GEC C.S.H.B. 740 75(R) BILL ANALYSIS BUSINESS & INDUSTRY C.S.H.B. 740 By: Solomons 4-10-97 Committee Report (Substituted) BACKGROUND Credit is the life-blood of the construction industry. Owners must have a ready source of credit in order to fund construction projects and to purchase improved property. Equally important is the credit that must be extended by contractors, subcontractors, and suppliers during the course of construction. Very few contractors and subcontractors have the working capital to finance ongoing construction projects. Currently, when a supplier furnishes materials on a construction project, the supplier extends credit -- often on a 30 day account. The supplier is paid for the materials furnished on the project when the contractor is paid by the owner or the owner's lender. When purchases from a supplier are made by a subcontractor, the money has to filter down two or more levels before the supplier is paid. The same is true for the payment of subcontractors for the labor they furnish to a project. Accordingly, a subcontractor or supplier may not get paid for 45 to 60 days after the labor or materials have been furnished to the project. Since the days of the Republic of Texas, those who furnish labor and materials have been given lien rights on the property being improved to secure the credit they extend on the project. To protect owners and others in the construction chain, the Legislature has imposed significant notice and filing requirements as a prerequisite for these liens. Claimants often complain that these laws are too complicated and that the steps for perfecting a lien claim are too difficult. On the other hand, property owners often complain that their property can be subject to the lien claim of a subcontractor or supplier with which the owner never directly contracted. While there are steps a property owner can take to avoid or significantly minimize the risk of having a mechanic's lien claim perfected against the property, many property owners, particularly homeowners who are having homes built on their own lots, are not aware of their legal rights and are not familiar with construction customs and practices. In such a case, when the contractor defaults, the consequences can be disastrous for the homeowner. Not only is the homeowner faced with having to hire a contractor to finish and, in some cases, to redo the work, but the homeowner may also have to deal with the mechanic's lien claims of the subcontractors and suppliers the contractor failed to pay. In the last several years, a number of homeowners have brought these problems to the Legislature's attention. In 1994, following the 74th Regular Session, the Committee on Business and Industry was charged with studying lien laws and construction contracts. During its Interim Study, the Committee took extensive testimony from consumers as well as all segments of the construction industry. While the issues are complex and not all problems can be fixed, the Committee concluded that there were some changes that could be made in current law which would give owners, particularly individual homeowners, added protection without unduly prejudicing the other segments of the construction industry. C.S.H.B. 740 reflects the work of the Committee and interested construction industry representatives to address those problems. PURPOSE The intent of this bill is to provide the appropriate protections for homeowners and other owners of real property while protecting the rights of contractors, subcontractors, and suppliers and maintaining a viable construction industry in Texas. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS SECTION (1) Amends Section 41.001(b), Property Code. The Section number relating to the special procedures for perfecting a lien on homestead is changed because Sec. 53.059 has been moved to Sec. 53.254. SECTION (2) Amends Section 53.001, Property Code. Three definitions are added to Sec. 53.001. These definitions are necessary in order to determine which types of projects will be subject to the amended lien perfection procedures, consumer disclosures, and other statutory changes in the new Subchapter K of Chapter 53. Essentially, with these definitions, it is the intent of this legislation to give individual homeowners added protection when they contract to construct or repair their homes or dwellings. New subsection (8) defines "residence" to mean a one to four unit house or residential structure which is used for residential purposes and is owned by one or more adult persons and is actually used or intended to be used as a dwelling by one or more of those owners. With regard to multi-unit structures, this definition is intended to cover the situation where an individual uses or intends to use one of the units as that individual's dwelling and intends to lease or rent the remaining units. This definition is intended to encompass a family homestead as well as second homes or vacation homes which the individual uses or intends to use as that individual's dwelling. Accordingly, the definition would include the situation where an adult person or a husband and wife are residing in a homestead but are building another home with the intent that they will move into the second home when it is completed. Lenders, title companies, contractors, and other interested parties often have difficulty determining which property is homestead in such situations. This definition removes that