This memorandum is effective September 1, 1999, and is being made available to our clients and friends for the purpose of explaining the changes in Mechanics Lien Laws that became effective September 1, 1997 and September 1, 1999. We have chosen a question and answer format in an attempt to simplify a complex subject. This memo is also available on the firm's Internet Website at www.davislawpc.com under Hot Topics. We appreciate your feedback and your continued support.

Chapter 53 of the Texas Property Code was changed effective September 1, 1997, as a result of Texas House Bill HB740. The Bill defined and distinguished residential construction projects from others and as a result, changes occurred in the areas of the Residential Construction Disclosure, Disbursement of Construction Funds, Bills Paid Affidavits, Construction Trust Funds, and the Timing of Filing Liens. In addition, for both residential and non-residential construction projects, changes have been made concerning Bills Paid Affidavits, and a statutory procedure for Expedited Lien Removal is now available. Subsequent changes were made effective September 1, 1999, as a result of Texas House Bill HB2054.

RESIDENTIAL CONSTRUCTION
DISCLOSURE STATEMENT

A. Required statutory language disclosure form plus "the list".

Q. When Is It Applicable?

A. Must be given on "Residential Construction Projects" = Contract between owner & contractor for construction or repair to owner's residence, including improvements appurtenant.
"Residence" = 1-4 family plus multi-family used or intended to be used as a dwelling by owner.
Conclusion:

- New construction - build on your lot
- Home Improvement
- Broader than "homestead" or "principal dwelling"

Q. Who Must Give It?

A. - Original Contractor (the one with the contract) - if no third party financing

- Lender - if third party financing

Q. When Given?

A. Contractor = "Before contract is executed"

Lender = "Before date of closing"

Q. What Is "The List"?

A. Attachment to the disclosure by contractor listing NAME, ADDRESS & PHONE NUMBER for all SUBS & SUPPLIERS that Contractor intends to use

- If not given with the disclosure, must be given prior to commencement
- The List also contains statutory verbiage (subsequent update requirements)

Q. Can The List Be Waived?

A. Yes. With Owner’s written waiver.

A. Yes. Within 15 days of adding or deleting a sub or supplier.

Q. Must The Lender's Disclosure Include The List?

A. Doesn't say.

Q. Is the lien good if Contractor and/or Lender do not provide Disclosure?

A. Yes, failure to provide does not affect lien validity.

Q. Any Other Requirements?

A. Yes. The Lender must provide all documentation relating to the closing not later than one business day before date of closing.

Q. Can Early Delivery of Docs Be Waived?

A. Maybe. In a bona fide emergency or other good cause plus owner's written consent.

Q. What About Last Minute Changes?

A. Probably O.K., with owner's written consent.

Q. What's The Penalty for Not Doing All This Stuff?

A. Don't know. Statute doesn't provide. Deceptive Trade Practice, maybe?

DISBURSEMENT OF FUNDS

A. Yes. On Residential Construction Contracts, the Contractor must provide signed disbursement statements that lists bills/expenses that will be paid and for which the contractor is requesting payment. The statements may include any information agreed to by the Owner and the Contractor and must include at least the name and address of each person who subcontracted directly with the Contractor and who the Contractor intends to pay from the requested funds.

Q. When Must the Contractor Give the Disbursement Itemization?

A. At the time the Contractor requests a progress payment from the Owner or the Owner’s Lender.

Q. Who Gives the Itemization If There Is A Loan?

A. The Lender. Actually, the Lender gives two:
The Contractor's required itemization and the Lender's statement of funds disbursed since the last statement.

Q. When Must These Statements Be Given To Owner?

A. Before funds are disbursed to the Contractor.

Q. How Are the Statements To Be Provided and Must Receipt Be Acknowledged?

A. They may be provided in any manner agreed to by owner and Lender. An acknowledgment is not required. We recommend that Lender's loan agreement be modified to provide for lender options, such as facsimile, personal delivery, overnight delivery and first class mail. Lender should document in its draw file how and when the statements were provided.

Q. Is The Lien Valid If The Statements Aren't Delivered?

A. Yes. Failure to comply does not invalidate the lien.

Q. Any Penalty?

A. Yes. If the Contractor employee or the Lender employee intentionally, knowingly or recklessly provides false or misleading information in a disbursement statement, it is a misdemeanor punishable by up to one year in jail and/or a $4,000 fine. It would also, most likely, be a Deceptive Trade Practice not to provide the statements as required by law (and by the loan agreement).

