Texas law requires construction owners to withhold 10% of the value of the work during a project and for 30 days after final completion. This is generally referred to as statutory withholding. Homeowners should memorize their legal obligation to withhold in their construction contracts, but nonetheless, the owner’s obligation to withhold arises from Texas law whether or not a contractual provision addresses it.
Often, general contractors shift the burden of statutory holdback downstream under a contractual holdback provision in their subcontracting agreements. Contractual holdback provisions allow the general contractor to withhold a percentage of the value of the subcontractor’s work throughout a project. Contractual withholding provisions provide similar advantages to the general contractor that legal withholding provisions offer owners, such as:
- Ensures that subcontractors perform the work in accordance with the contract and the owner’s standards;
- Ensures the completion of the work, including the checklist; and
- Ensures the payment of downstream obligations.
Contractual retention – A hypothesis
The withholding of contractual holdback creates additional notice obligations that subcontractors should be aware of in order to perfect a mechanic’s privilege for contractual holdback.
In Texas, subcontractors have mandatory deadlines for sending notice of unpaid amounts to the owner and the general contractor. In most scenarios giving rise to a claim of lien, overdue invoices set off a red flag and identify the need to send a pre-link notice to notify upstream parties of the non-payment.
However, when the contractual holdback is withheld from monthly invoices throughout the project, there is no warning as the subcontractor knows that the withheld funds are withheld in accordance with the subcontracting agreement. Despite the absence of a red flag, the subcontractor nevertheless performs work for which he has not been paid in full, which gives rise to a notice obligation under Texas law to perfect a lien.
Consider this assumption. The subcontractor performs 12 months of work on a project. The general contractor withholds a holdback from the subcontractor’s monthly invoices in accordance with a contractual holdback provision. The subcontractor completes his work and invoices the holdback retained for work carried out during the last 12 months. The general contractor tells the subcontractor that they cannot pay the subcontractor’s contractual holdback until the owner releases the general contractor’s holdback, which will not be for at least 60 days. The subcontractor wants his money now, but also wants to maintain a good business relationship with the general contractor and the owner, so the subcontractor decides that he will patiently wait for the holdback payment. In 30 days, the general contractor abandons the project and files for bankruptcy. Now what?
In this case, the subcontractor has carried out the work for which he has not been paid during the last year and has largely exceeded his deadlines to send pre-link notices to put in perfect condition a mechanic’s privilege. for unpaid work done 12 months ago. A contractual hold notice is imperative in this situation.
Notice of contractual deduction from the subcontractor
The best practice is for subcontractors to send a notice upon conclusion of the contract providing for contractual withholding. The notice must be given to the owner and the general contractor to inform them that the subcontractor has been hired to perform work on the owner’s project under a subcontracting agreement which provides for the withholding of contractual deduction. If the notice is not sent at the start of the subcontractor’s work, the deadline for sending a notice of contractual holdback is the earlier of the following dates: (1) the 30the day after the date on which the subcontractor’s agreement providing for the withholding is completed, terminated or abandoned, or (2) the 30the day after the date on which the original contract between the owner and the general contractor is terminated or abandoned. To apply these rules to our hypothetical, the subcontractor’s deadline to send a contractual holdback notice to the owner was 30 days after completing their work.
In accordance with Texas law, the following must be included in the subcontractor’s contractual withholding notice:
- Name and address of the requesting subcontractor;
- Indicate the existence of a contractual withholding obligation; and
- If the applicant is a second level subcontractor, provide the name and address of the first level subcontractor.
This notice perfects the ability to register a mechanic’s lien for unpaid contractual holdbacks and places the onus on the owner to notify the notifying subcontractor of events such as termination of the general contractor, abandonment or the filing of an affidavit of project completion. Subcontractors should ensure that their lien is registered in a timely manner. The time frames for perfecting a mechanic’s privilege may vary and are shortened upon termination, abandonment or filing of an affidavit of project completion. As always, see a lawyer as soon as possible to ensure you meet all legal lien deadlines.