uncertainty for purposes of this Chapter. On the other hand, the definition does not include a situation where an individual is building a residential structure for investment purposes such as resale or as a rent house for a third party. For multi-unit structures, if all of the units are intended for lease or resale, the structure is not a residence for the purposes of this Chapter. New subsection (9) defines "residential construction contract" to mean a contract between an owner and a contractor to construct or repair a residence. New subsection (10) defines "residential construction project" as a project for the construction or repair of a new or existing residence, pursuant to a residential construction contract. The remaining subsections are renumbered accordingly. SECTION (3) Amends Section 53.003(a), Property Code. The general provisions and requirements set forth in Sec. 53.003 relating to notices under this Chapter are made applicable to new Subchapter K and the notices set forth therein. SECTION (4)Amends Section 53.026(a), Property Code, by adding a new subsection (a)(2) and renumbering 53.026 (a) accordingly. Sec. 53.026 was known before the codification of the mechanic's lien statutes into the Property Code as the"Sham Contractor Statute" because it was intended, in part, to allow claimants to treat a property owner and contractor as a single entity for determining how to perfect a lien claim when the owner owned and/or controlled the contractor. This is important because owners and contractors do sometimes set up sham or even legitimate, wholly owned subsidiaries or affiliates to act as either the property owner or contractor. The problem with the current statute is that it only deals with the situation in which the owner actually owns and controls the contractor. In that situation, the owner and contractor are deemed to be the same party for purposes of determining the types of notices a claimant must furnish or steps a claimant must take in order to perfect a valid lien or bond claim. These amendments simply provide that, when the contractor owns and controls the owner (the reverse situation), they will be deemed the same entity for purposes of Chapter 53. In other words a claimant who contracts with the contractor in that situation will be deemed to have contracted with the owner. SECTION (5) Amends Section 53.052, Property Code. The time requirements for filing the mechanic's lien affidavit are changed. For liens arising from a residential construction project, the lien affidavit must be filed no later than the 15th day of the third calendar month after the date the indebtedness accrues. This amendment shortens the time for filing a lien affidavit for a lien arising from a residential construction project by one month. For all other projects, the time for filing the lien affidavit does not change. SECTION (6) Amends Sections 53.054(a) and (b), Property Code. The requirements for the content of the mechanic's lien affidavit are changed. These changes will apply to all lien claims, not just to those arising from a residential construction project. Changed or new requirements are: a.the claimant must disclose the last known addresses of the owner or reputed owner, original contractor, and person with whom the claimant contracted; b. the claimant must state its physical and, if different, mailing address; c.in connection with the general statement of the kind of work or materials furnished to the project by the claimant, any claimant other than an original contractor must state the month or months in which the work was performed or the materials were delivered; d.for a claimant other than an original contractor, the claimant must identify the date on which each notice of claim was sent to the owner and original contractor and must state the method the notice was sent (such as by hand delivery or certified mail). These new requirements are designed to give owners and other interested parties more information from the face of the lien affidavit about the nature and validity of the claimant's lien. For the most part, this information is readily available to claimants and should not be overly burdensome. It should be noted that the addresses of the third parties need only be the "last known addresses." Further, in the event that a claimant may inadvertently omit some information, it may not necessarily invalidate the lien claim because Sec. 53.054 continues to require that the claimant need only substantially comply with requirements for the content of the affidavit. SECTION (7) Amends Sec. 53.055(a), Property Code. Under current law, the claimant must send a copy of the lien affidavit to the owner and original contractor no later than the 10th business day after the date the lien is filed of record or, if earlier, on the date the statute requires the lien affidavit to be filed. Claimants will now be required to send a copy of the lien affidavit to the owner and original contractor no later than one business day after the lien affidavit is filed. This simplifies the procedure and gives owners and contractors information on a more timely basis. SECTION (8) Amends Sec. 53.056(a), Property Code. New notice requirements are imposed on claims arising from residential construction projects by the new Subchapter K. Sec. 53.056 is amended to provide that the notice to owner and original contractor for residential construction projects will be governed by Subchapter