Texas
Construction Lending State Compliance Library
State statute reference
Last updated August 8, 2023
Disclaimer: Information on this website is provided for informational purposes only and is not intended to be legal advice or establish an attorney-client relationship. Construction law can change at any time, so the information on this website may not be the most up-to-date information available. The information on this website is posted “as is” and no representations are made that the content is without errors. Use of this website does not create an attorney-client relationship between Land Gorilla, content creators, law firms, and any other contributors to this website. Users of this website should contact their own legal counsel for advice with respect to any legal matters.
Webinar
Texas Lien Law Overview
Watch Now On-Demand
Texas Construction Lien Law
Lien Law Overview
Texas mechanics lien law applies to both non-residential and residential construction projects. Non-residential projects have different filing deadlines than residential projects.
Changes to Lien Laws Effective January 1st, 2022
Major changes to Chapter 53 of the Texas Property Code went into effect on January 1, 2022 (House Bill 2237), which made significant changes to the Texas property code. It is important to note that, while the changes went into effect on January 1, 2022, the changes apply only to original contracts on or after January 1st, 2022. Therefore, it will be important to review the original contract. The date on which the original contract was entered into will dictate the applicable law. Even if the contract was signed after January 1, 2022, if the original contract pre-dates January 1, 2022, then the old law will apply. Please read the entire Texas statute to understand which areas are impacted by contracts predating the January 1st, 2022 changes.
Holdback Requirements
During the course of construction disbursements the owner, lender, and/or owner’s agent must reserve 10 percent of the contract price of the work to the owner; or 10 percent of the value of the work, measured by the proportion that the work done bears to the work to be done, using the contract price or, if there is no contract price, using the reasonable value of the completed work (Texas State Statute 53.101).
The law provides that either method is acceptable and a lender can vary from loan to loan, however, it is recommended that the practices remain consistent simply to avoid mistakes.
Since the law provides two methods the lender may:
- Holdback 10% of the final draw; or
- Holdback 10% of each draw (retainage method)
Releasing of Funds
During the course of construction disbursements by the owner, lender, or owner’s agent reserved 10% of the funds (reserve funds) to the contract as required by Sec. 53.101 of the states statute. These funds must be held:
- during the progress of work under the original contract; and
- for an additional 30 days after the work under the contract is completed (this time period can be evidenced by the Affidavit of Completion. See Section 53.106).
Failure to comply provides that all lien claimants who complied with the section shall have a lien, at least to the extent of the amount that should have been reserved.
Upon completion of the work, the owner can file an Affidavit of Completion to service as evidence that construction has been completed and to begin the 30-day time period that is required to withhold the reserve funds.
Lien Waivers
Lien Waiver Summary
Texas statutes provide that lien waivers are only enforceable when executed and delivered in accordance with the statutory requirements and on the statutory form. See Tex. Prop. Code § 53.284.
Statutory Form
Required
Notary
Date dependent*
Electronic Signature
Acceptable
*Due to changes that were made to the statute in January 2022. Notarization of the Lien Waiver may be required under the statute when the original construction contracts executed before January 1, 2022. For contracts executed after January 1st 2022 they are not required to be notarized.
Statutory Forms
There are four waiver and release forms set forth in Tex. Prop. Code § 53.284 that must be used in order to establish a conditional or unconditional waiver or release of lien or bond claim. Depending on the date of the construction, contract may require the form to be notarized.
- Conditional Waiver and Release on Progress Payment,
- Unconditional Waiver and Release on Progress Payment
- Conditional Waiver and Release on Final Payment
- Unconditional Waiver and Release on Final Payment
Conditional Waiver and Release on Progress Payment: Use this form if a contractor is required to execute a waiver and release in exchange for or to induce payment of a progress payment and is not paid in exchange for the waiver or release; OR if a single payee check or joint payee check is given in exchange for the waiver and release.
Unconditional Waiver and Release on Progress Payment: Use this form if a contractor (or other potential lien claimants) is required to execute an unconditional waiver and release to prove the receipt of good and sufficient funds for a progress payment and the claimant or potential claimant asserts in the waiver and release that they have been paid the progress payment.
Conditional Waiver and Release on Final Payment: Use this form if a contractor (or other potential lien claimants) is required to execute a waiver and release in exchange for or to induce the payment of a final payment and is not paid in good and sufficient funds in exchange for the waiver and release or if a single payee check or joint payee check is given in exchange for the waiver and release.
Unconditional Waiver and Release on Final Payment: Use this form if a contractor (or other potential lien claimants) is required to execute an unconditional waiver and release to prove the receipt of good and sufficient funds for a final payment and the claimant or potential claimant asserts in the
waiver and release that the claimant or potential claimant has been paid the final payment.
