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Monday, April 12, 2021

Mechanic’s liens: How far does the lien reach?

If you are involved in the construction industry, you have probably threatened or been threatened with a mechanic’s lien. However, the threats are often baseless because the lien does not attached to the fee (the dirt) interest in the property or the lien has not been properly perfected. A basic understanding of mechanic’s lien can either help you properly file a lien or summarily defeat a lien.

A lien on property gives the holder of the lien the right to sell the property and apply the proceeds from that sale to a debt owed. Companies and individuals in the construction industry are fortunate that Texas law allows them to put a lien on real property to secure payment for services and materials. This lien, commonly called a mechanic’s lien, is provided for by both the Property Code and the Texas Constitution. When used properly, the mechanic’s lien is a powerful tool to ensure payment. This is especially true in this economy where most businesses have no security on open accounts for services rendered and materials provided.

The mechanic’s lien procedure allows those who do work on real property to seek payment by filing a mechanic’s lien on the real property on which the services or materials were provided. As wonderful as this may sound to those in the construction industry, Texas law on mechanic’s liens is notoriously tricky, with confusing deadlines, conflicting provisions and stiff penalties for non-compliance. Therefore, understanding rights to a mechanic’s lien is vital in protecting this potentially last line of payment for those in the construction industry.

Most contractors, subcontractors and design professionals assume that if they perform work or furnish materials for a piece of property, then they have mechanic’s lien rights under Texas law. However, the right to a mechanic’s lien exists only if the company or individual performing the work is doing so under a contract with the owner or the owner’s agent. There is no issue when there is a contract directly with the owner. The more difficult question arises when a company or individual (usually a subcontractor) must show that the party it contracts with is the owner’s agent.

In a traditional construction setting an owner hires a general contractor who then hires subcontractors to complete work on a piece of property. The subcontractors are clearly working with the owner’s agent (the general contractor) in completing the work on the property.

However, a problem can arise when a company or individual (usually a subcontractor) performs work for its client on property and that client only holds a leasehold interest in the property. This situation often occurs when a retail store or restaurant (the tenant) leases space from the owner and then the tenant hires a construction company or design professional to build out the space for the tenant. Texas law is clear that a mechanic’s lien will not be available unless the owner of the land is also a party to the construction contract or the tenant is acting as an authorized agent of the owner. The fact that a mechanic’s lien is not available in this scenario may be a surprise to those who furnish services and materials in constructing a restaurant or a retail operation, despite the fact that the work was performed just like any other construction project in which a mechanic’s lien is available.

Problems can also arise if the work performed (or materials provided) on a piece of property was completed for someone who does not own legal title to the property. This situation most often occurs when a land developer has a contract to purchase and develop property. Before closing, the developer will often hire surveyors and possibly even engineers or architects to begin design work on the development. However, at the time of contracting, the developer owns only equitable title to the property. If the land deal falls through and the developer never closes to acquire legal title to the property, then the company or individual who contracted with the developer will not have a right to file a mechanic’s lien on that property.

Before filing a mechanic’s lien, a company or individual performing work or providing materials on real property should investigate whether its client was acting as the owner’s agent in connection with the services and/or materials provided. Filing a lien in violation of Texas law can expose the filer to potentially significant damages. For example, if a property owner was not involved in the transaction in which the mechanic’s lien was filed (as in the tenant example) and the mechanic’s lien clouds the title of the owner’s property, then the filer can be liable for any damages caused by the clouded title. Even if the owner of the property does not suffer actual damages from the filing of an improper lien, the filer can be liable for a $10,000 penalty.

Mechanic’s liens give those in the construction industry an added tool to collect on their accounts receivables. However, the strict mechanic’s lien guidelines, including having a contract with the owner or the owner’s agent, must be followed in order to have a proper mechanic’s lien and to avoid civil damages and penalties.

John Polzer is a partner with Cantey Hanger LLP law firm and an adjunct professor at Texas Christian University. He represents clients in areas such as business law, commercial litigation, energy and construction. He can be reached at jpolzer@canteyhanger.com.

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