Retainage, Payment Bonds, & Private Projects in Texas
Private projects in Texas – mechanic’s lien or bond claim? Ordinarily I would say “Mechanic’s lien!” However, that may not always be the case. And be careful, because mechanic’s liens and bond claims are not the same and may require different actions.
Texas Bond Claim
In Texas, a properly recorded payment bond prevents mechanic’s liens from attaching to the property (think “bond off lien”). Author Amy Wolfshohl explains in her article The Often Overlooked Protection Provided By A Statutory Payment Bond Under Chapter 53 Of The Texas Property Code, the payment bond must meet the following criteria.
To provide the protection contemplated by the statute, the bond must:
1. be in the original contract amount;
2. be in favor of the owner—as obligee;
3. have the written approval of the owner endorsed on it;
4. be executed by:
(a) the original contractor as principal; and
(b) a corporate surety authorized, admitted, and licensed to do business in Texas;
5. be conditioned on prompt payment for all labor, subcontracts, materials, specially fabricated materials, and normal and usual extras not exceeding 15% of the contract price; and
6. clearly and prominently display the contact information for the surety.
Although the security is different – a payment bond instead of a mechanic’s lien – you protect your Texas bond claim rights similarly to how you would protect mechanic’s lien rights.
Notice of Non-Payment (Commercial): When contracting directly with a subcontractor
– Serve notice upon the prime contractor no later than the 15th day of the second month following each month in which materials or services were furnished.
– Serve notice upon the owner and prime contractor no later than the 15th day of the third month following each month in which materials or services were furnished.
The difference? Also serve the surety with a copy of the notices and subsequent lien. And, be aware, if a payment bond is not properly recorded, you must comply with the terms and conditions of the payment bond when perfecting a claim!
Did you know, for private projects in Texas, the owner is required by statute to withhold 10% retainage?
Retainage is an agreed amount of a contract price retained from a contractor as assurance that subcontractors will be paid, and the job will be completed.
Sec. 53.101. REQUIRED RETAINAGE.
(a) During the progress of work under an original contract for which a mechanic’s lien may be claimed and for 30 days after the work is completed, the owner shall retain:
(1) 10 percent of the contract price of the work to the owner; or
(2) 10 percent of the value of the work, measured by the proportion that the work done bears to the work to be done, using the contract price or, if there is no contract price, using the reasonable value of the completed work.
(b) In this section, “owner” includes the owner’s agent, trustee, or receiver.
According to Wolfshohl, if the payment bond is recorded, the owner does not have to withhold retainage.
“If the owner obtains a bond that is consistent with these requirements and records it in the applicable real property records, the owner is relieved of the requirement to withhold retainage and cannot be held liable for failing to trap funds.”
Wolfshohl reminds readers, payment bonds aren’t just good for project owners, they’re good for subcontractors too!
“This is a win-win for owners and subcontractors because the subcontractor’s remedy is not limited to its proportionate share of retainage plus any trapped funds and the owner is not subjected to a multiplicity of often conflicting subcontractor claims if bankruptcy, termination, or abandonment occurs at the prime contractor level.”
In compliance with Article 9 of the Uniform Commercial Code, trade creditors can achieve a properly perfected security interest with a sound security agreement and the proper filing of a UCC-1 Financing Statement. Let’s review two basic types of secured transactions – Blanket and Purchase Money Security Interest (PMSI) – and the benefits of each!
- April 2: UCC Remedies Upon Debtor’s Default
- April 16: Understanding Lien Waivers
- April 30: UCCs Offer Security for Many Business Transactions
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