Special Disbursement Requirements
If the owner finances the construction that advances loan proceeds directly to the contractor, the lender shall:
- Obtain the signed Contractor’s Disbursement Disclosure from the original contractor that covers the amount of funds being requested; and
- Provide to the owner a statement of funds disbursed by the lender since the last statement was provided to the owner.
The lender shall provide to the owner the lender’s disbursement statement and the disbursement statement the lender obtained from the contractor before the lender disburses the funds to the original contractor. See Tex. Prop. Code § 53.258.
Contractor’s Disbursement Disclosure. Upon requesting payment from the owner or owner’s lender, an original contractor must provide the owner a disbursement statement (the Contractor’s Disbursement Disclosure) that at least includes the name and address of each person who subcontracted directly with the original contractor and who the original contractor intends to pay from the requested funds. The disclosure must be sent using any of the following methods:
- U.S. mail, first class postage paid and properly addressed to the owner, or
- hand delivery to the owner before the contractor receives the funds, or
- as otherwise agreed to by the parties in writing. See Tex. Prop. Code § 53.258
As a party making disbursements (lender or lender’s agent) you should review the contractor’s disclosure statement to previous statements to monitor suspicious activity. Use the disclosure statements as a tool to ensure that parties are being paid as stated by the contractor.
Lender’s Statement of Funds Disbursed. See Tex. Prop. Code § 53.258. If the lender facilitates disbursements to the contractor for the owner, then the lender must:
- obtain the signed Contractor’s Disbursement Disclosure from the original contractor that covers the amount of funds being requested, and
- give the owner a statement of funds disbursed (detailed draw request that includes a line item account of the funds being disbursed) by the lender starting from when any previous statement was provided, and
- give the owner the Lender’s Statement of Funds Disbursed, the Contractor’s Disbursement Disclosure the lender obtained from the contractor before the lender disburses the funds to the original contractor, and a copy of the statement of funds disbursed (aka detailed draw request that details by line item the amounts being disbursed).
The lender is not responsible for the accuracy of the information contained in the Contractor’s Disbursement Disclosure obtained from the original contractor, and the lender’s failure to provide these statements does not invalidate a lien, a contract lien, or a deed of trust. A person found guilty of intentionally, knowingly, or recklessly providing false or misleading information in a disbursement statement will be punished by a fine of up to $4,000, up to one year in jail, or both (See Tex. Prop. Code § 53.258(f)).
Change Orders. Although not specifically required by statute, amendments to the construction plans and specifications that adjust the contract scope, amount, or completion date should be documented by a change order. Many documents, statements, and affidavits will be relied on and documentation of the changes is necessary to avoid conflict between these other related documents. Additionally, other statutory practices, such as the Affidavit of Completion will reference changes within the affidavit.
Are Title companies required by law to manage construction loan disbursements?
No
Can a mechanics lien have priority over a pre-existing mortgage in Texas?
Texas is a first-in-time jurisdiction. Mechanics liens will take priority over liens that attach after the inception of the mechanics lien.
The “inception” of a mechanics lien is when construction begins or materials to be used in the project are delivered to the construction site. See Tex. Prop. Code §53.124(a) (“inception” is different for some design professional mechanics’ liens as described below). “commencement of construction of improvements or delivery of materials to the land on which the improvements are to be located and on which the materials are to be used” time.
A mechanics lien attaches to the house, building, improvements, or railroad property in preference to any prior lien, encumbrance, or mortgage on the land on which it is located, and the person enforcing the lien may have the house, building, improvement, or any piece of the railroad property sold separately. See Tex. Prop. Code §53.123(a)
All subcontractors, laborers, and materialmen who have a mechanics lien have preference over other creditors of the original contractor. Tex. Prop. Code §53.121. [Some courts have construed this provision to only apply to contests between mechanics lien claimants only (i.e., not mechanics lien claimants vs. secured creditors)].
Perfected mechanics liens are on equal footing without reference to the date of filing the affidavit claiming the lien. Tex. Prop. Code §53.122(a). As between equal competing mechanics liens, all lien claimants will share proceeds pro-rata if the sale of the property is insufficient to satisfy all claims. Tex. Prop. Code §53.122(b).
A mechanics lien does not have priority over any lien, encumbrance, or mortgage already on the land or improvement at the time of the inception of the mechanics lien. See Tex. Prop. Code §53.122(b).
