Lovein Ribman is a Texas based construction law firm who represents the construction industry in every county throughout the entire state of Texas. Our firm is led by Board-Certified Construction Attorneys (an honor held by only 135 attorneys in the state) who represent selected Homebuilders and Residential Remodel Contractors with defending and prosecuting claims by and against residential Homeowners that arise during or after the construction, purchase, or remodel of a home, to include claims for defective workmanship; failure to construct the house in accordance with the plans, specifications, or applicable codes; failure to obtain permits; delayed Project completion; Project abandonment; payment and accounting disputes; mismanagement of Project funds; unauthorized change orders or disputed change orders; a Contractor’s failure to pay Subcontractors/Suppliers; filing and foreclosing mechanic’s Liens; disputes over increased Project costs and escalation provisions; and Contract termination. If your company is in a dispute with a Homeowner or anticipates one, please contact us for a no obligation consultation by calling (888) 368-2483 or by submitting the Contact Form. Read on to learn more about the statutes typically involved with most residential construction disputes.

COMMON STATUTES INVOLVED WITH RESIDENTIAL CONSTRUCTION DISPUTES

Statutory and Constitutional Mechanic’s Lien

If a Builder/Contractor has not been paid for its labor/material, then filing a mechanic’s Lien against the Property is typically the most economic method for securing the debt and gaining leverage to resolve the dispute.For residential Properties, a statutory Lien under Texas Property Code 53, must be filed no later than the 15^th day of the third month from when the Contract is completed, terminated or abandoned.For a Texas Constitutional Lien (only available to Direct Contractors who improve the structure) must be filed no later than four years from when the Contract is completed, terminated or abandoned.If the rules are followed, then a Lien Claimant can actually foreclose (sell) a residential homestead Property to pay the amount of the Lien claim.However, if the Property is a homestead, the Builder/Contractor may not necessarily have the right to record a Lien.In that regard, it is not easy to perfect a Lien on a homestead Property and most Liens filed against a homestead Property are in fact invalid.With that said, the two most important requirements for perfecting a statutory Lien against a homestead Property are: (1) the Direct Contractor must have a written contract signed by both spouses (if a married couple) before any work has been performed at the Property; and (2) the contract must be recorded with the County Clerk’s Office (this can be done concurrently with recording the Lien Affidavit or thereafter).If these two requirements have not been satisfied, then the Direct Contractor and anyone working under the Direct Contractor, are not entitled to record a valid Lien against the Property.If the Lien being filed is a Constitutional Lien, then in order for the Lien to be valid the Contract must have been signed at a title company, lender’s office or before an attorney; and the Contract must contain a provision which allows the Homeowners to rescind the Contract within three days of signing the Contract.Additionally, the Lien Affidavit must contain the following notice at the top of the document in at least 10 font boldface: “NOTICE: THIS IS NOT A LIEN.THIS IS ONLY AN AFFIDAVIT CLAIMING A LIEN.”If the Lien Claimant was not hired directly by the Property Owner, then the Notice of Claim (the Notice required to be served prior to filing the Lien) must contain the following language for the Lien to be valid:

A Lien Claimant who knowingly records an invalid Lien against a Property with the intent to harm can be sanctioned $10,000.00, plus be required to pay punitive damages, and reimburse the Homeowners’ attorneys’ fees and Court costs.

Texas Property Code Chapter 27—(the “RCLA”)

Within no less than 60 days prior to filing a lawsuit or initiating binding arbitration against a Builder or Contractor to recover damages arising out of defective workmanship, Homeowners must first satisfy the mandatory requirements set forth in Chapter 27 of the Texas Property Code. Chapter 27, also referred to as the Residential Construction Liability Act (“RCLA”) was enacted in 1987, and has been amended five times since, to include the most recent amendments which came into effect on September 1, 2023.Chapter 27 was enacted to promote settlement discussions between Homeowners and Builders/Contractors, and to provide the parties with one last opportunity to resolve their dispute before initiating formal litigation. This is an important step in the claim process and as such, either consulting with or engaging a qualified construction attorney to assist is advisable if the size of the claim warrants. Chapter 27 applies to both new home construction and residential remodel Projects, and defects relating to every component of the main structure, and detached structures, driveways, sidewalks, pools, landscaping, outdoor living features, and fences. A new home Contract or remodel Contract is required to contain the following Notice (see below) in at least 10 bold font print generally outlining the steps for asserting a claim against a Builder/Contractor under Chapter 27. Failure to include this notice in the Contract subjects the Builder/Contractor to a civil penalty of $500.00.

