General Lien Questions
Can I File a Lien on a Public Project?
NO.
The first step in protecting your unpaid invoices is to determine whether the Property is owned by a Public Entity, a privately held company, or an individual. The process that you will follow to enforce your claim is different depending upon the answer to this question. You cannot file a Lien against a Property owned by a Public Entity, like the state, a county, municipality, or a city. Some examples of government owned Properties include public schools, libraries, highways, parks, and government buildings. As a substitute to a Lien, the State of Texas requires the General Contractor to purchase a Payment Bond from a reputable Surety (insurance company) wherein the prime contract (the contract between the Public Entity and the General Contractor) is over $25,000.00. If you provided labor/materials to a publicly owned Project and have not been paid, then your first step is to make a claim against the Payment Bond. If you need to file a Payment Bond Claim, please contact Lovein Ribman at (888) 368-2483 (www.loveinribman.com) for additional information and to have one of our construction lawyers prepare and serve a Payment Bond Claim for you.
On all other Projects, those that are owned by private individuals or private business entities, you can file a Lien against the Property to secure payment of the debt. Some examples of privately owned Properties include private homes, apartment complexes, office buildings, shopping centers, restaurants and leased commercial properties.
How Do I Enforce Payment on a Privately Owned Project?
There are at least six potential legal methods that you can use to enforce payment on a privately owned Project: (1) send a Pre-Lien Payment Demand Letter to the Property Owner, General Contractor, and the contractor who hired you; (2) file a Lien Affidavit against the Property; (3) serve the Property Owner, General Contractor, and contractor who hired you with a Notice of Lien Filing Payment Demand Cover Letter; (4) send a Pre-Foreclosure Payment Demand Letter; (5) send a Payment Demand Letter to the debtor only; and/or (6) file a Lawsuit to foreclose on the Lien and/or for breach of contract. Each one of these methods can be used independently or in conjunction with one another. Read below to learn more.
Serve a Pre-Lien Payment Demand Letter By General Contractor: If you were hired by the Property Owner, or the Property Owner’s agent, then you are not required to serve any preliminary Notices before filing a Lien. However, if you believe that filing a Lien may negatively affect your business relationship or if you believe that sending one last stern Notice may prompt payment, then you should consider sending a Pre-Lien Payment Demand Letter before filing a Lien.
Serve a Mandatory Pre-Lien Notice Payment Demand Letter: If you were not hired by the Property Owner or the Owner’s Agent, then you must serve a “Pre-Lien Notice” on the Property Owner and the General Contractor before filing a Lien. When properly prepared and timely served, the Property Owner is required to withhold from the General Contractor the amount you claim is owed (referred to as “trapped funds”) upon receipt of a Pre-Lien Notice. If the Property Owner pays the General Contractor after receiving the Notice, then the Property Owner may become personally liable for the debt. Moreover, if the General Contractor does not timely dispute the amount owed in writing, then the Property Owner is obligated to pay the amount of your claim directly to you. Additionally, when the Pre-Lien Notice is prepared and served as a strong Payment Demand Letter, it can be a very effective tool to enforcing payment without even filing a Lien. Keep in mind, you can always serve a Pre-Lien Notice without later filing a Lien. To learn more about the Pre-Lien Notice requirements, contact Lovein Ribman at (888) 368-2483 (www.loveinribman.com).
File a Lien against the Property: Almost everyone who provides labor, materials and/or equipment to a Property has the right to file a Lien against the Property if they have not been timely paid and have properly completed all Pre-Lien requirements. A Lien is a powerful tool that can be used to potentially secure payment of the debt and gain leverage in negotiating a settlement. To learn more about the Lien, see the “What is a Lien?” question herein.
Serve a Notice of Lien Filing Payment Demand Cover Letter: After you file the Lien, you must serve it on the Property Owner and the General Contractor within five days of filing. This is one of the best opportunities to inform the Property Owner, the General Contractor, and all other interested parties that a Lien has been filed and the legal action you intend to take if the debt is not immediately paid.
Send a Pre-Foreclosure Payment Demand Letter: If you have still not been paid after filing and serving the Lien, you may need to file a Lawsuit to foreclose on the Lien. However, before you do so, you should consider sending one last stern Payment Demand Letter to all parties who will be affected by the Lawsuit.
Serve a Payment Demand Letter: If you failed to timely serve any of the Pre-Lien Notices or file a Lien, then your remaining two options are to serve a strong Payment Demand Letter to the debtor who hired you and/or file a Lawsuit. Before filing a Lawsuit, you should consider sending a strong Payment Demand Letter to the company/individual who hired you before incurring the cost of litigation.
File a Lawsuit: If your deadline has passed to file a Lien, then other than serving a Payment Demand Letter, your remaining option is to file a Lawsuit. Additionally, if you have filed a Lien and have still not been paid, then your next step is to file a Lawsuit to foreclose on the Lien. Contact Lovein Ribman at (888) 368-2483 (www.loveinribman.com) to learn more about having a construction lawyer prepare and file a Lawsuit to foreclose for you.
What is a Lien?
A Lien is one of the most powerful legal tools that a General Contractor, Subcontractor, Architect, Engineer, Material Supplier, or Laborer has to secure payment for the unpaid labor/materials/equipment it provided to a privately owned (as opposed to state or federally owned) Property. In Texas, a Lien is referred to as a “Mechanic’s Lien,” “Construction Lien”, “Mechanic’s, Contractor’s, or Materialman’s Lien,” or just simply a “Lien.” When properly filed with the County Clerk’s Office in the county where the Property is located, the Lien creates an encumbrance (or a “cloud”) on the Property’s title, thereby giving notice to Lenders and potential purchasers that someone (referred to as the “Claimant”) claims a debt is owed to it for labor/materials/equipment provided to the Property. Lenders typically will not provide permanent financing nor will they refinance a Property that has a Lien filed against it. As such, Property Owners (especially on new construction) will need to resolve the Lien prior to completion of the Project or before the Property is refinanced or sold. It has become the practice, as opposed to the exception, for all categories of Contractors, Subcontractors, Architects, Engineers, Material Suppliers, and Laborers to routinely serve and file all necessary Lien documents as a means to protect their unpaid invoices.
What Are the Benefits to Filing a Lien?