K. SECTION (9) Amends Sec. 53.057(a), Property Code. New notice requirements are imposed on claims arising from residential construction projects by the new Subchapter K. Sec. 53.057 is amended to provide that the notices for residential construction projects will be governed by Subchapter K. There will be no notice of contractual retain age agreement for residential construction projects. This notice has been eliminated on these types of projects to simplify the procedures for owners, contractors, and claimants. Because the time periods for typical residential construction do not extend over many months, it is anticipated that most claimants who have contractual retain age agreements can simply comply with the other notice requirements with little difficulty. SECTION (10) Amends Sec. 53.058(a), Property Code. New notice requirements are imposed on claims arising from residential construction projects by the new Subchapter K. Sec. 53.058 is amended to provide that the notice for specially fabricated items for residential construction projects will be governed by Subchapter K. SECTION (11) Amends Sections 53.081 (a), (b), and (c), Property Code. Section 53.081 authorizes the owner to withhold funds upon receipt of special "fund-trapping" notices from claimants. Failing to withhold the amount of the claimant's claim from future payments to the contractor is one of the two ways an owner may become liable for the claim of a derivative claimant (a claimant with whom the owner does not have a direct contract). The new notice provisions in Subchapter K are added to Sec. 53.081 so that an owner will be authorized to withhold funds upon receipt. SECTION (12) Amends Section 53.084(b), Property Code. The provision imposing liability on the owner for failing to withhold the payments to the contractor in the amount stated in a claimant's notice of claim is amended to include the notices required by the new Subchapter K. SECTION (13) Amends Section 53.085, Property Code. Currently, Sec. 53.085 requires persons seeking payment for labor or materials furnished on a construction project to furnish an affidavit as a condition to payment in which the person seeking payment states that all bills have been paid. In the event that there are bills that have not been paid, the affiant is required to disclose the amount of each unpaid bill and the name of the person to whom it is owed. A similar affidavit must be given by a seller of property on which improvements were constructed. Various non-substantive changes were made in the wording of Sec. 53.085. Additionally, Sec. 53.085 (a) will include the requirement that the affiant state the address and telephone number, if known, of each of the persons to whom unpaid bills are owed. When the affidavit includes a waiver or release of the affiant's lien rights and payment is not made in current funds, Sec. 53.085(c)(1) will authorize the affiant to condition its waiver or release on receipt of actual payment. Under Sec. 53.085(c)(3) the affidavit may also include a contractual obligation of the affiant to indemnify the person paying the money for any loss or expense resulting from false or incorrect information in the affidavit. Under Sec. 53.085 (e) the person signing the affidavit will be personally liable for any such false or incorrect information. Because these affidavits are sometimes provided during the course of construction, Sec. 53.085 (c) (2) provides that the affidavit may include a warranty or representation that the affiant will use the funds to pay all current obligations. This recognizes the reality of current construction practices in which contractors use the proceeds of the progress payment to pay those bills which were incurred since the date of the last payment. In those situations, it is fair to require the contractor receiving payment to make an express representation that the money will be used for paying those current obligations. Sec. 53.085(d) provides that a person convicted of violating this Section shall be punished by a fine not to exceed $4,000 or confinement in jail for a term not to exceed one year, or both. A person will not be allowed to receive community supervision for the offense. SECTION (14) Amends Sections 53.106(b), (c), and (d), Property Code. Sec. 53.106, which deals with the Affidavit of Completion, is amended to conform to the amendments to Chapter 53 made in this bill, including the new notice provisions in Subchapter K. SECTION (15) Amends Sec. 53.157, Property Code. Subsection (4) is amended to conform to the new requirements in Subchapter H for releasing a lien by filing and recording a surety bond. Subsection (6) is added which provides for the discharge of a lien when an owner records a certified copy of the order removing a lien and the certificate of the clerk stating that no bond or security has been filed pursuant to the Summary Motion to Remove Invalid or Unenforceable Lien provisions in Sections 53.160 through 53.162. SECTION (16) Amends Sec. 53.158, Property Code. The limitations period for bringing suit to foreclose a lien arising from a residential construction project has been shortened to the first anniversary of the date the lien affidavit is filed. If a lien affidavit is filed on March 15 of a given year, any suit to foreclose the lien must be filed on or before March 15 of the next year. This limitations period does not apply to a suit on the underlying claim. Further, the one