A Builder/Contractor is only liable to a Homeowner for any damages proximately caused by a construction defect that result in: (1) actual physical damage to the residence; (2) an actual failure or lack of capability of a building component to perform its intended function or purpose; or (3) a verifiable danger to the safety of the occupants of the residence. Chapter 27 expressly defines “construction defect” as “a deficiency in the design, construction, or repair of a new residence, of an alteration of or repair or addition to an existing residence, or appurtenance (e.g., detached structure, retaining wall, pool, outdoor living area, fence or recreational area) to a residence.”

In addition to being a mandatory process for asserting a claim for defective workmanship against a Builder/Contractor, Chapter 27 also limits the nature and type of damages Homeowners can recover from a Builder/Contractor for damages arising from a construction defect to: (1) the reasonable cost to repair the construction defect; (2) the reasonable cost to repair or replace any damaged personal property caused by the construction defect; (3) reasonable and necessary engineering and consulting fees if and only if the Contract allows reimbursement for these costs; (4) reasonable expense for temporary housing during the repairs if the house cannot reasonably be occupied during the repairs; (5) the reduction in current market value, if any, valued after the construction defects have been repaired if the defects are structural in nature; (6) reimbursement of reasonable attorneys’ fees and litigation costs if supported by the contract or a statute; and (7) reimbursement of reasonable and necessary arbitration filing fees and arbitrator fees. Consequently, if another statute or cause of action allows for the potential recovery of additional damages not listed above, e.g., mental anguish, delay damages, or treble damages, then Chapter 27 bars the recovery of those damages if they arise out of or are in any way related to the construction defects.

If the cost to correct the construction defects is greater than $7,500.00, the Court may, upon the filing of a motion, compel the parties to mediate the dispute at the outset of litigation.

Below is a brief outline of the steps involved for responding to a Homeowners’ Chapter 27 claim.

Step One—Initiation of the Claim: A Chapter 27 claim is initiated by the Homeowners, by preparing and sending a formal Notice to the Builder/Contractor by certified mail, referencing Chapter 27 of the Texas Property Code and identifying in reasonable detail the known construction defects. A warranty claim or informal notice of a claim, typically will not satisfy the Chapter 27 notice requirement. The Notice must include any supporting evidence which depicts the “nature and cause of the defects” and the “nature and extent of repairs necessary to remedy the defects”, to include any expert inspection reports, repair estimates, photographs, and video or audio recordings. If a Builder/Contractor receives a Chapter 27 notice that does not include supporting evidence, the Builder/Contractor should immediately demand the evidence from the Homeowner. Builders/Contractors are not liable for damages caused by a Homeowners’ failure to mitigate damages caused by the defects or by failing to provide timely notice of the defects.

Step Two—Builder/Contractor’s Right to Inspect: Upon receipt of the Notice, the Builder/Contractor has 35 days to coordinate and conduct up to three (3) formal inspections to test and document the alleged defective work. Not all Builders/Contractors perform inspections, especially if they have already done so prior to the Notice being served but have the right to inspect if requested. If the Homeowners refuse to allow the Builder/Contractor an opportunity to inspect the defects, then the Homeowners may potentially waive their right to recover damages against the Builder/Contractor if they pursue formal litigation.

Step Three—Builder/Contractor’s Offer: Within no later than 60 days from when the Builder/Contractor receives the Notice (Step One above), the Builder/Contractor may make a written offer of settlement to the Homeowner. The offer may include an agreement by the Builder/Contractor to: (1) repair the defects; (2) have the defects repaired by an independent contractor at the Builder/Contractor’s expense; or (3) pay a sum of money to resolve the dispute. The Builder/Contractor is not required to make an offer. If an offer is not made within the 60-day deadline and no extension has been granted, then the process ends and the Homeowners can initiate formal litigation. If an offer is made, then the process proceeds to Step four below.

Step Four—Respond to Builder/Contractor’s Offer: If the Builder/Contractor makes a written offer of which the Homeowners deem reasonable, then the offer should be accepted in writing and memorialized through a Settlement Agreement. If the offer involves either the Builder/Contractor or one of its independent contractors making the repairs, then most repairs should be completed within 60 days or less depending upon the nature and extent of the repairs. If the settlement includes a payment of money to the Homeowners, payment is typically made within 15 – 30 days from execution of the Agreement.