A Lien creates a new and additional source to recover payment of the debt. For example, in the event of nonpayment, your first line of recovery would typically be a breach of contract claim against the party who hired you. However, if you timely and properly file a Lien against the Property, then you will have the following additional rights and protections: (1) to file a Lawsuit to foreclose on the Lien and force a sale of the Property; (2) a Lien against any funds held by the Property Owner and due to the General Contractor; (3) the right to be paid directly by the Property Owner if the General Contractor does not timely dispute the amount owed in writing; and (4) if the Property Owner pays the General Contractor after receiving a timely Pre-Lien Notice (with “fund trapping” language), then the potential right to force the Property Owner to pay twice for your work. The “Lien Process” is also an excellent way to gain leverage in negotiating a resolution of the debt. Moreover, if you file a Lawsuit and prevail on foreclosing on the Lien, then you may be entitled to recover all reasonable attorneys’ fees and costs.
How Do I Use the Lien Filing Process to Enforce Payment?
Typically, you engage the “Lien Filing Process” as a means to gain leverage to resolve the dispute. As such, each step of the process can be viewed independently and as an attempt to obtain payment without having to take the next step. With that said, it is important that each Lien document is: (1) timely sent; (2) has the right look and appearance; (3) has the strongest possible content; and (4) is served and/or filed at the optimal time.
What Laws Control the Filing of a Lien?
Texas Property Code Sections 53.001 through 53.176 contain the general provisions for filing a Lien against a privately owned Property in Texas and Sections 53.251 through 53.260 set forth special requirements for filing a Lien against a “residential” Property in Texas. These statutes are strictly enforced by the courts. If you fail to timely serve any of the Pre-Lien Notices or fail to timely record your Lien, you have likely waived your right to enforce payment by way of the Lien process.
In addition to a statutory Lien, the Texas Constitution, Article XVI, Section 37, provides certain Prime Contractors (those who have a direct contract with the Property Owner or the Owner’s Agent) with a second basis for a Lien, known as a “constitutional Lien.” Unlike a statutory Lien (which must be filed within a short time period from completion of the work), a constitutional Lien can potentially be filed up to four years from the completion of the entire Project.
How Long Should I Wait Before I Begin the Lien Process on a Project?
You should consider beginning the Lien Process the moment you enter into an agreement to provide labor and/or materials to a Project. One of the most common mistakes made is to assume that you will be paid for your work. The better approach is to assume that you will not be paid and to make it a practice in your business to timely serve all Pre-Lien Notices and file your Lien Affidavits well before your deadlines. Remember, a Pre-Lien Notice does not need to be a threatening demand for payment, but instead can be drafted in a manner that advises the Property Owner and the General Contractor that the Notice is simply being sent to comply with the mandatory Texas Lien Statutes.
Who Has the Right to File a Lien?
Any General Contractor, Subcontractor, Laborer, Material Supplier, Architect, Engineer, or Surveyor, who has provided labor, materials, equipment, plans, plats, or surveys to a Property for the construction or repair of a house, building, or a structure, may file a Lien against the Property.
Practice Pointer: Some trades are required to have provided their labor/materials “under or by virtue of a written contract” with the Property Owner, the Owner’s Agent, the General Contractor, or a Subcontractor as a prerequisite to being entitled to a Lien. For more information on these requirements please read the section entitled “Can I File a Lien Even if I do Not Have a Written Contract?”
What are the Necessary Steps for Filing a Lien?
Below are the bare minimum steps that must be completed in order to perfect a Lien. The deadlines and documents that you will use to complete these steps vary depending upon whether the Property is commercial, residential, or a homestead.
When Hired by the Property Owner
Step One: Prepare and file the Lien Affidavit with the County Clerk’s Office in the county where the Property is located within the statutory deadline.
Step Two: Serve the Lien Affidavit on the Property Owner within no later than five days from filing.
Step Three: File a Lawsuit to foreclose on the Lien if you have not been paid within the statutory deadline, or waive your right to further enforce the Lien.
When Hired by the General Contractor
Step One: Serve the Property Owner and the General Contractor with a Pre-Lien Notice within the statutory deadline.
Step Two: Prepare and file the Lien Affidavit with the County Clerk’s Office in the county where the Property is located within the statutory deadline.
Step Three: Serve the Lien Affidavit on the Property Owner and General Contractor within no later than five days from filing.
Step Four: File a Lawsuit to foreclose on the Lien if you have not been paid within the statutory deadline, or waive your right to further enforce the Lien.
When Hired by a Subcontractor
Step One: Serve the General Contractor with a Pre-Lien Notice within the statutory deadline (commercial Properties only—this step can be combined with Step 2 below).
Step Two: Serve the Property Owner and the General Contractor with a Pre-Lien Notice within the statutory deadline.
Step Three: Prepare and file the Lien Affidavit with the County Clerk’s Office in the county where the Property is located within the statutory deadline.
Step Four: Serve the Lien Affidavit on the Property Owner and General Contractor within no later than five days from filing.
Step Five: File a Lawsuit to foreclose on the Lien if you have not been paid within the statutory deadline, or waive your right to further enforce the Lien.
Again, the above steps represent the bare minimum that you need to do to perfect a Lien. Read on to learn how to maximize the probability of being paid through each step.
Are the Requirements and Deadlines Different for Filing a Lien on a “Commercial” Property Versus a “Residential” Property?
YES.
The first step in analyzing your Lien rights is to determine whether you supplied labor or materials to a “residential” Property or a “commercial” Property as defined under the Texas Property Code. If the Property is not “residential,” then it is “commercial” by default.
A “residential Property” is a single-family house, a duplex, a triplex, a quadruplex, or a unit in a multi-unit structure (like a condo) that is used for residential purposes and that is:
(1) owned by one or more adult persons (not an entity); and
(2) used or intended to be used as a dwelling by one of the Owners.
Therefore, if the Owner is a company (like a builder), then the Property is likely commercial and not residential for Lien purposes. In contrast, if the Owner lives in or intends to live in the house, then the Property is likely considered residential for Lien purposes.
Example: Here are some basic examples to consider: your next door neighbor’s house, if rented, would not be a residential Property since the Owner does not live in the house and since it is being used to generate income. A spec house or a house in a large scale development would not be residential if it has not yet been sold and occupied by its Owner. An apartment complex is not a residential Property if the units are intended to be leased. Therefore, just because something looks like a “residence” does not mean that it is a residential Property for Lien purposes.
Practice Pointer: The Pre-Lien Notice and Lien filing deadlines are shorter for residential Properties than they are for commercial Properties. Additionally, there are special requirements which must be followed if the Property is a residential homestead Property. Therefore, it is always better for the Claimant if the Property is considered “commercial” rather than “residential.”
