The issue of whether construction liens are binding after the transfer of property is a thorny one. The new owners did not commission the work, and in many cases may not have known that a lien claim was filed on the property. But the lien claimant also usually has no knowledge of the transfer of the property, or to whom it is being transferred. Additionally, the construction lien does not ask for potential owners…it asks for the name of the current owner.
Then there’s the case of the transfer of properties from one entity to another just to avoid a mechanics lien being filed, or to make it invalid because the new owner is not known to the lien claimant. This happens more often than it should.
So what happens when a Texas construction lien is filed right before a property transfer? And how does this affect the new owner, who had no actual knowledge of the filing? Does the construction lien stay on the property, encumbering the new owner’s interest, and making the new owner liable for payment of the lien, and subject to foreclosure of their newly purchased property? Or does the failure to give the new owner actual notice result in the lien being expunged or discharged, or simply not effective against the new owner’s interest.
The longstanding law is that the new owner is saddled with the lien, and the payment of that lien, may have rights to recover against the prior property owner. Under Texas’s codified bona-fide purchaser doctrine, an instrument reflecting a property conveyance or interest will not cloud the title of a subsequent purchaser, so long as the purchaser pays valuable consideration and lacks actual and constructive notice of the instrument. § 13.001.
So who has actual or constructive notice of construction liens, and when does it occur? According to Texas law, all persons have constructive notice of instruments that are “properly recorded in the proper county.” § 13.002. These statutes place purchasers with constructive notice of a property interest on even footing with those who have actual notice; that is, the recorded instrument will cloud their respective titles equally.
This rule applies not only to construction liens, but also to the filing of a lis pendens: a document that is filed with the county clerk when a lawsuit is filed, and is intended as a follow up to a construction lien, providing notice that a lawsuit has been filed to foreclose on the lien). In turn, a notice of lis pendens qualifies as an instrument reflecting a property interest, and recording it in the proper county “constructively notif[ies] anyone taking an interest in real property that a claim is being litigated against the property.” Long Beach Mortg. Co. v. Evans, 284 S.W.3d 406, 414 (Tex. App.—Dallas 2009, pet. denied).
Thus, a properly recorded lis-pendens notice places prospective buyers who don’t actually know about the pending action in the same position as those who do: both will acquire their interest in the property subject to the claims being litigated. World Sav. Bank, F.S.B. v. Gantt, 246 S.W.3d 299, 303 (Tex. App.—Houston [14th Dist.] 2008, no pet.); see also Tex. Prop. Code § 13.004(b) (“A transfer or encumbrance of real property involved in a proceeding . . . to a third party who has paid a valuable consideration and who does not have actual or constructive notice of the proceeding is effective . . . unless a notice of the pendency of the proceeding has been recorded . . . in each county in which the property is located.”). Again, actual notice and constructive notice have the same legal consequences. By providing a mechanism for constructive notice of an action involving real property, the Property Code protects the claimant’s alleged rights in the disputed property. Collins v. Tex. Mall, L.P., 297 S.W.3d 409, 418 (Tex. App.—Fort Worth 2009, no pet.).
But litigations take a long time, and when a lis pendens or a construction lien are encumbering the property, the property itself is all tied up. As such, the Property Code also provides a procedure by which another party to the action may seek to have the notice of lis pendens “expunged,” that is, “erase[d] or destroy[ed].” Tex. Prop. Code § 12.0071; Expunge, Black’s Law Dictionary (10th ed. 2014). This can be done by motion or summary action with a court of law, and the statute requires the trial court to order a lis-pendens notice expunged if “the claimant fails to establish by a preponderance of the evidence the probable validity of the real property claim.” Tex. Prop. Code § 12.0071(c)(2). The claimant must therefore satisfy a threshold evidentiary showing on the merits of its real-property claim to continue to encumber the property during the pendency of the underlying suit. If the claimant cannot do so and an expunction order is entered and recorded, subsection (f) ensures that neither the notice of lis pendens nor the “information derived from the notice”—that is, the suit itself—is enforceable against a subsequent purchaser for value. Id. § 12.0071(f).
Read the full text of the recent Texas case that discusses the effect of the filing of Texas construction liens and lis pendens: Sommers v. Sandcastle Homes, Inc., 60 Tex. Sup. Ct. J. 1291 (2017).
Home Improvement Acts (HIA) have proliferated across the country. The purpose of these acts is to protect homeowners from unscrupulous contractors taking advantage, taking money, and doing no work or terrible work. In some states, such as New Jersey, HIA violations can result in treble damages, attorneys fees, and forfeiture of the right to payment. While the HIAs are strict and written to heavily favor and protect homeowners, many interpretations by the Courts have softened the blow for contractors.
A recent case in Connecticut did not follow that trend. The case of Burns v. Adler, 325 Conn. 14, 155 A.3d 1223 (2017) related to a contractor‘s action against a homeowner (HO), arising from home improvement services on a residential renovation project. The contractor sued the homeowner for a balance due for work performed on the home, including an action for foreclosure on a Connecticut Mechanic’s lien. The contractor further alleged that the homeowner acted in bad faith in not paying the amounts due and owing.
In response, the homeowner claimed that the enactment of the Home Improvement Act, Conn. Gen. Stat. § 20-429 (Rev. to 2007), specifically removed a rule previously created by the courts that allowed judges and juries to consider whether a HO acted in bad faith.
The Court held that Judgment for the HO was warranted dismissing the contractor‘s breach of contract claim and request for judgment of strict foreclosure on a mechanic’s lien. The court held that the parties’ contract did not comply with the Act and the bad faith exception was inapplicable in the circumstances (notably the court did not get rid of the bad faith exception, but rather held that it did not apply to the facts presented to it).
In holding that the HO was not required to pay the contract, the court relied mainly on the CT HIA. The court found that the contract did not satisfy § 20-429(a) or (f) because it was not signed by the contractor, did not contain a completion date, and there was no proof that a completed copy was delivered to the HO.
The message from CT is clear: if you are a contractor, ensure you comply with the HIA, or the homeowner has the right to withhold payment, even if you completed your work in a satisfactory manner. To make sure you are in compliance, contractors should visit the Connecticut Department of Consumer Protection webpage that provides Information for Home Improvement Contractors.
The vexing problem of owners not knowing who is providing labor, materials or services for their project is once again being addressed by the Massachusetts legislature. Massachusetts already has a requirement that a “Notice of Contract” be filed with the county clerk prior to the filing of any lien claim. The Notice of Contract records the existence of a contract, and also provides the property owner with notice that a contract has been entered into.
This notice, however, has been deemed not to be enough, since most Notices of Contract are not filed until there is a payment dispute. The timing of the filing of the Notice of Contract not only affects lien rights, but is also perceived to put the owner in an awkward position, since the owner would not know that there is a dispute until after it already arose, making it harder to resolve.
The latest proposal has been to require that subcontractors and suppliers, those who do not have a direct contract with the owner, serve the owner with a “Notice of Identification”, at the start of the delivery of work or materials to the project. The Notice of Identification would provide the owner with the name of the subcontractor or supplier, the amount of the contract, and with whom the contract is with. Many other states have similar requirements (i.e. Florida Notice to Owner), and sending these notices is routine in these states.
Massachusetts is proposing, in 2017 Bill Text MA H.B. 3721, that the text of the notice also provide the owner with a rundown of its rights regarding potential lien claimants, and is as follows:
The notice must be in at least 10-point bold type, if printed, or in capital letters, if typewritten and must state as follows: