Construction Project Mangement: When Being Last Can Be Least

A new construction, large or small, is a very exciting process to be a part of, but it comes with it’s share of hassles. Managing contractors, subcontractors and suppliers and all of the laws associated with it can be a headache. Are you educated before embarking on your project?

In Texas, liens for labor and materials incorporated into a construction project must strictly comply with the statutory notices and time frames to be enforceable. On the other hand, if the contractor has a direct contract with the owner, the contractor can rely on the self-enacting constitutional lien. However, the contractor should still file a notice of its constitutional lien so that third parties will have constructive notice of it. Of course, in addition to creating a lien, the contractor’s main goal is to get paid.

Subcontractors or suppliers who provide labor and/or services toward the end of a construction project face two additional challenges. First, the 10% statutory retainage may have been released to a large extent pursuant to the owner’s contract with the general contractor or because early finishing subcontractors have already received 100% of their funds. Even if the retainage funds are still available, the owner is entitled to release them 30 days after final completion of the construction project. Unless a subcontractor or supplier checks the real estate records frequently, such person may not even be aware that the retainage holding period has expired, often before such person’s statutory lien notice and filing dates have occurred.

To protect their lien rights, subcontractors and suppliers should proactively file their liens and notices promptly and not wait for the statutory deadlines, which are outside limits similar to a statute of limitations. Sending a retainage notice to both the owner and the general contractor as soon as such subcontractor or supplier starts work on the construction project provides further evidence of its rights.

Despite taking all these steps, if a contractor is not paid in full, such contractor should consider either pursuing a judicial foreclosure that allows removal of its materials (if possible) or if the contractor is relying on a constitutional lien, filing a lawsuit and a lis pendens notice against the property.

Limitations on Covenants in General Warranty Deeds

The covenant language in a typical general warranty deed, which reads as follows:

“GRANTOR WARRANTS AND FOREVER DEFENDS, ALL AND SINGULAR THE SAID PREMISES UNTO THE SAID GRANTEE, AGAINST EVERY PERSON WHOSOEVER LAWFULLY CLAIMING, OR TO CLAIM THE SAME, OR ANY PART THEREOF”

seems straightforward and ironclad. However, in a recent Texas Court of Appeals opinion issued on September 25, 2014, in which our own Kyle Dickson successfully represented the appellant (Grantor), the Court placed two significant restrictions on the covenant to warrant and forever defend. Stumhoffer v. Perales, No.01-12-00953-CV, (Tex. App.-Houston [1st Dist.] 2014, rev’d and remanded).

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The trial court initially held that Grantor’s covenant to defend included attorney’s fees and costs and granted summary judgment in favor of Grantee. With $75,000 at stake, Grantor appealed.

WHAT HAPPENS WHEN THE GRANTOR DECLINES TO DEFEND A LAWSUIT OVER THE TITLE TO THE PREMISES?

The trial court held that, in that situation, the Grantor waived any right to object to the manner in which the Grantee handled the defense of the action. Moreover, if Grantee lost title to any part of the Premises, then Grantor would be liable to Grantee for the fair market value of the portion of the Premises so lost. Ironically, Grantee prevailed in the lawsuit and, thus, Grantor incurred no liability under the general warranty deed.

The lesson is that grantors decline to defend title claims at their own peril.

DOES GRANTOR HAVE AN OBLIGATION TO INDEMNIFY GRANTEE FOR GRANTEE’S ATTORNEY’S FEES ASSOCIATED WITH DEFENDING TITLE TO THE PREMISES?

The Court of Appeals reasoned that, if there had been a failure of title to the Premises, Grantee’s damages would not have included attorney’s fees absent a question of fraud, imposition, or malicious conduct involved. The Court also distinguished several cases in which grantors made additional promises specifically relating to the payment of a grantee’s attorney’s fees, stating no such promise was made in this case. The Court concludes that attorney’s fees are recoverable in Texas only when an agreement between the parties so provides.

The Grantee was also unable to recover attorney’s fees based on a breach of contract because Grantee’s defense of title to the Premises was successful and, therefore, no breach occurred.

As a result of this ruling, a grantee has two options. First, the grantee should get a specific written agreement with the grantor concerning attorney’s fee reimbursement before defending title. If the grantor refuses, the grantee has to weigh the cost of defense against the fair market value of the premises in dispute.

In the case before the Court, one hopes that the Grantee is satisfied that retaining the additional seven feet width of Grantee’s Premises was worth the $75,000 expended in attorney’s fees.