Are the Requirements and Deadlines for Serving and Filing Lien Documents Different if You Were Hired by the Property Owner, General Contractor, or a Subcontractor?
YES.
The requirements and deadlines for serving Pre-Lien Notices and filing the Lien Affidavit are different depending upon who hired you. Therefore, the second step in analyzing your Lien rights is to confirm who hired you.
If you were hired by the Property Owner you are an “Original Contractor” or a “General Contractor,” even if you only supplied materials. Keep in mind that if you were hired by the Owner’s Authorized Agent, then you have been hired by the Property Owner. An example of a Property Owner’s Agent might be an apartment management company who is authorized to retain Contractors to perform work at the Project.
If you were hired by the Original Contractor/General Contractor, then you are a First-Tier Subcontractor/Supplier.
If you were hired by a Subcontractor of any level, then you are considered a Second-Tier Subcontractor/Supplier for Lien purposes.
Are the Requirements and Deadlines for Serving and Filing Lien Documents Different for Protecting “Unpaid Progress Payments” Versus “Withheld Contractual Retainage”?
YES
The procedures and deadlines for filing a Lien to protect withheld contractual retainage are different than they are for filing a Lien for unpaid progress payments. “Contractual retainage” is any amount withheld by the contractor who hired you from your monthly progress payments. Typically, the amount withheld is 5% to 10% of your overall contract and is not due until the entire Project is complete.
Step One—Serve Notice of Contractual Retainage: If you were not hired by the Property Owner, or the Property Owner’s Authorized Agent, then you must notify the Property Owner in writing that your contract allows the contractor who hired you to withhold retainage from your progress payments. If your contract is with a Subcontractor, then you must serve the General Contractor with the Notice as well. The Notice must be served within the earlier of: (1) the 30th day from when you complete, terminate, or abandon your contract; or (2) before the 30th day after the contract between the Property Owner and the General Contractor is completed, terminated, or abandoned. This simple notice requirement can easily be incorporated into the standard Pre-Lien Notice for unpaid progress payments or sent independently.
WARNING: The deadline to serve a Notice is not extended if the 15th falls on a Sunday or legal holiday. Therefore, if your deadline falls on one of these days, you must serve the Notice on the preceding business day for it to be timely.
Step Two—File the Lien Affidavit: A claim for withheld contractual retainage does not accrue until the contract between the Property Owner and the General Contractor is completed, settled, terminated, or abandoned. At that point, you have until the 15th day of the fourth month (on a commercial Project) or the 15th day of the third month (on a residential Project) to timely file a Lien Affidavit. As such, if you provide labor/materials at the outset of a large scale Project, it is likely that your right to file a Lien for withheld/unpaid contractual retainage may not arise until well after you have completed your work.
Example: Assume that in March you installed and completed the foundation on a commercial Project and that the entire Project was not completed until December of that same year. Your right to the retainage would not accrue until December (completion of the Project) and you would have until April 15th of the next year to timely file the Lien. (See below for a Warning.)
Warning: Generally speaking, a Property Owner is permitted to release final payment (typically withheld statutory retainage) to the General Contractor within 30 days after completion of the entire Project. If a Property Owner timely receives Notice of Contractual Retainage (as discussed above) it should not release the statutory retainage to the General Contractor until after the deadline to file a Lien for contractual retainage has passed. However, Property Owners do not always know or follow the law. Therefore, best practice is to always file your Lien Affidavit for withheld contractual retainage within no later than 30 days from completion of the Project as opposed to waiting until your deadline.
Can I File a Lien if the Work Was Performed for a Commercial Tenant?
YES. However, the Lien will only extend to the “leasehold interest” held by the tenant as opposed to the real Property itself. A leasehold interest is the interest that a tenant has to use the Property by and through the lease agreement. This is typically not the type of “interest” that you would want to foreclose on through a Lien. However, there are two major benefits for filing a Lien when the work was performed for a commercial tenant.
First, the lease agreement between the tenant and the landlord should have a provision in it which expressly prohibits the tenant from allowing a Lien to be filed against the Property or against the “leasehold interest.” Consequently, by filing the Lien you will put the tenant in default of the lease. Second, as an incentive to obtain a tenant or keep a pre-existing tenant, landlords will commonly agree to pay for some of the tenant improvements by way of tenant improvement money, also known as “TI” money. Usually, the landlord will not release the TI money until the construction is complete and the tenant has obtained a Lien waiver from the General Contractor representing that all subcontractors/suppliers have been paid in full. By filing a Lien, you will likely prevent the release of the TI money until your Lien is resolved.
The process for filing a Lien against the leasehold interest is exactly the same as filing a Lien against the real Property, with the only two differences being that the tenant becomes the “Property Owner” (since he owns the leasehold interest) and the Property description should state that the Lien is being recorded against “the leasehold interest owned by [tenant’s name] for real Property located at [address and legal description].” All other requirements are the same.
Can I File a Lien Even if I Do Not Have A Written Contract?
It depends upon who hired you and whether the Property is a residential homestead Property.
Contractors, Subcontractors, Laborers, Equipment Suppliers, and Material Suppliers who provide labor or materials to a commercial or non-homestead residential Property are not required to have a written contract as a prerequisite to filing a Lien.
Architects, Engineers, and Surveyors must have provided their work under or by virtue of a written contract with the Owner or the Owner’s Agent to have a right to file a Lien.
Landscapers must have a written contract with the Property Owner, Property Owner’s Authorized Agent, General Contractor, or a Subcontractor to have a right to file a Lien.
Homestead Properties: In order to have a right to file a Lien against a residential homestead Property, the work needs to have been performed under or by virtue of a written contract (signed by both the husband and wife, if applicable). For more details see section entitled “Are there Special Requirements for Filing a Lien Against a Residential Homestead Property?”
Are There Special Requirements for Filing a Lien Against a Residential Homestead Property?
YES. In order to file a Lien against a residential homestead Property, either you, or the General Contractor must: (1) have a written contract signed by the Property Owner (if they are a married couple, then both must sign the contract); (2) before the work begins; and (3) the contract must be filed with the County Clerk. See Texas Property Code Section 53.254 for more details.
Practice Pointer: If you are a Subcontractor or a Material Suppler who provided labor/materials to a residential homestead Property by virtue of a verbal contract or a purchase order, you still have a right to file a Lien if you properly/timely serve the Pre-Lien Notice and if the General Contractor has satisfied the above requirements of having a written contract.
What is a Pre-Lien Notice?