BILLS PAID AFFIDAVITS

A. The existing Section 53.085 of the Property Code allowed "requestors" (owners, purchasers and lenders) to require partial and final bills paid affidavits. Usually, neither would require them, but typically, the title company would at the time of permanent loan closing or title policy endorsement on a one-time loan. The amendment expands the information that the requestor can require.

Q. What Information Can Be Required?

(i) a statement that each sub, laborer or materialman has been paid in full for all labor and materials, or if not the case, list the name of the person unpaid and the amount owed, and if known, the address and telephone number of such person.

(ii) a waiver or release of lien rights that may be conditioned upon receipt of actual payment or collection of funds (if paid by check or draft).

(iii) a warranty or representation that certain bills will be paid from the funds paid in reliance of the affidavit.

(iv) an indemnification for any loss or expense resulting from false or incorrect information.

Q. Can Receiving A Bills Paid Affidavit Be a Requirement For Payment To The Contractor?

A. Yes. Section 53.085 states that the requestor can make it a condition of payment.

Q. Any Penalties?

A. Yes. A person who intentionally, knowingly or recklessly makes a false or misleading statement in an affidavit commits a misdemeanor punishable by confinement in jail for up to one year and/or a fine of up to $4,000. Additionally, the person signing the affidavit is personally liable for any loss or damage resulting from false or incorrect information.

Q. Does This Apply Just to Residential Construction Projects?

A. No, this is for all construction projects.

Q. Are There Additional Provisions Relating to Bills Paid Affidavits For Residential Construction Contracts?

A. Yes, new Section 53.259 provides that final bills paid affidavits are required of the Contractor as a condition of final payment under a Residential Construction Contract. Also a Seller of any 1-4 family residence where the residence is intended to be used as the purchaser's principal place of residence, is required to provide a bills paid affidavit.

Q. What Are the Differences Between Section 53.085 and Section 53.259?

A. It appears that the major difference is that the Section 53.085 Bills Paid Affidavit is mandatory on the Contractor or Seller only if requested by another party (owner, lender or purchaser). Section 53.259, however, makes it mandatory on the Contractor or Seller to provide a final bills paid affidavit, but the release of lien, indemnity and representation that certain bills will be paid from the draw, are not mandatory clauses to be included. The penalties under Section 53.259 are the same.

EXPEDITED LIEN REMOVAL PROCEDURE

A. It's a new statutory procedure allowing for an early determination as to the validity of a mechanic's lien.

Q. Who May Use This Procedure?

A. New Section 53.160 of the Property Code doesn't specify, but refers to "a party objecting to the validity or enforceability of the claim or lien." It appears that an owner or a lender could institute a suit under this procedure.

Q. Are The Grounds For Proving The Lien Invalid Limited To A Certain Class?

A. Yes. They are limited to the following:

1. Notice of claim was not timely furnished to the owner or the Contractor.

2. The lien affidavit contents failed to comply with statutory requirements.

3. Notice of the lien affidavit was not timely furnished to the owner or the Contractor.

4. The owner retained and properly paid the retainage and all other funds to the Contractor before the owner received notice of the claim and before the claimant perfected the lien claim.

5. All funds subject to the claim and all retainage have been deposited in the Registry of the Court.

6. When the lien affidavit is filed against the homestead, (i) no lien contract was executed or filed, or the contract did not contain the required homestead disclosure or (ii) the notice of claim or affidavit failed to include the required homestead disclaimer.

7. The claimant executed a valid and enforceable waiver or release.

Q. When Does The Judge Decide on The Validity of The Lien?

A. After at least 21 days notice to the lien claimant of the hearing date. The burden of proof is on the claimant to show that the notice of claim and the lien affidavit were furnished to the owner and the original contractor. The party objecting to the lien then has the burden to establish that the lien should be removed because of one of the 7 defects.

Q. If The Lender or Owner Wins, What Happens?

A. The lien is ordered removed and the judge sets the amount of security that the lien claimant may provide in order to keep the lien in place. The security must be provided within 30 days of the court order. If the lien claimant does not provide the security, the owner may get a recordable certificate on which creditors or subsequent purchasers may rely.

Q. If the Judge Orders the Lien Removed, What Happens to the Lawsuit?

A. If the lien claimant has sued to foreclose on its lien, the case proceeds to full hearing on the foreclosure. If the claimant wins final judgment and the "mini-trial" is reversed, the court will order the lien revived. If the claimant loses, the objecting party's attorney's fees are paid out of the claimant's posted security.

CONTRACTOR TRUST FUND ACCOUNT REQUIREMENTS

A. With one exception, yes.Construction payments are trust funds if the payments are made to a contractor under a construction contract for the improvement of specific real property. On a cost plus contract, the management fee is not considered trust funds.

Q. Are Construction Loan Draw Proceeds Considered Trust Funds?

A. Yes.

Q. Who Are Considered the Trustees?

A. A contractor, subcontractor, or owner (and their officers, directors and agents) who receives or controls trust funds are trustees.

Lenders are not trustees.

Q. Who Are The Beneficiaries?

A. The subs and suppliers who provided the work and material are beneficiaries, but Lenders are not.

Q. How Does the Contractor Get in Trouble?

A. When the Contractor - trustee acts with "intent to defraud" or when he/she retains, uses, disburses or diverts trust funds with intent to deprive the beneficiaries of trust funds.

Q. What's New?

A. The Contractor is required to maintain a construction account on any written contract with a property owner to construct improvements on a residential homestead for an amount exceeding $5,000. The Contract must also maintain account records. Failure to so maintain the construction account or the account records will be considered "intent to defraud".

Also if the Contractor uses, disburses or diverts trust funds that were paid to the Contractor in reliance of a bills paid affidavit (Section 53.085) which contains false information relating to contractors payment of current of past due obligations, the Contractor has committed "intent to defraud".

Q. Where Must The Construction Account Be Established?

A. With a bank, savings association, savings bank, credit union, or savings and loan association authorized to do business in Texas. The styling of the account must include the words: "construction account".

Q. What Are The Account Records Requirements?

A. 1. Source and Amount of Funds in the Construction Account and the date the funds were deposited.

2. The date and amount of each disbursement and the person to whom the funds were disbursed.

3. The current balance of the account.

4. An account record must be kept for each project.

Q. Can A Contractor Have One Construction Account Or May Several Projects be Co-mingled?

A. The statute does not address that issue. Except for money placed in the account to avoid a service charge, only construction funds may go into the account. However, the statute does provide that, "The Contractor shall maintain an account record for each construction project that specifies the direct and indirect costs charged to the owner." This provision appears to make it unfeasible to provide the required data in a co-mingled account.

Q. Are There Other Contractor Requirements?

A. Yes. The Contractor must maintain all invoices and supporting documents relating to funds disbursed from the construction account. All deposit and disbursement documentation must include the construction account number. The Contractor must not destroy information required to be maintained before one year from completion of the improvements.

Q. In What Instances Will The Construction Account Requirement Apply?

A. New construction - build on your lot
Home improvements over $5,000

Q. What are the Penalties for Failure to Comply?

A. A misapplication of funds of $500.00 or more is a Class A misdemeanor. A misapplication of funds of $500.00 or more with intent to defraud is a third degree felony.

Q. Does A Trustee Have Affirmative Defenses to Liability?

A. Yes. The trustee has affirmative defenses to prosecution or liability under these sections if the trust funds not paid to beneficiaries are used by the trustee to pay the trustee's actual expenses directly related to the repair of the construction of the improvement, or if the trustee has retained the payment (after notice to the beneficiary who made the request for payment) because the trustee reasonably believes that the beneficiary is not entitled to the funds, or if the funds are being retained as authorized or required by Chapter 53 of the Code (the Retainge provisions). The trustee also has an affirmative defense to prosecution or other action if the trustee pays the beneficiaries all the trust funds which they are entitled to receive no later than thirty (30) days after written notice to the trustee of a filing of a criminal complaint or other notice of a pending criminal investigation.

