The following is adapted from Quit Getting Stiffed.
Imagine all the business opportunities that open up when you can secure the money you are owed. That’s what knowing what a lien is and what your lien rights are does: that knowledge opens so many doors that may have been closed before. Once you know what’s needed to have a valid lien, all the leverage is yours.
Fund Trapping
Normally, a lien claimant is only entitled to recover the amount they are owed from reserved funds. Reserved funds are 10% of the general contract amount. If there are more lien claimants, then the lien claimants must share the reserved funds pro rata, meaning the funds are shared proportionally based on the amount of the lien. The more owed, the higher percentage of reserved funds the lien claimant is entitled to.
However—and this is a big however—there is a way to make the owner liable for more than just reserved funds, called fund trapping. Fund trapping happens when you send notice of your unpaid amount to the owner while they still have more than reserved funds due to the general contractor. The following special language must be included in your notice to invoke fund trapping.
If the claim remains unpaid, the owner may be personally liable, and the owner’s property may be subjected to a lien unless:
- The owner withholds payment from the Contractor for payment of the claim; or
- The claim is otherwise paid or settled.
Texas Property Code 53.056
It is good practice to add this language to any notice letter that you send out. If the owner has more than reserved funds due to the general contractor when they receive your notice, the owner needs to pay you what you are owed, unless the general contractor disputes the amount you are owed in writing.
Negotiate Better Construction Contracts
At The Cromeens Law Firm, we have extensive knowledge and understanding of construction contract laws and are licensed in Texas, Georgia, and California. We are often able to solve contract disputes for our clients through informal negotiations, mediation, or arbitration. Work with us to equip yourself with the ability to properly evaluate your risks before you sign and negotiate your next subcontract with greater confidence and ease.
Send Notice Early and Often
The sooner you send your notice, the more likely you are to trap funds in the hands of the owner and the more likely you are to be paid the full amount you are owed. We saw this play out in real life with a client who was an electrical contractor. It was getting toward the end of their scope and they were owed $60,000. They had not gotten paid for the last two draws they had submitted, and no one was answering the phone at the general contractor’s office. They came to our office very concerned about the situation. We started the lien process immediately and sent the first notice to the general contractor and owner with the required fund trapping language.
We filed the lien and the client decided to sit on the lien for a little while and not file suit right away. About three weeks later, that client was back in my office: they had been sued. The owner had sued all of the trades that had liens on the project. The lawsuit claimed that although there was over $800,000 in liens against the property, the owner was only responsible for the reserved funds amount of $300,000, and the lien claimants would have to share that amount. Under that calculation, my client would get less than $30,000 of the $60,000 they were owed.
Don’t work for free
Collecting what is yours is crucial to the livelihood of your business. We have a team ready to take your call to protect what is yours, collect what is yours, and educate yourself on the front-end!
After we did some discovery, we found that my client had been one of the first lien claimants to send the fund trapping language in a letter to the owner. The owner had paid the general contractor after they had received my client’s notice letter. Because the owner had paid the general contractor after they had notice of my client’s claims, the owner had to pay my client the full amount they were owed. If the owner pays the general contractor when he knows there are unpaid subcontracts or material suppliers, they will have to pay that same amount again if the contractors and material suppliers remain unpaid.
It is in your best interest to send notice early and often. The earlier you send notice, the more likely you are to be paid in full.
In Conclusion
Sending timely notices lets all the parties involved know that you are aware of what is required to file a valid lien and that you will file one if you are not paid. Are you in a bind in one of your projects? You need to get paid; do you know what your next step is? If you are unsure of what to do next, contact our experienced team of construction lawyers at The Cromeens Law Firm to set up a free consultation today 713-715-7334. Don’t wait until it’s too late. Know your lien rights and how to get paid on time every time. Your business depends on it.
For more advice on a Texas contractor’s collection and lien rights, you can find Quit Getting Stiffed on Amazon. You can also find materials referenced in Quit Getting Stiffed, this blog, and correlating information on collection and lien rights for all 50 states in the U.S. at www.subcontractorinstitute.com.
About Karalynn Cromeens
Author of Quit Getting Screwed: Understanding and Negotiating the Subcontract, and creator of The Subcontractor Institute, has been a licensed attorney for more than seventeen years. She has spent her entire legal career in construction law, advising countless clients on how to avoid litigation. Karalynn is on a mission to educate and inform subcontractors about the importance of understanding their lien and collections rights, sparking change, and leveling the playing field in the construction industry.
This article is intended as a general educational overview of the subject matter and is not intended to be a comprehensive survey of recent jurisprudence, nor a substitute for legal advice for a specific legal matter. If you have a legal issue, consult an attorney.