What is a Pre-Lien Notice?
If you were not hired by the Property Owner, or the Property Owner’s Agent, then before you can file a Lien, you must provide the Property Owner and the General Contractor with written notice of your claim. In Texas, this Notice is commonly referred to as a “Pre-Lien Notice,” “Preliminary Notice,” or an “Intent to File a Lien.” The Notice must be served (not filed with the County Clerk’s Office) on the Property Owner and General Contractor within the statutory deadline from when the labor/materials/equipment were provided to the Property. Specific statutory language (required by the Texas Property Code) must be included in the Notice for it to be valid and to require the Property Owner to withhold construction funds from the General Contractor. Failure to serve the Notice by the statutory deadline (even by one day) will result in a waiver of the right to later file a Lien against the Property.
Inside Tip No. 1: Every time you prepare/serve a document in regard to your claim, (like a Pre-Lien Notice), consider using it as an opportunity to demand payment. Remember, you only have a limited number of opportunities to demand payment and you need to make the most out of all of them. Keep in mind, you are not required to file a Lien simply because you served a Pre-Lien Notice.
Inside Tip No. 2: For strategic reasons, General Contractors should consider sending a Pre-Lien Payment Demand Letter to the Property Owner, the Lender, and anyone else who may be affected by the filing of a Lien, before actually filing the Lien if you believe it will enforce payment.
What is the Deadline to Serve a Pre-Lien Notice on a “Commercial” Property?
Original Contractors/General Contractors (those hired by the Property Owner or the Property Owner’s Agent): If you were hired by the Property Owner or the Property Owner’s Agent, then you are not required to serve or file any Pre-Lien Notices before filing your Lien. You can go straight to filing a Lien against the Property. However, you might consider sending a strong Payment Demand Letter before filing a Lien if you think it will resolve the payment dispute.
First-Tier Subcontractors/Suppliers (those hired by the General Contractor): If you were hired by the Project General Contractor (or any Contractor who was hired by the Property Owner), then you must serve the Property Owner and the General Contractor with a Pre-Lien Notice by no later than the 15th day of the third month, for EACH AND EVERY MONTH that you provide labor or materials to the Project and have not been paid.
Pre-Lien Notice Requirements
Example: If you provided labor/materials in January and February and were not paid, then for the work done in January you must serve a Pre-Lien Notice by no later than April 15; for the work done in February, you must serve the Pre-Lien Notice by no later than May 15. In other words, you have to notify the Property Owner EACH AND EVERY MONTH payment has not been made.
Inside Tip: In the above example, you could serve just one Notice (combining both months) as long as the Notice is sent before April 15th (which would be the 15th of the third month for the work performed in January). Keep in mind, you can serve the Notice as early as the first month following the month that you provided the labor/materials. For example, if you provided the labor/materials in March, you can serve the Pre-Lien Notice on April 1.
Practice Pointer: To calculate the Pre-Lien Notice deadline, do not look to the date of your invoice or the date payment is due under your contract—both are irrelevant. Your sole concern in calculating the deadline is the month that the labor/materials were provided to the Property.
Warning: A Property Owner is allowed to release final payment (typically withheld statutory retainage) to the General Contractor within 30 days after completion of the entire Project. Once it has been released, you can no longer require the Property Owner to withhold it or place a Lien against it. As such, if possible, always serve the Pre-Lien Notice (regardless of your final deadline) before the Property Owner releases final payment to the General Contractor.
WARNING: The deadline to serve a Notice is not extended if the 15th falls on a Sunday or legal holiday. Therefore, if your deadline falls on one of these days, you must serve the Notice on the preceding business day for it to be timely.
Second-Tier Subcontractors/Suppliers (those hired by a Subcontractor): If you were hired by a Subcontractor, then you must serve a Pre-Lien Notice on the General Contractor by the 15th day of the second month, for EACH AND EVERY MONTH that you provide labor and materials to the Property and have not been paid. Additionally, like a first-tier Subcontractor, you must also serve the Property Owner and the General Contractor with a Pre-Lien Notice by the 15th of the third month, for each and every month that you provide labor/materials to the Property and have not been paid.
Example: If you provided labor/materials in January and were not paid, then you must serve the first Pre-Lien Notice on the General Contractor by no later than March 15 and the second Pre-Lien Notice on the General Contractor and the Property Owner by April 15. See the Inside Tip below for combining these Notices into one Notice.
Inside Tip: You may combine the Second and Third Month Notices into one Notice by sending the Notice to the Property Owner and the General Contractor by the 15th day of the second month from when you provided the labor/materials and by including the special “fund trapping” language that is included in the Third Month Notice.
Warning: A Property Owner is allowed to release final payment (typically withheld statutory retainage) to the General Contractor within 30 days after completion of the entire Project. Once it has been released, you can no longer require the Property Owner to withhold it or place a Lien against it. As such, if possible, always serve the Pre-Lien Notice (regardless of your final deadline) before the Property Owner releases final payment to the General Contractor.
Inside Tip: Although you are not required to serve the Subcontractor who hired you with these Notices, you should consider doing so anyway. If the Subcontractor is aware of your intentions to file a Lien and does not want you to do so, sending the Notice to the Subcontractor may increase your odds of getting paid without filing the Lien.
WARNING: The deadline to serve a Notice is not extended if the 15th falls on a Sunday or legal holiday. Therefore, if your deadline falls on one of these days, you must serve the Notice on the preceding business day for it to be timely.
What is the Deadline to Serve a Pre-Lien Notice on a “Residential” Property?
Original Contractor/General Contractor (those hired by the Owner or Owner’s Agent): If you were hired by the Property Owner or the Owner’s Agent, then you are not required to serve or file any Pre-Lien Notices before filing your Lien. You can move straight to filing a Lien. However, you might consider sending a strong Payment Demand Letter before filing a Lien if you think it will resolve the payment dispute.
All Subcontractors/Suppliers: If you were not hired by the Property Owner or the Property Owner’s Agent, then you must serve the Property Owner and the General Contractor with a Pre-Lien Notice by the 15th day of the second month, for EACH AND EVERY MONTH that you provided labor or materials to the Property and have not been paid.
Example: If you provided labor/materials in January and February and were not paid, then for the work done in January, you must serve a Pre-Lien Notice by no later than March 15; for the work done in February, you must serve the Pre-Lien Notice by no later than April 15. In other words, you have to notify the Property Owner EACH AND EVERY MONTH payment has not been made.