Design professionals (architects, engineers, surveyors, landscapers, etc.):
For original contracts entered into on or after January 1, 2022, Design professionals with mechanics’ liens share the same preferences and priority as all other laborers and materialmen. See Tex. Prop. Code §§53.001(3) and 53.021 (revised definition of “labor” to include certain design services; and revised to equally include design professionals and to remove direct contract with owner requirements for design professionals). For original contracts entered into before January 1, 2022, mechanics’ liens perfected by Design professionals are prioritized by the date of filing of the affidavit of lien required by section 53.052. See Tex. Prop. Code §§ 53.123 and 53.124(e).
Obtaining First Lien Priority on a Homestead
Failure to close a construction or renovation that is in compliance with the Texas Constitution and Statutory Requirements of the State Property Code will result in the lender not having a valid lien on a Texas Homestead.
Texas is a very unique and complicated state as it addresses lien rights on residential construction projects (construction and renovation). The loan closing is an instrumental part of making a construction loan and should not be done without trained professionals that adhere to the Texas State Constitution Article XVI, Section 50(a)(5) and Texas Property Code 53.254
A homestead is defined in Texas as the place of residence for a family or individual and is secure from forced sale by general creditors. The Texas Constitution guarantees the only way a person can lose his or her homestead rights is by death abandonment sale of property or foreclosure of a lien against the homestead. Texas’s State Constitution Article 16 Section 50(a)(5).
Texas residential construction projects require the party contracting with the owner to have a residential construction contract to secure mechanics lien rights on a homestead property.
- The contract must be in writing and signed before any work begins on the project
- If the owner is married; the contract must be signed by both spouses
- Once the contract is signed it must be filed with the county clerk of the county where the property is located
- Failure to follow these steps is fatal to a contractor’s lien rights!
The original contractor must deliver the Residential Construction Contract disclosure statement to the owner before the owner executes the residential construction contract. See Tex. Prop. Code § 53.255. Failure to provide the statement does not invalidate the lien.
The original contractor is required to provide the owner, before construction begins, a written list with the name, address, and telephone number of each subcontractor and supplier the contractor intends to use in the work to be performed. During the course of construction, the contractor must provide an updated list of suppliers and subcontractors no later than the 15th day after one is added or deleted. An owner may waive this requirement in writing, either within the residential construction contract itself or by a separate waiver that is set forth by statute. See Tex.Prop. Code § 53.256. Although this practice is required by statute, violation by the contractor does not invalidate their lien rights and we are unable to identify any implications to the parties if the contractor does not comply. This can be used as a tool to compel to the contractor to provide the list before or during construction.
The Texas State Constitution Article 16 Section 5(a)(5) provides the legal power for lenders to make construction and renovation loans on a homestead in Texas. The loan closing documents on these loans must meet critical constitutional and statutory legal requirements for the lender to have a lien.
- The Residential Construction Contract creates a mechanics lien in favor of the Contractor
- The customized loan closing package adds specific construction documents to the standard package
- The lender will have a document that transfers the residential construction contract mechanics lien rights to the lender
- With a valid lien and priority, the lender is able to make disbursements from the construction/renovation loan
Failure to close a construction or renovation that is in compliance with the Texas Constitution and Statutory Requirements of the State Property Code will result in the lender not having a valid lien on a Texas Homestead.
Notices
Affidavit of Commencement
The owner and original contractor may, but are not required to, file an affidavit of commencement with the county clerk where the land is located. See Tex. Prop. Code § 53.124(c). Filing the affidavit serves as prima facie evidence of the date of commencement and thus the date of the inception of the involuntary mechanics liens that will be filed in relation to the construction. See Tex. Prop. Code § 53.124(d). The affidavit must be signed and recorded within 30 days after the work begins or the materials are delivered. See Tex. Prop. Code § 53.124(c).
This document should be executed after the loan closes and should NOT be executed at the loan closing because the risk of it being recorded prior to the lender’s lien is too great. First in time gets priority and all material and mechanics liens for the project relate back to the date of filing of the affidavit. The owner and the contractor should execute and record the affidavit promptly after the construction loan documents have been filed and construction has actually commenced.
If there is no affidavit of commencement timely filed, the date of inception of the mechanics lien is not fixed, so there is no priority for that lien. Therefore, it opens the owner, contractor, and lender to arguments about when work actually began, which is often the subject of litigation when a contractor is not paid.
The property Owner and General Contractor Jointly Notarize the Affidavit, whereas one party may file the recorded document in the jurisdiction where the property is located. It must be filed within 30 days of starting the work and posted on the job site.
Special Note: This Affidavit of Commencement is different from other states that use the traditional ‘Notice of Commencement’ recorded document to provide information on the parties related to the project that should be notified. Therefore appointing an additional designee does not serve the same purpose.
