By Emily A. Pendleton of Porter Hedges LLP
Published June 3, 2021
Texas law obligates construction owners to withhold 10% of the value of the work during the course of a project and for 30 days after final completion. This is generally known as statutory retainage. Owners should memorialize their statutory retainage obligation in their construction contracts, but nevertheless, the owner’s obligation to withhold arises from Texas statute regardless of whether a contractual provision addresses it.
Often times, general contractors pass the burden of statutory retainage downstream by virtue of a contractual retainage provision in their subcontract agreements. Contractual retainage provisions authorize the general contractor to withhold a percentage of the value of the subcontractor’s work throughout the course of a project. Contractual retainage provisions afford similar benefits to the general contractor as the statutory retainage provisions provide to owners, such as:
- Ensures subcontractors perform work in accordance with the contract and owner standards;
- Ensures completion of the work, including punch list; and
- Ensures payment of downstream obligations.
Contractual Retainage – A Hypothetical
The withholding of contractual retainage creates additional notice obligations that subcontractors should be aware of in order to perfect a mechanic’s lien for contractual retainage.
In Texas, subcontractors have mandatory deadlines by which to send notice of unpaid amounts to the owner and general contractor. In most scenarios giving rise to a lien claim, overdue invoices raise a red-flag and identify the need to send a pre-lien notice to inform upstream parties of non-payment.
However, when contractual retainage is withheld on monthly invoices throughout the course of the project, there are no red-flags because the subcontractor knows the retained funds are withheld in accordance with the subcontract agreement. Despite lack of a red-flag, the subcontractor is nevertheless performing work for which it has not been paid in full, giving rise to a pre-lien notice requirement under Texas law to perfect a lien.
Consider this hypothetical. Subcontractor performs 12 months of work on a project. General contractor withholds retainage on subcontractor’s monthly invoices pursuant to a contractual retainage provision. Subcontractor completes its work and invoices for the retainage withheld for the work performed over the last 12 months. General contractor tells subcontractor that it cannot pay subcontractor’s contractual retainage until the owner releases general contractor’s retainage, which will not be for at least another 60 days. Subcontractor wants its money now, but also wants to maintain a good business relationship with the general contractor and the owner, so subcontractor decides it will patiently wait for the retainage payment. In 30 days, general contractor abandons the project and files bankruptcy. Now what?
In this hypothetical, subcontractor performed the work for which is has not been paid over the last year and is well-past its deadlines to send pre-lien notices to perfect a mechanic’s lien for unpaid work performed 12 months ago. A contractual retainage notice is imperative in this situation.
The Subcontractor’s Contractual Retainage Notice
Best practice is for subcontractors to send a notice as soon as the contract providing for contractual retainage is entered into. The notice must be sent to the owner and general contractor informing the owner that the subcontractor has been hired to perform work on the owner’s project under a subcontract agreement that provides for the withholding of contractual retainage. If the notice is not sent at the start of subcontractor’s work, the deadline for sending a contractual retainage notice is the earlier of: (1) the 30th day after the date subcontractor’s agreement providing for retainage is completed, terminated, or abandoned, or (2) the 30th day after the date the original contract between the owner and general contractor is terminated or abandoned. To apply these rules to our hypothetical, subcontractor’s deadline to send a contractual retainage notice to the owner was 30 days after it completed its work.
Pursuant to Texas statute, the following items are required to be included in the subcontractor’s contractual retainage notice:
- Name and address of the subcontractor claimant;
- State the existence of a contractual requirement for retainage; and
- If claimant is a second-tier subcontractor, state the name and address of the first-tier subcontractor.
This notice perfects the ability to record a mechanic’s lien for unpaid contractual retainage and places burdens on the owner to inform the notifying subcontractor of events such as termination of the general contractor, abandonment, or the filing of an affidavit of project completion. Subcontractors should be sure to timely record their lien. Deadlines to perfect a mechanic’s lien can vary and are shortened upon termination, abandonment, or filing of an affidavit of project completion. As always, consult with an attorney as early as possible to ensure you comply with all statutory lien deadlines.
Emily Pendleton is an Associate at Porter Hedges LLP in the Houston office. Her practice focuses on construction and commercial litigation with particular experience defending, analyzing, and preparing lien, bond, and other construction related claims. She can be reached at firstname.lastname@example.org or 713.226.6756.