Inside Tip: In the above example, you could serve just one Notice (combining both months) as long as the Notice is sent before March 15th (which would be the 15th of the second month for the work performed in January). Keep in mind you can always serve a Notice early, just don’t serve it late.
Warning: A Property Owner is allowed to release final payment (typically withheld statutory retainage) to the General Contractor within 30 days after completion of the entire Project. Once it has been released, you can no longer require the Property Owner to withhold it or place a Lien against it. As such, if possible, always serve the Pre-Lien Notice (regardless of your final deadline) before the Property Owner releases final payment to the General Contractor. On residential homestead Properties, the Property Owner is not liable to a Subcontractor or Material Supplier for any amount paid to its General Contractor (including the withheld 10% retainage) before receiving a Pre-Lien Notice. Again, consider serving the Pre-Lien Notice as soon as you expect a payment dispute and before the Property Owner releases final payment to the General Contractor.
WARNING: The deadline to serve a Notice is not extended if the 15th falls on a Sunday or legal holiday. Therefore, if your deadline falls on one of these days, you must serve the Notice on the preceding business day for it to be timely.
How Do I Serve the Pre-Lien Notice?
The Pre-Lien Notice may be served by any one of the following methods:
Personal Service: You may serve the Pre-Lien Notice by personal delivery to the person entitled to receive the Notice. If you chose to personally serve the Notice, you should consider using an independent process server who can confirm under oath that the Notice was timely and properly served.
Certified or Registered Mail: You may serve the Notice by certified or registered mail, with return receipt requested. This is the preferred and least expensive method of service. When served by this method, the Notice is deemed served on the date post marked even if the addressee does not accept or receive the Notice (as long as you can prove the Notice was actually sent to the addressee’s last known address).
Practice Pointer: As an exception to the service rules, if a Notice is actually received by the person who is entitled to receive it, the method used to serve the Notice is immaterial. In other words, if you failed to properly serve the Notice by one of the required service methods, but can prove it was actually received within the deadline, you should be able to establish that the Notice requirement was satisfied.
How Do I Use the Pre-Lien Notice to Compel the Property Owner to Pay My Claim Directly?
A Property Owner is required by statute (Texas Property Code Section 53.101) to retain 10% of the overall Prime Contract amount from the General Contractor for up to thirty days from completion of the entire Project (referred to as “statutory retainage”). Statutory retainage is intended to be a source of funds that unpaid Subcontractors can look to for payment. However, it typically is not enough to satisfy all unpaid claims. As such, to require the Property Owner to withhold the “entire amount of your claim” from the General Contractor (referred to as “trapped funds”), you must include certain statutory language in the Pre-Lien Notice. The trapped funds create an entirely new source of funds in which to satisfy your claim. Moreover, even before you file a Lien, you can make a demand upon the Property Owner to pay your claim from the trapped funds and if the General Contract fails to state in writing that the claim is disputed, the Property Owner is obligated to directly pay you from the trapped funds. Upon receipt of a properly prepared Pre-Lien Notice, the Property Owner must retain the trapped funds until either: (1) the time for filing the Lien has passed; or (2) if a Lien was timely filed, until the lien claim has been satisfied or released.
What If I failed to Serve the Pre-Lien Notice?
Anyone who was not hired directly by the Property Owner or the Property Owner’s Agent must notify the Property Owner in writing of the unpaid amount before filing a Lien. However, if you failed to serve the Pre-Lien Notice, you may still have the right to file a Lien if you can demonstrate that either: (1) the Property Owner (and the General Contractor if you were hired by a Subcontractor) received notice of the unpaid amount by some other means; or (2) the Property Owner and the General Contractor are essentially one in the same (referred to as a “sham contract”), thereby relieving you of the obligation to serve a Pre-Lien Notice.
Notice of the Unpaid Amount: If you can show that the Property Owner (and General Contractor if you were hired by a Subcontractor) actually received your invoice before the Pre-Lien Notice statutory deadline, then you have likely satisfied the basic requirement of the Pre-Lien Notice. The requirement might also be satisfied if you can show that notice of the unpaid amount was received by email or some other form of written communication.
Sham Contract: If you provided labor/materials to a Project under a direct contract with a third party who is not the Property owner, the law will infer that you have a direct contractual relationship with the Property Owner, making you an “Original Contractor,” if you can demonstrate that the Property Owner contracted with the third party and one of the following applies:
(1). the Property Owner controls the third party through ownership of voting stock, interlocking directorship, or otherwise;
(2). the third party can effectively control the Property Owner through ownership of voting stock, interlocking directorship, or otherwise; or
(3). the contract between the Property Owner and the third party was made without a good faith intention that the third party would perform the contract.
If you can demonstrate the above, then you are not required to serve a Pre-Lien Notice before filing a Lien.
Lien Filing Requirements and Foreclosure
What Information Must Be Included in the Lien Affidavit?
After you have served a Pre-Lien Notice, then the next step in the Lien Process is to file the Lien Affidavit with the County Clerk’s Office in the county where the Property is located prior to your Lien filing deadline. The Texas Property Code requires the following specific categories of information to be stated in the Lien Affidavit in order for the Lien to be valid:
Identification of the Claimant: The one who is owed money is referred to as the “Claimant.” If the Claimant is a registered entity, then the full legal name of the business should be stated. You will also need to identify the person who will sign the Affidavit on behalf of the entity and that person’s title with the company. If the Claimant is a d/b/a, then the person who is using the d/b/a needs to be identified, along with the d/b/a name. If the Claimant is an individual, then simply state that person’s full name. In addition to the above, the Affidavit must include: (1) the mailing and business address for the Claimant; and (2) the county of which the person who signs the Affidavit is a resident.
Identification of the Owner or Reputed Owner: The Lien Affidavit must include the name and address of the Property Owner or the person or entity reasonably thought to be the Property Owner, otherwise known as the “reputed” Owner.
A Description of the Work Performed and Materials Furnished: All Claimants must include a description of the work or the materials furnished to the Project. Everyone but a General Contractor must also state the month(s) in which the work or materials were provided to the Project. Depending upon the information contained in your invoice, you may be able to satisfy this requirement by simply attaching the invoice(s). However, note that the County Clerk’s Office will generally charge an extra $4.00 for every page filed with the Lien Affidavit. Therefore, sometimes it is cheaper and safer, to just describe the work and identify the months the work was performed in the Lien Affidavit itself as opposed to relying on attached invoices. The Texas Property Code also permits use of common industry abbreviations to describe the work or materials; however, it is better practice to use complete words/sentences so as to avoid any confusion or miscommunication.