Q. Does the Trust Fund Statute Create Any Obligations On the Lender?

A. No.

Q. When Are the Construction Accounts Required?

A. Beginning on contracts signed on and after September 1, 1997.

TIMING REQUIREMENTS FOR LIENS & LAWSUITS

A. For funds trapping, prior law provided the subcontractor was to give the original contractor written notice of the unpaid balance by the 15th day of the second month following each month in which work was done or materials were supplied (the "work"), and then give the same notices to the owner and the original contractor by the 15th day of the third month following each month that work was done. The new law shortens the notice period for residential construction projects; both contractor and owner are to be given notice by the 15th day of the second month following each month in which work is done. Thus, the notice period to the owner has been shortened by one month.

For the timing of sending and filing an affidavit claiming a lien, on a residential construction project, prior law required that a subcontractor must file the affidavit claiming a lien not later than the 15th day of the fourth calendar month after the last month in which that subcontractor did work. The prior law also required the subcontractor to notify the owner of the filing of the affidavit by the earlier of (i) 10 days after the affidavit had been filed, and (ii) the filing deadline. For residential construction projects, the new law shortens the time for filing the affidavit and simplifies the notice to owner timing requirements. For residential construction projects, the new law shortens the time a subcontractor must file a lien by one month to the 15th day of the third calendar month after the last month that subcontractor did work on the project, and the subcontractor now must send the owner notice of the filing not later than the fifth day after the date the affidavit is filed.

For the time limit for a contractor to file a lawsuit to foreclose on a valid mechanic's lien, prior law allowed a contractor or subcontractor to file the lawsuit to foreclose on the lien within two years of the filing of the affidavit or one year after completion of the work under the contract with the owner, whichever was later. The new law provides that for a residential construction project, suit must be brought within one year after the last day a claimant may file a lien affidavit or within one year after completion, termination, or abandonment of the work under the original contract under which the lien is claimed, whichever is later.

MISCELLANEOUS

A. Under the new law, No. Some contractors prefer to have the land in their own name until the residence is completed. In response to a perceived abuse by contractors, the law now provides the contractor can no longer require the conveyance of the lot in order to build.

DISCLOSURE STATEMENT REQUIRED FOR
RESIDENTIAL CONSTRUCTION CONTRACT

(A) BEFORE A RESIDENTIAL CONSTRUCTION CONTRACT IS EXECUTED BY THE OWNER, THE ORIGINAL CONTRACTOR SHALL DELIVER TO THE OWNER A DISCLOSURE STATEMENT DESCRIBED BY THIS SECTION.

(B) THE DISCLOSURE STATEMENT MUST READ SUBSTANTIALLY SIMILAR TO THE FOLLOWING:

KNOW YOUR RIGHTS AND RESPONSIBILITIES UNDER THE LAW. YOU ARE ABOUT TO ENTER INTO A TRANSACTION TO BUILD A NEW HOME OR REMODEL EXISTING RESIDENTIAL PROPERTY. TEXAS LAW REQUIRES YOUR CONTRACTOR TO PROVIDE YOU WITH THIS BRIEF OVERVIEW OF SOME OF YOUR RIGHTS, RESPONSIBILITIES, AND RISKS IN THIS TRANSACTION.

CONVEYANCE TO CONTRACTOR NOT REQUIRED. YOUR CONTRACTOR MAY NOT REQUIRE YOU TO CONVEY YOUR REAL PROPERTY TO YOUR CONTRACTOR AS A CONDITION TO THE AGREEMENT FOR THE CONSTRUCTION OF IMPROVEMENTS ON YOUR PROPERTY.

KNOW YOUR CONTRACTOR. BEFORE YOU ENTER INTO YOUR AGREEMENT FOR THE CONSTRUCTION OF IMPROVEMENTS TO YOUR REAL PROPERTY, MAKE SURE THAT YOU HAVE INVESTIGATED YOUR CONTRACTOR. OBTAIN AND VERIFY REFERENCES FROM OTHER PEOPLE WHO HAVE USED THE CONTRACTOR FOR THE TYPE AND SIZE OF CONSTRUCTION PROJECT ON YOUR PROPERTY.

