About Kelly M. Davis Esq.

Kelly M. Davis is the owner of Kelly M. Davis & Associates, LLC. She grew up around the construction industry and knew once she opened her practice she would help construction related businesses.

Retainage Protection – Part 2

The last time (Retainage Protection Part 1) we talked about the importance of documenting your file.  Today I want to discuss one component of that documentation-the notice you are required to send when your subcontract includes payments that are being withheld as contractual retainage.  Take note that the bulk of this discussion relates to subcontractors on a commercial construction project-there are some significant differences in the residential context and other differences if you are the original contractor working for the owner.

So, let’s say you are a subcontractor working on a commercial construction project where you contractually agreed to allow retainage to be held back from your payments.  What is the process for protecting your right to be paid? How do you get paid that money?   First you send the correct Notice, and then you file a Lien.

The Notice:

To begin with, a brief history on timing for sending retainage notices.  You might have heard, but in 2011, there was a major overhaul of the retainage portion of the Mechanic’s Lien statutes.  This is found in Section 53.057 of the Texas Property Code.

Before 2011 derivative claimants (what most people know as 1st tier and below claimants) were required to send notice of their retainage agreement to the Owner of the Project at the beginning of project.  (I wrote about this in the December 1, 2009 Blog Post, Retainage Claims).  This allows Owners to be aware of the contractual provision and be advised of the possible future claim on “statutory retainage” which is the ten percent (10%) of the project’s original contract price that Owners are legally responsible to withhold to pay lien claimants. There were many issues with the 2011 deadlines.  For instance, the retainage notice was easily overlooked by subs who were working in the early phases of the project, when the obligation to pay did not accrue until after the project was finished.  Another issue was that the original contractors and owners complained of receiving “unnecessary” notices, long before the obligation to pay had arrived.

After September, 2011, the requirements were changed so that you can now send the retainage notice after completion of your work, after the original contract is terminated, abandoned or completed.

Note that nothing requires you to wait until after completion of any work to send the retainage notice, and we would encourage you not to wait.  Deadlines are just that-you have rights to recover if you act before the deadline, and afterwards you risk losing those rights.  But there is nothing in the Property Code that requires you to wait until the obligation to pay accrues to file your notice or your lien.  We have seen this argument made a few times in the last year or so, and there is no legal basis for this argument.  Despite what many people will tell you, there is no “too early” when it comes to sending the notice or filing a lien for retainage.

One benefit of sending your retainage notice earlier rather than later is that it gives you additional protections when it comes to receiving information about the project.  For instance if an owner files an “affidavit of completion” with the county clerk, they have to send you a copy by certified mail if they have received any notices of non-payment from you.  If the owner terminates the original contractor who hired you, or that original contractor abandons the project, the owner is required to send you notice of that as well.  Since those days start the countdown to the deadline for recovery of retainage, these are important dates to know and receiving these notice will alert you to the need to file your lien, if you haven’t already.  The Owner is not legally required to send this information to you unless he has received a Retainage or other Mechanic’s Lien Notice.

How should you send your Notice that your contract contains retainage provisions?  Best answer-certified mail to the owner and the original contractor.  Every other requirement under the Mechanic’s Lien sections of the Texas Property Code relating to notices require you to send them via certified mail.  However, the 2011 changes discussed above removed the requirement that the retainage notice be sent by certified mail.  As you know, the difference here is that we are trying to establish best practices, not just meet minimum requirements.  If there is a dispute you will be required to prove that you sent the notice, and certified mail makes a record that the letter was actually sent, even if the owner or original contractor doesn’t pick it up or refused delivery.  It’s worth the couple of bucks to send it certified.  Additionally, it is better for you to always get into the habit of sending all Property Code notifications via certified mail as opposed to getting confused later as to which are and which are not supposed to be sent certified mail and having something invalidated because you do it wrong.

What does your notice for contractual retainage need to include?  It is a little different than the notice for nonpayment or for progress payments.   It needs to generally state the existence of your contract’s requirement for retainage, contain your name and address, and the other the name and address of the other party to the contract.  That’s it, but it doesn’t hurt to tell them more, such as the amount of the retainage and the expected amount of the contractual payments.

The notice is also the first step in filing a lien for the retainage.  However, unlike a notice for non-payment, you will also have to have filed your lien affidavit (and have sent it to the owner of course) to authorize the owner to use statutory retainage funds to satisfy the retainage debt.  An owner won’t be held personally liable for any amount over and above the retainage unless a trapped funds demand was also sent authorizing the Owner to withhold funds claiming to be owed from the General Contractor.  (I will discuss trapped funds in detail within the next blog post).  So it is important to your potential recovery to get them notice of the retainage contract and the affidavit of the retainage lien.

So to sum up on notices: If your contract contains a requirement for retainage the deadline for sending notice is the earlier of the 30th day after your contract is completed, terminated or abandoned, or the 30th day after the original contract between the owner and original contract is terminated, completed or abandoned.  The notice must be sent to the original contractor and the owner. But don’t wait until the deadline, send it as soon as you know there is a problem and send it certified mail.

Next time I will discuss some pointers on the retainage lien affidavit.