If the Homeowners deem the offer to be unreasonable, then the Homeowners have 25 days to reply to the Builder/Contractor’s offer in writing, sent by certified mail, specifically identifying why the offer is unreasonable and reasserting or modifying the original demand. If the Homeowners fail to respond to the offer, then it is automatically deemed rejected. If the Homeowners reject a “reasonable offer” (later to be determined by a judge, jury, or arbitrator if the Homeowners pursue a formal claim), then the Homeowners’ potential recovery through a lawsuit and/or arbitration will be limited to the original offer and the Homeowners will not be allowed to recover reimbursement of attorneys’ fees incurred after the offer was rejected. Most Homeowners do not want the Builder/Contractor to repair the defects because of the Builder/Contractor’s prior conduct and by the time the dispute reaches the Chapter 27 process, the relationship has typically deteriorated beyond repair. If the Homeowners can demonstrate that allowing the Builder/Contractor to repair the defects would be unreasonable, then rejecting a Builder/Contractor’s offer to repair might be deemed reasonable by the trier-of-fact.

Step Five—Builder/Contractor’s Counteroffer: Upon receipt of the Homeowners’ response to the Builder/Contractor’s original offer, the Builder/Contractor may respond back within 10 days with a new offer, but is not required to. If a new offer is made and deemed to be reasonable, then the Homeowners can accept the offer and memorialize the terms in a Settlement Agreement as discussed above. If the offer is still unreasonable, then the Homeowners are not required to respond and the RCLA process is deemed concluded. The Homeowners may now proceed with formal litigation—filing a lawsuit or binding arbitration if required under the original Contract.

In summary, Builders/Contractors should fully participate in the RCLA process in an attempt to resolve the dispute. The initial offer should exceed what the Builder/Contractor deems reasonable by 10% – 20% to ensure that the Homeowners will no be able to recover any future attorneys’ fees/costs if the offer is rejected and the Homeowners fail to obtain a more favorable result through a civil lawsuit or arbitration.

The Deceptive Trade Practices Act—(“DTPA”)

The Deceptive Trade Practices–Consumer Protection Act (known as the “DTPA”) is a consumer protection statute which aims to protect consumers against certain “false, misleading, and deceptive business practices”, unconscionable actions, and breach of warranties. A violation of the DTPA is commonly alleged in a construction defect case because the DTPA expressly applies to when a Builder/Contractor breaches its own express warranty and/or the implied warranty of “good workmanlike manner” and/or habitability. A Builder/Contractor also violates the DTPA when it commits an “act or practice which, to a consumer’s detriment, takes advantage of the lack of knowledge, ability, experience, or capacity of the consumer to a grossly unfair degree.” Finally, a Builder/Contractor violates the DTPA when it engages in “false, misleading, or deceptive acts or practices” that fall under one or more of the following categories:

Most all residential construction claims will include an allegation by the Homeowners that the Builder/Contractor somehow violated the DTPA. Obtaining a finding that the Builder/Contractor violated the DTPA can be beneficial for Homeowners in that the court and/or arbitrator must award the Homeowners reimbursement of reasonable and necessary attorneys’ fees and costs. Additionally, if the trier-of-fact finds that the Builder/Contractor’s conduct was committed “knowingly” (actual awareness) then the consumer may also recover damages for mental anguish and up to three times (known as “treble damages”) the amount of the economic damages. If the trier-of-fact finds that the Builder/Contractor’s conduct was committed “intentionally” (actual awareness coupled with the specific intent that the consumer relied on the wrongful act) then the consumer may recover treble damages for both economic and mental anguish damages. However, as discussed under the RCLA section above, the RCLA limits the categories and types of damages a Homeowner can recover from damages arising out of a “construction defect”. Since the RCLA does not expressly allow for treble damages or mental anguish, a Homeowner cannot recover treble damages or mental anguish damages if the wrongful act arises out of or is in any way related to the construction defect. For example, a Builder/Contractor’s failure to honor an express warranty is a violation of the DTPA; however, even if the Builder/Contractor did so either knowingly or intentionally, the Homeowner cannot recover mental anguish or treble damages because failing to honor the warranty is directly related to the construction defects. Therefore, in order to recover mental anguish and/or treble damages in a construction defect case, Texas courts have held that the wrongful conduct must be unrelated to the defect claim. Hypothetically, any conduct that falls under the above list or is unconscionable and does not in any way relate to the defective work, might be a basis for a Homeowner to recover mental anguish and/or treble damages of the damages caused by the wrongful conduct.

The Prompt Payment Act—Texas Property Code Chapter 28

Texas has mandatory deadlines for paying Contractors, Subcontractors, and Suppliers who provide labor, material and/or equipment to a residential Project. Pursuant to Texas Property Code, Chapter 28, referred to as the “Prompt Payment Act”, a Property Owner must pay its Contractor within no later than 35 days from receipt of a written payment request (this deadline is extended if the Homeowners obtained a loan for the improvements or construction of the residence).In turn, the Contractor is required to pay its Subcontractors and Suppliers that portion of the payment attributable to their labor/material/equipment within no later than 7 days from receipt of the payment. Those Subcontractors and Suppliers are then required to pay their downstream Subcontractor and Suppliers within no later than 7 days as well.