Who files the Notice of Commencement?
Property Owner
General Contractor
When must it be filed?
Within 30 days of starting work
Is it required to be posted on the job site?
Yes
Is a Designee required?
No*
*Additionally, preliminary lien notices are not required to be sent to agents found on the Affidavit of Commencement and, in fact, has no impact on the actions or deadlines of any party.
Preliminary Lien Notifications
Mechanics Lien Creation.
A valid mechanics lien can attach to Texas homestead property for work and material used in constructing improvements, or used in repairing or renovating existing improvements, if:
- the work and material are contracted for in writing before any materials are delivered or any labor is performed. See Tex. Const. Article XVI, Section 50(a)(5)(A); See also Tex. Prop. Code § 53.254(b),
- the contract for work and material (“Contract”) is executed by both spouses in the case of a family homestead (in the same way as required in sales and conveyances of homesteads). Tex. Const. Article XVI, Section 50(a)(5)(A); See Tex. Const. Article XVI, Section 50(b); See also Tex. Fam. Code § 5.001.,
- the Contract is not executed until at least five days after the owner makes a loan application for the work and material (unless the owner acknowledges in writing that the work and material are necessary to complete immediate repairs that materially affect the health or safety of the owner or other homestead residents). See Tex. Const. Article XVI, Section 50(a)(5)(B).,
- the Contract expressly provides the owner may rescind it without penalty or charge within three days after it is signed by all parties (unless the owner acknowledges in writing that the work and material are necessary to complete immediate repairs that materially affect the health or safety of the owner or other homestead residents). See Tex. Const. Article XVI, Section 50(a)(5)(C)., and v) the Contract is executed by the owner and owner’s spouse at the office of the lender originating the loan, a title company, or an attorney’s office. See Tex. Const. Article XVI, Section 50(a)(5)(D). Commencement of construction before the contract is executed invalidates a mechanics lien on a homestead. Tex. Prop. Code § 53.254(b).
Notice of Completion
Owners Affidavit of Completion.
Tex. Prop Code § 53.001(15) provides that “Completion” of an original contract means the actual completion of the work, including any extras or change orders reasonably required or contemplated under the original contract, other than warranty work or replacement or repair of the work performed under the contract. An owner may file an affidavit of completion with the county clerk of the county in which the property is located. A properly filed affidavit of completion is prima facie evidence of the completion of the construction project. Some of the timing and delivery requirements of this affidavit change depending on when the original contract is executed. See Tex. Prop. Code §53.106. Lenders should be cautioned to verify which requirements of the law apply to a particular transaction.
This Affidavit is recorded by the Owner and can be used as evidence to begin the 30-day period at the end of construction for complying with the statutory holdback of funds requirement.
Contractor Licensing
There is no statewide requirement to get licensed as a general contractor in the state of Texas, however, a license may be issued on a local level. To find out whether a contractor needs to be licensed to perform general, specialty, or home improvement contractor work, contact the local licensing authority.
NOTE: Although contractor licensing is not regulated at a state level, Texas does require a business to be registered.
Contractor Requirement: License not required.
Subcontractor Requirement: Only specialty contractors need to be licensed.
Contractor Warranties: Implied warranties of workmanlike service and habitability. Habitability cannot be waived.
Contractor License Search (statewide for electrical, HVAC only): https://www.tdlr.texas.gov/licensesearch
Contractor Requirements: https://gov.texas.gov/business/page/business-permits-office
Texas Construction Lending Documents Kit
Download the Texas documents kit by filling out the form. The documents included are listed below.
Disclaimer: These forms are provided for informational purposes only and are not intended to be legal advice or establish an attorney-client relationship. They are posted ‘as is’ and we do not warrant that they are the most current version. Users of these forms should consult their legal counsel before using for their particular transaction.
- Contractor’s Disbursement Disclosure Statement
- Lender’s Statement of Funds Disbursed
- Final Bills Paid Affidavit
- Affidavit of Commencement
- Affidavit of Completion (if Contract Entered into BEFORE January 1st 2022)
- Affidavit of Completion (if Contract Entered into AFTER January 1st 2022)
- Conditional Waiver and Release on Progress Payment
- Unconditional Waiver and Release on Progress Payment
- Conditional Waiver and Release on Final Payment
- Unconditional Waiver and Release on Final Payment
Have Questions?
Reach out if you have any comments or questions about our state resources.
Additional Construction Lending Resources
The Construction Lending Podcast
We examine the challenging and complex topics lenders face with construction and renovation loan products
Webinar, eBooks and More
Find the resources you need to enhance your construction loan program
Ready for a better construction lending experience?
Request your demo today.