Identification of the Person Who Hired the Claimant: This requirement is satisfied by including the name and last known address of the person or company who hired you.
Identification of the General Contractor: Include the name and last known address of the Project General Contractor.
A Description of the Property: The Affidavit must contain a legally sufficient description of the Property. The description must be detailed enough for the tract of land to be identified with reasonable certainty. A lot-and-block description of the Property is preferred, but if not available, it may be sufficient to describe the Property by cross streets and/or a common name.
The Amount of the Claim: The Lien Affidavit must state the amount claimed owed. Some examples of items that should not be included in calculating the Lien amount are: (1) anticipated profits; (2) prejudgment interest; (3) returned materials not incorporated into the Project (if not specially fabricated); (4) Lien costs; or (5) attorneys’ fees. Although attorneys’ fees and costs are recoverable under Texas Property Code Section 53.156, the amount incurred for these items cannot be included in the Lien Affidavit.
Pursuant to Texas Property Code Section 53.024, the amount of a subcontractor’s Lien 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.
Identification of Statutory Notices: All Claimants, other than General Contractors must state the date on which each Pre-Lien Notice was sent to the Property Owner and General Contractor, and identify the method by which the Notices were sent.
The Affidavit Must be Sworn Under Oath: This is accomplished by concluding the Affidavit with what’s known as a jurat, whereby the affiant affirms or swears under oath that the contents of the Affidavit are true. The jurat is made before a notary. Failure to use a jurat in the Affidavit will render it invalid and unenforceable.
After you have filed the Lien Affidavit, the next step is to serve the Lien Affidavit on the Property Owner and General Contractor (if applicable). See “Am I Required to Notify the Property Owner or the General Contractor That I File a Lien?” herein.
What Is the Deadline for Filing a Lien On a Commercial Property?
When Hired by the Property Owner: At the very latest, the Lien Affidavit must be filed with the County Clerk’s Office in the county where the Property is located by no later than the 15th day of the fourth calendar month from when the contract is terminated in writing, has been completed, finally settled, or abandoned.
Example: Assume that you completed your contract in January, then your Lien Affidavit must be filed by no later than May 15. Alternatively, assume that the Property Owner terminated your contract in writing in January, then your Lien Affidavit would still need to be filed by no later than May 15.
Exception for Constitutional Lien: If you were hired by the Property Owner or the Property Owner’s Agent, then you may also have a right to file a constitutional Lien against the Property if your work affected the structure. The type of work typically not covered by a constitutional Lien might include: (1) landscaping that does not affect the structure; (2) supplying or installing plant materials; (3) irrigation; (4) underground wells; (5) demolition; and/or (6) fencing. Unlike a statutory Lien, a constitutional Lien can be potentially filed within up to four years after providing labor or materials to the Property or before the Property is sold to a purchaser who is not aware of the debt. A constitutional Lien is easily asserted by a simple paragraph in the statutory Lien Affidavit or by way of its own independent Lien Affidavit. Even if you are uncertain as to whether you qualify for a constitutional Lien, you should consider including the constitutional Lien language in the Lien Affidavit.
When Not Hired by the Property Owner: For Subcontractors/Material Suppliers, the deadline to file a Lien depends upon: (1) whether the unpaid amount is a “progress payment” or withheld “contractual retainage”; and (2) whether you want the Lien to attach to the statutory retainage withheld by the Property Owner from the General Contractor (of which you do).
If you were hired by the General Contractor, a Subcontractor, or a Material Supplier, then at the very latest, your deadline to file a Lien Affidavit for unpaid progress payments (or anything other than withheld contractual retainage), is by no later than the 15th day of the fourth month from when you last provide labor or materials to the Project, excluding warranty work.
Example: Assume that you completed your work in January and that the contractor who hired you did not withhold contractual retainage. Under that scenario, your deadline to file a Lien Affidavit for the unpaid contract balance would be by no later than the 15th day of May. However, to ensure that your Lien attaches to the 10% statutory retainage being withheld by the Property Owner from the General Contractor, make sure you file the Lien Affidavit by no later than 30 days from completion of the entire Project even if the 15th of the fourth month comes after this date. (See below.)
If your claim is purely for unpaid withheld contractual retainage, then at the very latest, your deadline to file the Lien Affidavit is by no later than the 15th day of the fourth month from when all work called for under the contract between the Property Owner and the General Contractor has been completed, finally settled, terminated, or abandoned.
Example: Assume that you completed your work in January and the contractor who hired you did withhold contractual retainage from your progress payments (typically 5% to 10%). Further assume that the contract between the Property Owner and the General Contractor was not completed until March. If your claim is purely for the unpaid withheld retainage, then your deadline to file the Lien Affidavit would be by no later than July 15. However, to ensure that your Lien attaches to the 10% statutory retainage being withheld by the Property Owner from the General Contractor, make sure you file the Lien Affidavit by no later than 30 days from completion of the entire Project, even if the 15th of the fourth month comes after this date. (See below.)
Notwithstanding the above deadlines, to ensure that your Lien attaches to the 10% statutory retainage being withheld by the Property Owner from the General Contractor, you must file your Lien Affidavit within no later than 30 days from completion of the entire Project, regardless of the above-referenced deadlines.
Example: Assume that your deadline to file a Lien is the 15th day of March (regardless if it is for a progress payment or pure contractual retainage). Further assume the contract between the Property Owner and the General Contractor was completed on January 10. Under this scenario, although you would have until March 15th to file the Lien, you would want to ensure that the Lien was filed by no later than February 10 (30 days from completion of the Project), so that the Lien attaches to the withheld statutory retainage.
WARNING: The deadline to file a Lien is not extended if the 15th falls on a Saturday, Sunday, or legal holiday. Therefore, if your deadline falls on one of these days, you must file the Lien Affidavit on the preceding business day for it to be timely. Additionally, the Lien Affidavit must actually be filed on or before the 15th, not simply placed in the mail or waiting at the Clerk’s office to be filed.
What Is the Deadline for Filing a Lien On a Residential Property?
When Hired by the Property Owner: At the very latest, the Lien Affidavit must be filed with the County Clerk’s Office in the county where the Property is located by no later than the 15th day of the third month from when the contract is terminated in writing, has been completed, finally settled, or abandoned.
Example: Assume that you completed your contract in January, then your Lien Affidavit must be filed by no later than April 15. Alternatively, assume that the Property Owner terminated your contract in writing in January, then your Lien Affidavit would still need to be filed by no later than April 15.