GET IT IN WRITING. MAKE SURE THAT YOU HAVE A WRITTEN AGREEMENT WITH YOUR CONTRACTOR THAT INCLUDES: (1) A DESCRIPTION OF THE WORK THE CONTRACTOR IS TO PERFORM; (2) THE REQUIRED OR ESTIMATED TIME FOR COMPLETION OF THE WORK; (3) THE COST OF THE WORK OR HOW THE COST WILL BE DETERMINED; AND (4) THE PROCEDURE AND METHOD OF PAYMENT, INCLUDING PROVISIONS FOR STATUTORY RETAINAGE AND CONDITIONS FOR FINAL PAYMENT. IF YOUR CONTRACTOR MADE A PROMISE, WARRANTY, OR REPRESENTATION TO YOU CONCERNING THE WORK THE CONTRACTOR IS TO PERFORM, MAKE SURE THAT PROMISE, WARRANTY, OR REPRESENTATION IS SPECIFIED IN THE WRITTEN AGREEMENT. AN ORAL PROMISE THAT IS NOT INCLUDED IN THE WRITTEN AGREEMENT MAY NOT BE ENFORCEABLE UNDER TEXAS LAW.

READ BEFORE YOU SIGN. DO NOT SIGN ANY DOCUMENT BEFORE YOU HAVE READ AND UNDERSTOOD IT. NEVER SIGN A DOCUMENT THAT INCLUDES AN UNTRUE STATEMENT. TAKE YOUR TIME IN REVIEWING DOCUMENTS. IF YOU BORROW MONEY FROM A LENDER TO PAY FOR THE IMPROVEMENTS, YOU ARE ENTITLED TO HAVE THE LOAN CLOSING DOCUMENTS FURNISHED TO YOU FOR REVIEW AT LEAST ONE BUSINESS DAY BEFORE THE CLOSING. DO NOT WAIVE THIS REQUIREMENT UNLESS A BONA FIDE EMERGENCY OR ANOTHER GOOD CAUSE EXISTS, AND MAKE SURE YOU UNDERSTAND THE DOCUMENTS BEFORE YOU SIGN THEM. IF YOU FAIL TO COMPLY WITH THE TERMS OF THE DOCUMENTS, YOU COULD LOSE YOUR PROPERTY. YOU ARE ENTITLED TO HAVE YOUR OWN ATTORNEY REVIEW ANY DOCUMENTS. IF YOU HAVE ANY QUESTION ABOUT THE MEANING OF A DOCUMENT, CONSULT AN ATTORNEY.

GET A LIST OF SUBCONTRACTORS AND SUPPLIERS. BEFORE CONSTRUCTION COMMENCES, YOUR CONTRACTOR IS REQUIRED TO PROVIDE YOU WITH A LIST OF THE SUBCONTRACTORS AND SUPPLIERS THE CONTRACTOR INTENDS TO USE ON YOUR PROJECT. YOUR CONTRACTOR IS REQUIRED TO SUPPLY UPDATED INFORMATION ON ANY SUBCONTRACTORS AND SUPPLIERS ADDED AFTER THE LIST IS PROVIDED. YOUR CONTRACTOR IS NOT REQUIRED TO SUPPLY THIS INFORMATION IF YOU SIGN A WRITTEN WAIVER OF YOUR RIGHTS TO RECEIVE THIS INFORMATION.

MONITOR THE WORK. LENDERS AND GOVERNMENTAL AUTHORITIES MAY INSPECT THE WORK IN PROGRESS FROM TIME TO TIME FOR THEIR OWN PURPOSES. THESE INSPECTIONS ARE NOT INTENDED AS QUALITY CONTROL INSPECTIONS. QUALITY CONTROL IS A MATTER FOR YOU AND YOUR CONTRACTOR. TO ENSURE THAT YOUR HOME IS BEING CONSTRUCTED IN ACCORDANCE WITH YOUR WISHES AND SPECIFICATIONS, YOU SHOULD INSPECT THE WORK YOURSELF OR HAVE YOUR OWN INDEPENDENT INSPECTOR REVIEW THE WORK IN PROGRESS.

MONITOR PAYMENTS. IF YOU USE A LENDER, YOUR LENDER IS REQUIRED TO PROVIDE YOU WITH A PERIODIC STATEMENT SHOWING THE MONEY DISBURSED BY THE LENDER FROM THE PROCEEDS OF YOUR LOAN. EACH TIME YOUR CONTRACTOR REQUESTS PAYMENT FROM YOU OR YOUR LENDER FOR WORK PERFORMED, YOUR CONTRACTOR IS ALSO REQUIRED TO FURNISH YOU WITH A DISBURSEMENT STATEMENT THAT LISTS THE NAME AND ADDRESS OF EACH SUBCONTRACTOR OR SUPPLIER THAT THE CONTRACTOR INTENDS TO PAY FROM THE REQUESTED FUNDS. REVIEW THESE STATEMENTS AND MAKE SURE THAT THE MONEY IS BEING PROPERLY DISBURSED.