year limitations period in Subsection (b) only applies to liens arising from residential construction projects. SECTION (17)Amends Chapter G, Property Code, by adding Sections 53.160, 53.161, and 53.162. One of the problems the Committee found in its hearings was that owners needed a relatively inexpensive and efficient means of clearing title to their property when disputed liens have been filed. Even a lien claim which appears invalid on its face may cause a cloud on an owner's title which could result in the owner being unable to sell the property or to use it as collateral for a loan. This problem can be quite critical when a contractor defaults and multiple claimants file lien claims. Frequently, those claims are not valid or the claimants otherwise fail to properly perfect their liens. While an owner can bond around those liens, there should be an alternative method to clear title without unduly prejudicing the rights of legitimate claimants. C.S.H.B. 740 creates a new procedure to allow owners who are in litigation with lien claimants to file an expedited motion which is very similar to a Motion for Summary Judgment permitted under the Texas Rules of Civil Procedure. However, unlike most pre-trial orders, the court's order can be used to remove the liens and clear title to the owner's property before a full trial on the merits is conducted and before a lengthy appeal is exhausted. Lien claimants whose liens are ordered removed are not denied due process because they are given a full hearing on the issues of the validity of the lien and are provided with a means of staying the order by posting a reasonable bond or similar security. Under Section 53.160, whenever a lien claimant has filed suit to enforce and foreclose a lien or an owner has filed suit to declare a claim or lien invalid or unenforceable, the owner may file a motion with the court to remove the claim or lien. The motion must be verified and must state the legal and factual basis for objecting to the lien or the underlying claim. Sec. 53.160 (b) sets forth the only grounds on which the owner can object and have the lien removed pursuant to this special procedure. The 7 grounds generally relate to defects in the manner in which notice is given or the lien is perfected, whether the claimant previously released or waived the lien or claim, and whether the claimant actually trapped funds or properly perfected a claim against the statutory retain age. For the most part, the grounds for removal relate to issues or facts that should be relatively clear or easily discernable. Consequently, under subsection (c) the motion can be heard on 21 days notice so long as the claimant has appeared in the proceeding for at least 21 days. The claimant does not need to file a formal response to the motion. At the hearing, if one of the grounds stated in the motion was that the claimant failed to furnish the notice of claim or the lien affidavit to the owner or the original contractor as required by Chapter 53, the burden will be on the claimant to prove that the notices and lien affidavit were properly sent or furnished. The owner will have the burden of proof on all other grounds. Sec. 53.160 (d). Any admissible evidence offered at the hearing may be used in the trial of the case; however, the court's order, itself, will not be admissible in the subsequent trial in determining the validity and enforceability of the claim or lien. Sec. 53.160 (f). Given the nature of the issues, it is anticipated that the evidence will consist primarily of affidavits and documents. However, when a factual issue is in dispute, the court presumably would listen to the testimony of witnesses as in any contested hearing or trial. Following the hearing, the court is directed under subsection (e) to promptly determine whether the movant is entitled to have the lien removed. If the court determines that the movant is entitled to have the lien or liens removed, the court shall enter an order removing the lien claimed in the lien affidavit. If the court determines that the movant is not entitled to removal of the lien, the court shall deny the motion. Because the proceeding is only directed to the validity or enforceability of the lien, it will not resolve all of the issues relating to the owner or contractor's underlying liability for the claim. In fact, it will not be a final judgment as to the validity of the lien. Consequently, the order will be interlocutory and there will be no appeal until there has been a trial on the merits and a final judgment is entered resolving of all the outstanding issues in the case. Under Sec. 53.161, if the court enters an order removing the lien, the court is also required to set the amount of the bond or other security which the claimant may provide in order to stay the removal. The amount of the bond or security must be the amount which the court determines to be a reasonable estimate of the costs and attorney's fees which the owner will incur in the ongoing litigation. However, in no event shall the amount of the bond or other security be set at an amount greater than the lien claim itself. If the court should fail to set the amount of the bond in the order of removal, the bond amount shall be the amount of the lien claim. Under subsection (c) the bond must be conditioned upon the claimant's payment of any final judgment rendered against the claimant with regard to attorney's fees and costs to the movant