Texas Mechanic’s Liens News–Why are Pre-lien Notices Needed?
Texas is a state that requires pre-lien notices for subcontractors and suppliers before recording the mechanic’s lien. But why do we really need them and do they accomplish a tangible purpose in getting paid?
One of the biggest complaints from owners is when they pay the general contractor, it does not filter down to the Texas subcontractors and suppliers. When this happens, the owner will in essence be paying twice if the subcontractor later files a Texas mechanic’s lien. So Texas has come up with a scheme to prevent this. The notices inform the owner that a subcontractor could in the future file a mechanic’s lien and so in essence gives the owner the ability to withhold monies or guarantee they actually end up in the hands of that subcontractor.
After an owner receives the Notice, he or she withholds monies unpaid to the sub/supplier from the general—whether the unpaid amount under the base contract or the retention–they are in essence frozen. These monies are paid only upon settlement or if the sub fails to timely file a lien.
The notices we are talking about include the Texas Notice of Specially Fabricated Items, Notice of Contractual Retainage, Third Month Notice, and the Second Month Notice. They are popularly known as “fund trapping notices”. In essence, they trap the money still held by the owner and make sure it ends up in the right hands, namely subcontractors and suppliers. It is the same as the owner holding money for your benefit. Simple question: would you rather have a Texas mechanic’s lien on the property that requires the time and expense of bringing a lawsuit to foreclose or money sitting in an account to cover your unpaid supplier bills?
But like everything else, there is a catch. These are powerful devices, but have limitations: they are good only if the owner still owes the general at the time he/she receives the Notice. If the owner has already paid the general, there is nothing left to “hold”. For this reason, it is important not to wait too long to serve. In the case of the Third and Second Month Notices, a long time is given to serve—between two and three months. This has the effect of giving a claimant a false sense of security—but watch out–the money may be gone in the meantime.
In conclusion, a Texas mechanic’s lien is a powerful device, but you can only use it if pre-lien notices have been properly served.