CLAIMS BY SUBCONTRACTORS AND SUPPLIERS. UNDER TEXAS LAW, IF A SUBCONTRACTOR OR SUPPLIER WHO FURNISHES LABOR OR MATERIALS FOR THE CONSTRUCTION OF IMPROVEMENTS ON YOUR PROPERTY IS NOT PAID, YOU MAY BECOME LIABLE AND YOUR PROPERTY MAY BE SUBJECT TO A LIEN FOR THE UNPAID AMOUNT, EVEN IF YOU HAVE NOT CONTRACTED DIRECTLY WITH THE SUBCONTRACTOR OR SUPPLIER. TO AVOID LIABILITY, YOU SHOULD TAKE THE FOLLOWING ACTIONS:

(1) IF YOU RECEIVE A WRITTEN NOTICE FROM A SUBCONTRACTOR OR SUPPLIER, YOU SHOULD WITHHOLD PAYMENT FROM YOUR CONTRACTOR FOR THE AMOUNT OF THE CLAIM STATED IN THE NOTICE UNTIL THE DISPUTE BETWEEN YOUR CONTRACTOR AND THE SUBCONTRACTOR OR SUPPLIER IS RESOLVED. IF YOUR LENDER IS DISBURSING MONEY DIRECTLY TO YOUR CONTRACTOR, YOU SHOULD IMMEDIATELY PROVIDE A COPY OF THE NOTICE TO YOUR LENDER AND INSTRUCT THE LENDER TO WITHHOLD PAYMENT IN THE AMOUNT OF THE CLAIM STATED IN THE NOTICE. IF YOU CONTINUE TO PAY THE CONTRACTOR AFTER RECEIVING THE WRITTEN NOTICE WITHOUT WITHHOLDING THE AMOUNT OF THE CLAIM, YOU MAY BE LIABLE AND YOUR PROPERTY MAY BE SUBJECT TO A LIEN FOR THE AMOUNT YOU FAILED TO WITHHOLD.

(2) DURING CONSTRUCTION AND FOR 30 DAYS AFTER FINAL COMPLETION, TERMINATION, OR ABANDONMENT OF THE CONTRACT BY THE CONTRACTOR, YOU SHOULD WITHHOLD OR CAUSE YOUR LENDER TO WITHHOLD 10 PERCENT OF THE AMOUNT OF PAYMENTS MADE FOR THE WORK PERFORMED BY YOUR CONTRACTOR. THIS IS SOMETIMES REFERRED TO AS 'STATUTORY RETAINAGE.' IF YOU CHOOSE NOT TO WITHHOLD THE 10 PERCENT FOR AT LEAST 30 DAYS AFTER FINAL COMPLETION, TERMINATION, OR ABANDONMENT OF THE CONTRACT BY THE CONTRACTOR AND IF A VALID CLAIM IS TIMELY MADE BY A CLAIMANT AND YOUR CONTRACTOR FAILS TO PAY THE CLAIM, YOU MAY BE PERSONALLY LIABLE AND YOUR PROPERTY MAY BE SUBJECT TO A LIEN UP TO THE AMOUNT THAT YOU FAILED TO WITHHOLD. IF A CLAIM IS NOT PAID WITHIN A CERTAIN TIME PERIOD, THE CLAIMANT IS REQUIRED TO FILE A MECHANIC'S LIEN AFFIDAVIT IN THE REAL PROPERTY RECORDS IN THE COUNTY WHERE THE PROPERTY IS LOCATED. A MECHANIC'S LIEN AFFIDAVIT IS NOT A LIEN ON YOUR PROPERTY, BUT THE FILING OF THE AFFIDAVIT COULD RESULT IN A COURT IMPOSING A LIEN ON YOUR PROPERTY IF THE CLAIMANT IS SUCCESSFUL IN LITIGATION TO ENFORCE THE LIEN CLAIM.