Exception for Constitutional Lien: If you were hired by the Property Owner or the Property Owner’s Agent, then you may also have a right to file a constitutional Lien against the Property if your work affected the structure. The type of work typically not covered by a constitutional Lien might include: (1) landscaping that does not affect the structure; (2) supplying or installing plant materials; (3) irrigation; (4) underground wells; (5) demolition; and/or (6) fencing. Unlike a statutory Lien, a constitutional Lien can be potentially filed within up to four years after providing labor or materials to the Property or before the Property is sold to a purchaser who is not aware of the debt. A constitutional Lien is easily asserted by a simple paragraph in the statutory Lien Affidavit or by way of its own independent Lien Affidavit. Even if you are uncertain as to whether you qualify for a constitutional Lien, you should consider including the constitutional Lien language in the Lien Affidavit.
When Not Hired by the Property Owner: For Subcontractors/Material Suppliers, the deadline to file a Lien depends upon: (1) whether the unpaid amount is a “progress payment” or withheld “contractual retainage”; and (2) whether you want the Lien to attach to the statutory retainage withheld by the Property Owner from the General Contractor (of which you do).
If you were hired by the General Contractor, a Subcontractor, or a Material Supplier, then at the very latest, your deadline to file a Lien Affidavit for unpaid progress payments (or anything other than withheld contractual retainage), is by no later than the 15th day of the third month from when you last provide labor or materials to the Project, excluding warranty work.
Example: Assume that you completed your work in January and that the contractor who hired you did not withhold contractual retainage. Under this scenario, your deadline to file a Lien Affidavit for the unpaid contract balance would be by no later than the 15th day of April. However, to ensure that your Lien attaches to the 10% statutory retainage being withheld by the Property Owner from the General Contractor, make sure you file the Lien Affidavit by no later than 30 days from completion of the entire Project even if the 15th day of the third month comes after this date. (See below.)
If your claim is purely for unpaid withheld contractual retainage, then at the very latest, your deadline to file the Lien Affidavit is by no later than the 15th day of the third month from when all work called for by the contract between the Property Owner and the General Contractor has been completed, finally settled, terminated, or abandoned.
Example: Assume that you completed your work in January and the contractor who hired you did withhold contractual retainage from your progress payments (typically 5% to 10%). Further assume that the contract between the Property Owner and the General Contractor was not completed until March. If your claim is purely for the unpaid withheld retainage, then your deadline to file the Lien Affidavit would be by no later than June 15. However, to ensure that your Lien attaches to the 10% statutory retainage being withheld by the Property Owner from the General Contractor, make sure you file the Lien Affidavit by no later than 30 days from completion of the entire Project even if the 15th of the third month comes after this date. (See below.)
Notwithstanding the above deadlines, to ensure that your Lien attaches to the 10% statutory retainage being withheld by the Property Owner from the General Contractor, you must file your Lien Affidavit within no later than 30 days from completion of the entire Project, regardless of the above-referenced deadlines. On residential homestead Properties, the Property Owner’s liability only extends to the 10% statutory retainage and any funds “trapped” from your Pre-Lien Notice, if any. As such, on residential homestead Properties, you must file your Lien within no later than 30 days from completion of the entire Project.
Example: Assume that your deadline to file a Lien is the 15th day of March (regardless if it is for a progress payment or pure contractual retainage). Further assume the contract between the Property Owner and the General Contractor was completed on January 10. Under this scenario, although you would have until March 15th to file the Lien, you would want to ensure that the Lien was filed by no later than February 10 (30 days from completion of the Project), so that the Lien attached to the withheld statutory retainage.
WARNING: The deadline to file a Lien is not extended if the 15th falls on a Saturday, Sunday, or legal holiday. Therefore, if your deadline falls on one of these days, you must file the Lien Affidavit on the preceding business day for it to be timely. Additionally, the Lien Affidavit must actually be filed on or before the 15th, not simply placed in the mail or waiting at the Clerk’s office to be filed.
Am I Required to Notify the Property Owner or the General Contractor After I File a Lien?
YES.
The Lien Affidavit must be served on the Property Owner by personal service, certified mail, or registered mail by no later than the 5th day after it has been filed with the County Clerk’s Office. If you are a Subcontractor or Material Supplier not hired by the Property Owner, then you must also serve the Lien Affidavit on the Project General Contractor.
Inside Tip No. 1: To take full advantage of the Lien filing, you should consider serving the Lien as an enclosure to a strong Payment Demand Cover Letter advising the Property Owner, the General Contractor, and anyone else who might be affected by the filing of the Lien or a Lawsuit to foreclose on the Lien. Remember, you only have a limited number of opportunities to demand payment; service of the Lien can be one of the best opportunities that you will have to resolve the Claim before filing a Lawsuit to foreclosure.
Inside Tip No. 2: If you serve the Lien, or any other Lien document by certified mail, you can go to www.USPS.com, click on the “track and confirm” option, enter the certified mail number in the box and the tracking information will appear; such as when the document was delivered and who signed for it.
How Is the Lien Removed After the Debt Is Paid?
Removing the Lien is simple! After you have been paid or resolved the debt, just file a Release of Lien with the County Clerk’s Office where you filed the Lien. Once the release is accepted and recorded by the Clerk, the Lien is forever removed.
Practice Pointer: If you fail to release the Lien after you have been paid and within 10 days of receiving a written demand to do so, the Property Owner has the right to file a Lawsuit to request the Court to release the Lien. In the event the Court grants the request, the Property Owner will be entitled to recover attorneys’ fees and costs incurred in making the request.
What Is the Deadline to File a Lawsuit to Foreclose on the Lien?
It depends upon the type of Property.
Commercial Properties: It is the later of: (1) two years after the last day from when you could file the Lien; or (2) within one year after completion, termination, or abandonment of the work under the original contract. So at a minimum, you have two years to file a Lawsuit to foreclose on the Lien. If you fail to file a Lawsuit within this time period, the Lien becomes invalid.
Residential Properties: It is the later of: (1) one year after the last day from when you could file the Lien; or (2) within one year after completion, termination, or abandonment of the work under the original contract that the Lien is claimed. So at a minimum, you have one year to file a Lawsuit to foreclose on the Lien. If you fail to file a Lawsuit within this time period, the Lien becomes invalid.