under Sec. 53.156. Therefore, if the movant recovers no damages but is awarded $5,000 in attorney's fees in a final judgment in the case, the claimant's surety will be liable for $5,000 in the event the claimant fails or refuses to pay the attorney's fees. On the other hand, if the movant is not awarded any attorney's fees or costs in the final judgment, the claimant's surety will have no liability under the bond. Under subsection (d) the claimant may provide alternative security in lieu of a bond. The security may include cash, a negotiable obligation of the federal government or a negotiable obligation of a federally insured financial institution. Under subsection (b), if the claimant does timely and properly file the bond or authorized security, the court must stay the removal order. The primary purpose of this proceeding is to allow an owner to clear title to its property when an invalid lien claim has been asserted. Because the order removing the lien is interlocutory and not appealable, such a pretrial order would normally not be effective to remove the cloud on the owner's title. However, under these procedures, the order may be effective to remove the lien with regard to third party creditors and purchasers under certain circumstances. Under subsection (f), if the claimant fails to provide the bond or security with the clerk of the court in which the litigation is pending within 30 days (or as otherwise ordered by the court), the owner can obtain a certified copy of the order and a certificate from the clerk that no bond or security has been filed and record those two instruments in the Real Property Records of the County in which the property is located. When that is done, the lien is removed and extinguished as to any creditor or subsequent purchaser for valuable consideration. This would remove the cloud which the lien imposed on the owner's title -- at least as to subsequent creditors and purchasers who pay valuable consideration for the property. Because the order removing the lien is not a final judgment, the litigation between the parties will likely continue. In the event that the claimant is unable or otherwise fails to furnish the bond or security in a timely fashion but nonetheless obtains a final judgment which establishes the validity of the lien, the claimant may file a certified copy of the judgment with the county clerk in the county in which the real property is located and the lien affidavit was filed. When the judgment is filed, the lien is revived and the claimant is entitled to foreclosure of the lien. However, the lien is not revived as to creditors or purchasers for value who obtained their interest in the property after the lien was removed but before the final judgment reviving the lien was filed with the county clerk. This new summary proceeding is not limited to lien claims arising from residential construction projects. Also, this does not prevent an owner or other interested party in litigation to seek and obtain a summary judgment under appropriate court rules which would, of course, be a final judgment if granted. With a traditional summary judgment, however, the claimant would have the right to appeal and supersede the judgment under applicable rules of procedure. Therefore, an owner may not be able to remove the cloud on its title by filing a traditional motion for summary judgment. SECTION (18) Amends Section 53.171, Property Code by adding a new subsection (c). Sec. 53.171 authorizes an owner or other interested party to file a bond to release a lien claim on the owner's property. This is another mechanism for an owner to clear a cloud on its title created by one or more disputed lien claims. One of the problems the Committee found with this procedure is the difficulty owners or interested parties have in complying with the requirement for service of the bond on the disputed lien claimant. Often the lien claims that are disputed fail to fully identify the lien claimant or claimants dodge service for any number of reasons. C.S.H.B. 740 addresses this problem by changing the requirements concerning the lien release bond. Instead of having to serve the claimant with a copy of the bond, the county clerk will only have to mail a copy by certified mail. (See Sections 19 and 20 below). The new subsection (c) to Sec. 53.171 makes it clear to title companies and third parties relying on the bond to release the lien that the lien is released against the property when the bond is filed with the county clerk, the notice by the clerk is issued, and the bond and notice are filed by the clerk. Therefore, actual service on the claimant is no longer a prerequisite for the lien being released by the bond. SECTION (19) Amends Section 53.172, Property Code. The procedures required in order for the bond under Sec. 53.171 to be effective to release a disputed lien have been changed. A copy of the bond and notice issued by the county clerk no longer have to be served on the lien claimant. Under C.S.H.B. 740, the clerk issues a notice and the clerk serves the notice and a copy of the bond on the claimant by mailing it to the claimant by first class certified mail, return receipt requested, at the address which the claimant discloses in its lien affidavit. That is one of the reasons that Sec. 53.054 has also been amended to require the claimant to disclose its physical and mailing address. If the claimant fails to disclose its address, the clerk