SOME CLAIMS MAY NOT BE VALID. WHEN YOU RECEIVE A WRITTEN NOTICE OF A CLAIM OR WHEN A MECHANIC'S LIEN AFFIDAVIT IS FILED ON YOUR PROPERTY, YOU SHOULD KNOW YOUR LEGAL RIGHTS AND RESPONSIBILITIES REGARDING THE CLAIM. NOT ALL CLAIMS ARE VALID. A NOTICE OF A CLAIM BY A SUBCONTRACTOR OR SUPPLIER IS REQUIRED TO BE SENT, AND THE MECHANIC'S LIEN AFFIDAVIT IS REQUIRED TO BE FILED, WITHIN STRICT TIME PERIODS. THE NOTICE AND THE AFFIDAVIT MUST CONTAIN CERTAIN INFORMATION. ALL CLAIMANTS MAY NOT FULLY COMPLY WITH THE LEGAL REQUIREMENTS TO COLLECT ON A CLAIM. IF YOU HAVE PAID THE CONTRACTOR IN FULL BEFORE RECEIVING A NOTICE OF A CLAIM AND HAVE FULLY COMPLIED WITH THE LAW REGARDING STATUTORY RETAINAGE, YOU MAY NOT BE LIABLE FOR THAT CLAIM. ACCORDINGLY, YOU SHOULD CONSULT YOUR ATTORNEY WHEN YOU RECEIVE A WRITTEN NOTICE OF A CLAIM TO DETERMINE THE TRUE EXTENT OF YOUR LIABILITY OR POTENTIAL LIABILITY FOR THAT CLAIM.

OBTAIN A LIEN RELEASE AND A BILLS-PAID AFFIDAVIT. WHEN YOU RECEIVE A NOTICE OF CLAIM, DO NOT RELEASE WITHHELD FUNDS WITHOUT OBTAINING A SIGNED AND NOTARIZED RELEASE OF LIEN AND CLAIM FROM THE CLAIMANT. YOU CAN ALSO REDUCE THE RISK OF HAVING A CLAIM FILED BY A SUBCONTRACTOR OR SUPPLIER BY REQUIRING AS A CONDITION OF EACH PAYMENT MADE BY YOU OR YOUR LENDER THAT YOUR CONTRACTOR FURNISH YOU WITH AN AFFIDAVIT STATING THAT ALL BILLS HAVE BEEN PAID. UNDER TEXAS LAW, ON FINAL COMPLETION OF THE WORK AND BEFORE FINAL PAYMENT, THE CONTRACTOR IS REQUIRED TO FURNISH YOU WITH AN AFFIDAVIT STATING THAT ALL BILLS HAVE BEEN PAID. IF THE CONTRACTOR DISCLOSES ANY UNPAID BILL IN THE AFFIDAVIT, YOU SHOULD WITHHOLD PAYMENT IN THE AMOUNT OF THE UNPAID BILL UNTIL YOU RECEIVE A WAIVER OF LIEN OR RELEASE FROM THAT SUBCONTRACTOR OR SUPPLIER.

OBTAIN TITLE INSURANCE PROTECTION. YOU MAY BE ABLE TO OBTAIN A TITLE INSURANCE POLICY TO INSURE THAT THE TITLE TO YOUR PROPERTY AND THE EXISTING IMPROVEMENTS ON YOUR PROPERTY ARE FREE FROM LIENS CLAIMED BY SUBCONTRACTORS AND SUPPLIERS. IF YOUR POLICY IS ISSUED BEFORE THE IMPROVEMENTS ARE COMPLETED AND COVERS THE VALUE OF THE IMPROVEMENTS TO BE COMPLETED, YOU SHOULD OBTAIN, ON THE COMPLETION OF THE IMPROVEMENTS AND AS A CONDITION OF YOUR FINAL PAYMENT, A 'COMPLETION OF IMPROVEMENTS' POLICY ENDORSEMENT. THIS ENDORSEMENT WILL PROTECT YOUR PROPERTY FROM LIENS CLAIMED BY SUBCONTRACTORS AND SUPPLIERS THAT MAY ARISE FROM THE DATE THE ORIGINAL TITLE POLICY IS ISSUED TO THE DATE OF THE ENDORSEMENT.