Notwithstanding the above, there is a way in which Homeowners can use the Prompt Payment Act as a shield. Specifically, if the Homeowners can identify a legitimate reason, referred to as a “Good Faith Dispute”, as to why some or all the amount claimed owed should not be paid, then the they may withhold 110% of that amount from the overall payment until the dispute is resolved, but no more. For example, if a Builder/Contractor submits a payment request in the amount of $75,000.00, but the Homeowners have a good faith reason for withholding $15,000.00 of that amount as a result of a dispute, then the Homeowner may legally withhold $15,000.00 and release the remaining undisputed $60,000.00.A good faith dispute can be for any legitimate reason, including accounting errors, disputed charges, defective work, incomplete work, or a right provided for by Contract, e.g., statutory or contractual retainage, or an administrative condition precedent to payment like the execution/exchange of a Conditional Lien Waiver & Release. Homeowners can use the Prompt Payment Act to withhold funds from a progress or final payment until the dispute is resolved.

To invoke the Good Faith Exception, the Homeowners must serve the Builder/Contractor with written notice expressly identifying the specific reasons for withholding payment. If a reason specified includes nonconforming or defective work, then the Contractor is entitled to a reasonable opportunity to cure the defects or to offer a sum of money in which to compensate the Homeowners for the items that cannot be promptly cured. Presumably, failure to satisfy this notice requirement and/or to allow the Contractor an opportunity to cure, would defeat a Homeowner’s assertion of the Good Faith Dispute exception as a defense to nonpayment. Further, if a trier-of-fact (through an arbitration or civil lawsuit) later finds that the Homeowners did not have a “good faith” right to withhold payment, then the Homeowners may be required to pay accrued interest on the unpaid amount at 1.5% a month and reimburse the Builder/Contractor’s attorneys’ fees.

The Trust Fund Statute (Personal Liability and Civil/Criminal Penalties): A Builder/Contractor who diverts construction funds from the Project can be both civilly and criminally liable. Pursuant to Texas Property Code, Chapter 162, referred to as the “Trust Fund Statute” Contractors, Subcontractors, Suppliers and their respective officers, employees and agents who receive Project funds become a “trustee” of those funds for the Homeowners’ benefit and for those of whom are owed money for their labor or material provided to the Project. A trustee who intentionally, knowingly or with the “intent to defraud” directly or indirectly retains, uses, disburses, or otherwise diverts trust funds from the Project without first fully paying all current or past due obligations, is considered to have misapplied trust funds. A trustee acts with an “intent to defraud” when the trustee: (1) retains, uses, disburses, or diverts trust funds with the “intent to deprive the beneficiaries of the trust funds”; or (2) uses, disburses, or diverts trust funds that were paid to the trustee in exchange for a Lien Waiver and Release wherein the express representation was made that the funds would be used to pay current or past due obligations. A trustee who misapplies trust funds amounting to $500 or more commits a Class A misdemeanor. A trustee who misapplies trust funds amounting to $500 or more with the “intent to defraud”, commits a third-degree felony. The individual trustee who had control over the misapplied funds is personally liable, both civilly and criminally.

A trustee can potentially defeat an alleged Trust Fund violation if the trustee can prove that: (1) the funds were used to pay other Project related expenses; (2) the funds were retained in accordance with the Prompt Payment Act “Good Faith Dispute” exception (explained above); or (3) if the trustee pays the beneficiaries the funds owed within no later than 30 days following the filing of a criminal complaint or notice of a pending criminal investigation.

Additionally, on residential Projects wherein the work is performed under a written Contract in an amount over $5,000.00, the Builder/Contractor is required to maintain a construction account and deposit the Project funds into that account. The periodic statements from the bank must specifically identify the account as a “construction account”. A Builder/Contractor who is required to maintain a construction account shall maintain records for the account that provides information relating to: (1) the source and amount of the funds in the account and the date the funds were deposited; (2) the date and amount of each disbursement from the account and the person to whom the funds were disbursed; and (3) the current balance of the account. The Builder/Contractor shall maintain an account record for each Project that specifies the direct and indirect costs charged to the Homeowners. The Builder/Contractor is required to retain all invoices and other supporting documentation received relating to the funds disbursed from the construction account. The Contractor shall ensure that all deposit and disbursement documentation includes the construction account number or information that provides a direct connection between the documentation and the account. The Contractor must maintain and not destroy the above information for one year from completion of the Project. Failure to maintain a construction account is a misdemeanor.

If your company is in a dispute with a Homeowner or is anticipating one, please contact us by calling our toll free number at (888) 368-2483 or by submitting the Contact Form.