Compared to prime (general) contractors, it is much more difficult for subcontractors to perfect lien and bond claims on private projects. Subcontractors must give timely notice of non-payment to the owner. If the subcontractor claimant does not have an agreement with the prime contractor, notice must also be given to the prime contractor. Failure to comply with the pre-lien notice requirements is fatal to a subcontractor’s lien claim
Prime contractors, on the other hand, are not burdened with pre-lien notice requirements. They can still claim a lien (even if no affidavit is recorded) and the value of their lien claim is not affected by retainage.
The reasons for this disparate treatment stems from the fact that a general contractor’s lien rights derive from the Texas Constitution, common-law, contract and statute. Subcontractors’ lien rights are derived solely from statute and are totally dependent upon compliance with these statutes. This system creates many obstacles and pitfalls for subcontractors that properly provide labor and materials.
Prime / General Contractors vs. Subcontractors
For purposes of mechanic’s lien law, a prime contractor is defined as a person or entity having a direct contractual relationship with the owner. It is not uncommon for some owners to directly contract with more than one trade on a single job, so it is possible for many prime contractors to exist on a single project. A subcontractor does not contract directly with the owner, but instead provides labor or materials to a prime contractor or another subcontractor.
Are you sure you are a subcontractor? Maybe not.
All too often our firm receives a call from a ‘subcontractor’ explaining that they haven’t been paid and also failed to send pre-lien notices. At first glance it appears that the client is in trouble because the general is gone or the owner won’t pay. The subcontractor has no lien rights because they didn’t follow the statute. But are you “just a sub” with no lien claim? You look like a subcontractor, you talk like a subcontractor, you operate like a subcontractor, your scope is typically performed by a subcontractor; heck, your agreements state that you are a subcontractor. Despite all appearances, you may in fact be a prime (with lien rights still intact).
The “Sham Contract”
All too often, a property owner will develop their own land. They may own a construction company that acts as the general contractor. Sometimes, they may not own the general contractor but instead they serve as a director, officer or manager for the general contractor. The question is the appearance of control.
If the owner can effectively control the general contractor through ownership, directorship or otherwise; or if the owner contracted with the another person for the construction or repair without a good faith intention of the parties that the other person was to perform as the general contractor, then all those that contracted directly with the general contractor are entitled to treatment as general/prime contractors. Tex. Prop. Code §53.026.
The significance of being converted from a 1st tier subcontractor to a general/prime contractor stems from the fact that lien perfection for the general contractor is substantially less onerous and my not require any affirmative action at all.
Constitutional Mechanic’s Liens
In addition to statutory mechanic’s liens, those who contract directly with an Owner are generally entitled to claim a “Constitutional Lien” as provided by Article 16, Section 37 of the Texas Constitution. Constitutional liens have the same effect as statutory liens but differ in that they are self-executing and exist independent and apart from any legislative act. Perfection of a constitutional lien is therefore much less onerous that perfection of a statutory lien since no notices or lien affidavits are required. Stated another way, constitutional liens arise automatically without specific action by the general contractor.
Sham Contracts and Constitutional Mechanic’s Liens
As stated earlier, a subcontractor cannot claim a constitutional lien. However, in Trinity Drywall Systems, LLC v. Toka General Contractors, Ltd., 416 S.W.3d 201 (Tex.App.—El Paso 2013), a subcontractor challenged the interpretation of the interaction between the sham contract statute and the mechanic’s lien provisions of Texas Constitution. In that case, the trial court determined that Trinity Drywall (a “subcontractor”) was entitled to enforce a constitutional lien because the sham contract statute placed Trinity Drywall in direct contractual relationship with the landowner. Therefore, even though Trinity completely failed to comply with the mechanic’s lien statutes, they were still entitled to a mechanic’s lien if they could establish the existence of a sham contract.
Before a subcontractor throws in the towel because notices were not sent or lien affidavits were not timely filed, it pays to carefully look behind the curtain and search for clues to determine whether or not it appears that the landowner and general contractor are in cahoots.