property and as a personal liability to the (previous) owner after a transfer. There are some other questions that come to mind, but hopefully this section will be fleshed out if Texas lawmakers move forward with the bill.

As for the amount of the lien/ personal liability, the aggregate amount the claimants’ liens may not exceed the price of the original contract (plus modifications). Duplicated claims asserted by claimants within the same chain of contract cannot be included twice in determining the aggregate amount of liens. However, payment by the owner to the original contractor does not reduce the aggregate liability of the owner for liens. 53.0841(b). This section addresses a situation that is not uncommon in payment disputes: because the general contractor and the subcontractor sometimes have claims that overlap, the total amount of liens on the property may exceed the price of the entire project. Under this section of the bill, such a situation would not be possible- the combined price of all liens on the project cannot exceed the price of the original contract plus modifications.

Lastly, a party who purchases the property subject to liens is not personally liable for the lien claim in a foreclosure action brought by a claimant. The new owner may be held liable for costs and attorney fees, however, when a court finds it equitable and just. 53.0841(c).

Priority

Equality of Liens (53.122)

According to 53.122(a), liens with the same inception date (more on this in just a second) would be on equal footing, regardless of when the lien claim affidavit was filed.

Inception of Mechanics Lien (53.124)

53.124(c) was essentially rewritten. Under the proposed bill, the inception of a mechanics lien is the latter of the date the notice of commencement is filed and the date when it was posted to the lien website. As for work that was performed prior to the notice of commencement, the time of inception follows 53.124(a) (time of inception is the commencement of construction/repair of improvements or delivery of materials to the property). For work done after a notice of completion is filed, the inception date also reverts back to 53.124(a) or the date that a new notice of commencement is posted. The jointly filed affidavit from the general contractor and owner that currently exists under this section would be eliminated.

Section 53.124(d) was also rewritten. It states: a lien, encumbrance, or mortgage securing an interest in the land has been filed with the county on or before the date the notice of commencement is posted, that lien, encumbrance, or mortgage will have priority over a mechanics lien who’s inception is at the time of the notice. 53.124(d). So if the mechanics lien begins on the notice of commencement, any other lien, mortgage, or encumbrance filed on the same day as the notice of commencement will have priority over the mechanics lien. Liens, mortgages, or other encumbrances filed prior to the notice of commencement will also exceed mechanics liens in priority.

Lastly, the inception date for landscaping and demolition work that is not provided for in the notice of commencement is the date that the lien claim affidavit is recorded. The priority of these liens will be determined by the date of recording. Liens for landscaping or demolition work are not valid against a grantee or purchaser who acquires an interest in the real property before the time of the inception of the lien. 53.124(f). Note, however, that if landscaping or demolition work is included in the notice of commencement, the lien’s inception will be the date of the notice of commencement.

Takeaway

I hope you aren’t tired of hearing about the proposed changes to Texas lien laws, because we’re not quite done yet. As with all of the other proposed changes to Texas lien law that we discussed, these alterations, if adopted, would not go into affect until May of 2018. Considering they have just entered the legislative process, there is a good chance that the bills would look very different even if passed. Still, it’s important to understand what legislators are proposing in order to stay ahead of the game. Be on the lookout for the next post in this series regarding Waiver, Foreclosure, and Bonding Off a Lien.

We regularly put out content regarding Texas lien law, so head over to the Texas tag on the blog for more on the Lone Star State.

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