Construction Projects, Liens, & Bonds
If you are ever working on a good-sized construction project, you will in all likelihood have to deal with lien claims. Many times the lien claims are invalid, either for substantive reasons (the contractor is not owed or the contractor gets paid after the notice is sent or the lien is filed) or because the contractor did not comply with the technical rules governing liens (which are set out in Texas Property Code Chapter 53). Regardless of the validity of the lien claim, the mere existence of a potential claim can hold up a closing or refinance or otherwise adversely affect a construction project.
In fact, many attorneys use the fact that the claim will hold things up as leverage to try to get the owner to pay. I recently explained (at length) to an attorney why his client’s lien claims against my client’s property were not valid and should be withdrawn. He didn’t address any of the reasons I gave but simply said something along the lines of, “I think we’re going to keep them in place right now.”
When you are faced with such a situation, it can be frustrating and can hold up your project. What can you do?
Thankfully, Texas law provides a method for owners to address lien claims without jeopardizing or delaying the project. Once a lien claim is filed, subchapter H of Chapter 53, Texas Property Code (53.171-.175), allows “any person” to file a bond to indemnify against that lien. The bond is basically the owner’s undertaking (along with a surety) to pay the lien claim if the claim is valid. The bond must:
- be signed by the owner and the surety;
- describe the property;
- refer to each lien sufficient to identify it
- be payable to the party claiming the lien; and
- be in an amount that is double the lien amount or, if the lien amount is more than $40,000.00, in an amount that is 1 1/2 times the lien amount.
Once the bond is filed with the county clerk, the clerk must issue notice of the bond to the claimant by certified mail, attaching a copy of the bond to the notice. Once the county clerk receives the return receipt, the clerk must file the bond along with a copy of the notice. The lien “is discharged” when the bond is filed, the notice is issued, and the bond and notice are recorded. The statute makes clear that “[i]n acquiring an interest in or insuring title to real property, a purchaser, insurer of title, or lender may rely on and is absolutely protected by the record of the bond and the notice to the same extent as if the lien claimant had filed a release of lien in the real property records.”
Many owners have failed to utilize this remedy because surety companies have historically required collateral that usually approaches 100% of the bond amount. Unless the owner had cash in the amount of twice the liens claimed, it really wasn’t an option. If the owner is sufficiently financially healthy, however, the owner can obtain a bond to indemnify lien for little or no collateral. I have recently been able to assist a client in obtaining a no-collateral bond to indemnify lien. Hopefully, more owners who can show their financial strength to a surety can now use this procedure to bypass contractors or suppliers who have filed liens and refuse to remove them in the hope of holding up a project.