Inside Tip: Remember, each step of the Lien Process is a new and different opportunity to enforce payment. If you have not received the desired response to your Lien, the next step is to file a Lawsuit. If the money is owed, typically the mere filing and serving of the Lawsuit can be enough to prompt payment. Even at this stage, you may not be filing the Lawsuit to actually see it through to a judge or jury, but instead using it as another step in the process to enforce payment now. To learn more about having a construction lawyer file the Lawsuit for you, please contact Lovein Ribman at (888) 368-2483 (www.loveinribman.com)
What is a Payment Demand Letter?
A Payment Demand Letter is an informal request for payment sent to the debtor and all other parties who may be affected by the recording of a Lien or a Lawsuit to foreclose (the Lender, Property Owner, General Contractor, and/or Subcontractors). It is not a prerequisite to serving a Pre-Lien Notice, filing a Lien, serving Notice of the Lien Filing, or filing a Lawsuit. However, it is an extremely effective tool to enforce payment and should be considered at every step of the Lien process; failure to take advantage of the Payment Demand Letter may very well increase the amount of time it takes to get paid and result in having to take additional unnecessary steps to enforce payment.
To be effective, you should consider incorporating a Payment Demand into every step of the Lien Filing Process. A strong Payment Demand should include at least the following allegations: (1) that the contract has been breached by nonpayment; (2) that the Prompt Payment Act has been or will be violated if the Contractor and/or Subcontractor received your progress payment and fails to remit the payment to you within the statutory deadline; (3) that if the Prompt Payment Act has been violated, then notice that interest is accruing on the unpaid amount at eighteen percent (18%) a year; (4) a calculation and demand for the accrued interest; (5) if suspected, an allegation that payments have been wrongfully withheld or diverted from the Project in violation of the Trust Fund Statute; (6) a presentment for future attorneys’ fees in the event an attorney is later obtained to enforce payment; (7) a representation that a Lien or a Lawsuit to foreclose on the Lien will be filed if payment is not immediately made; and (8) that if a Lawsuit is filed to collect the debt, that you will sue the Property Owner and the contractor who hired you to seek an award for the principal amount owed, accrued interest, attorneys’ fees, costs, and punitive damages (if applicable).
Finally, a Payment Demand Letter can be sent by anyone before or after filing a Lien or a Lawsuit if you believe doing so will resolve the dispute without having to take the aforementioned formal steps to enforce payment.
Inside Tip No. 1: Since a Payment Demand Letter is not a prerequisite to filing a Lien or a Lawsuit, it can be sent at any step in the collection process and as many times as you deem necessary; however, do not send a Payment Demand Letter without following through with the threats made in the previous letter, or you will lose credibility and the demand will become less effective. Also, if you set a deadline for a response to your demand, be sure to set a date that allows you sufficient time to prepare, record, and serve either the Lien or file a Lawsuit before the applicable deadline.
What is the Trust Fund Statute and How can it be Used to Enforce Payment?
Texas Property Code Section 162, (referred to as the “Trust Fund Statute”) is another powerful tool that you have in your arsenal (independent from a Lien) to enforce payment for unpaid labor/materials provided to a construction Project.
In summary, an Owner, Contractor or Subcontractor violates the statute when it intentionally, knowingly, or with the intent to defraud, retains, uses, disburses, or diverts trust funds without first fully paying all obligations incurred or owed for labor or materials furnished to the Project. The statute imposes both civil and criminal liability on any individual who violates it.
Example: When a General Contractor and/or a Subcontractor receives a progress payment and uses the money received to pay non-Project debts, such as those incurred on an unrelated Project, then that Contractor has likely violated the Trust Fund Statute.
In the civil context, the officers, directors and agents of a Property Owner, General Contractor, or Subcontractor are deemed “trustees” of construction funds received for the benefit of another. If the trustee violates the Trust Fund Statute, he or she becomes personally liable to the Contractor and can be individually sued in civil court and criminally prosecuted by the state.
In regard to criminal liability, a trustee who intentionally or knowingly misapplies trust funds amounting to $500 or more, commits a Class A misdemeanor. A trustee who misapplies trust funds amounting to $500 or more with an “intent to defraud” commits a felony of the third degree.
There are three primary ways to use the Trust Fund Statute: (1) as an educational threat in your Pre-Lien Notice or Notice of Lien Filing; (2) through a Payment Demand Letter; or (3) by Filing a Lawsuit and alleging a violation of the Trust Fund Statute.
Inside Tip: Since the statute imposes personal liability against those individuals who violate it, you can name those persons in the Lawsuit as individual defendants; of which you may not otherwise be allowed to do on a simple breach of contract claim. No one likes to be personally sued and most employees think that they can hide behind the company; however, if there is a reasonable basis to believe that an officer, Owner, or employee violated the statute, then you can sue them individually.
What is the Prompt Payment Act and How can it Assist Me in Recovering Interest?
When a Property Owner receives a timely and allowed written payment request from a General Contractor, then the Property Owner must pay the amount owed to the General Contractor by the thirty-fifth (35th) day after the Owner receives the request; failure to do so is a violation of the Prompt Payment Act, unless there is a reasonable basis to dispute the amount owed. Even if there is a dispute, the Property Owner cannot withhold more than 100% of the disputed amount on commercial Projects and 110% of the disputed amount on residential Projects.
When a General Contractor receives payment from a Property Owner, the General Contractor must pay each of its Subcontractors that portion of the Property Owner’s payment attributable to the Subcontractors’ work performed under its contract with the Contractor within seven (7) days of receiving the payment from the Owner; failure to do so is a violation of the Act, unless there is a reasonable basis to dispute the amount owed. Even if there is a dispute, the General Contractor cannot withhold more than 100% of the disputed amount on commercial Projects and 110% of the disputed amount on residential Projects.
When a Subcontractor receives payment from a Contractor, the Subcontractor must pay each of its Subcontractors and Suppliers the portion of the Contractor’s payment attributable to its Subcontractors and Suppliers for work performed under its contract with them within seven (7) days of receiving the payment from the Contractor; failure to do so is a violation of the Act, unless there is a reasonable basis to dispute the amount owed. Even if there is a dispute, the Subcontractor cannot withhold more than 100% of the disputed amount on commercial Projects and 110% of the disputed amount on residential Projects.
Any unpaid amount that is required to be paid pursuant to the Act begins to accrue interest the day after the date that payment becomes due at 1 ½ percent each month (or 18% a year).
Inside Tip: Claimants should consider including potential or actual violations of the Prompt Payment Act in the Pre-Lien Notice, Notice of Lien Filing, and/or a Payment Demand Letter.