does not have to mail the bond to the claimant. Therefore, the failure to disclose the address may not be a fatal defect in the lien affidavit for the claimant, but it may result in the claimant not having notice of the filing of the bond. The bond releases the lien when the clerk files the notice to the claimant and the bond. The clerk should retain any return receipt showing actual receipt by the claimant; however, actual receipt is not necessary. This should not work a hardship on a claimant because the claimant will still have an alternative form of security for its claim, to wit: the bond. However, claimants may be subject to a shorter limitations period and must act diligently in pursuing their claims. It is the Committee's intent that, by making these procedures more workable, owners will have viable, affordable alternatives in removing disputed lien claims on their property without prejudicing legitimate claimants. SECTION (20) Amends Sec. 53.174, Property Code. This amendment requires the clerk to file a certificate of mailing in the real property records, along with the bond and a copy of the notice to the claimant. However, a party acquiring an interest in the property (a purchaser or lender) or a party insuring title to the property (a title company) may rely on the filing of the bond and notice with regard to the release of the lien. In other words, the clerk's failure to file a certificate of mailing will still result in the lien being released. SECTION (21) Amends Sec. 53.175(b), Property Code. Sec. 53.175(b) is amended to make it clear that a suit against the lien release bond must be filed in the same jurisdiction that a suit to enforce the lien claim is filed. In other words, it must be filed in the county in which the property is located. However, it may be filed in any court having the appropriate monetary jurisdictional limits. Accordingly, if the bond is only $1,000, the suit may be filed in a court other than District Court. SECTION (22) Amends Sec. 53.201(a), Property Code. Sec. 53.201 deals with the statutory payment bond that covers claims which might arise on the entire project. It is typically a bond that is provided at the beginning of the project and is typically referred to as the "payment bond." It is different from the lien release bond provided by Sections 53.171 - 53.175 (see above). Under current law, the payment bond is required to be filed; however, there is no requirement as to when the bond must be filed. In fact, Sec. 53.208(d) expressly contemplates the situation in which the bond is actually filed after a lien claim is perfected. The bond is still effective to remove any and all liens on the property. C.S.H.B. 740 amends Sec. 53.201(a) to make it more clear that the owner may furnish the bond at any time for the benefit of claimants. In other words, the bond need not be furnished before any work has commenced or any claims have been asserted. SECTION (23) Amends Chapter 53, Property Code, by adding a new Subchapter K relating to claims arising from residential construction projects. A new Subchapter K entitled "Residential Construction Projects" is added to Chapter 53 of the Property Code. This new Subchapter deals with contracts and claims arising on residential construction projects as defined in Sec. 53.001. Sec. 53.251 provides that Subchapter K applies only to residential construction projects. (See analysis of Section 2 above for a discussion of the meaning and scope of a residential construction project.) To perfect a valid lien on property, the lien claimant must furnish written notice to the owner and original contractor within strict time periods. Under current law (Sec. 53.056) a derivative claimant (a claimant that does not have a direct contract with the owner) must give written notice of the claim to the owner, with a copy to the original contractor, no later than the 15th day of the 3rd month after each month in which the unpaid work or materials were furnished. In other words, for unpaid work in January, the claimant must send the notice letter by April 15. If the claimant had performed work in December for which payment is sought and the claimant waited until April 15 to send the notice of claim letter, the claimant would not have perfected a valid claim for the value of the work performed in December. When a claimant does not have a direct contractual relationship with the original contractor, the claimant has to also send a notice letter to the original contractor by the 15th day of the 2nd month after each month in which the unpaid work or materials were furnished. Therefore, for work performed in January, the letter to the original contractor must be sent by the 15th of March. In order to simplify the procedures and to provide owners with more timely information, the notice requirement on residential construction projects under Sec. 53.252 has been reduced by one month (to the 15th day of the 2nd month after each month in which the unpaid work was furnished). This eliminates the need for a second letter to the original contractor because the claimant must copy the original contractor with the notice letter anyway. With regard to the notice requirement for specially fabricated materials on residential construction projects, which is now contained in Sec. 53.253, no real substantive change has been made in the content or timing of the notice. C.S.H.B. 740 does make one significant change in the notice requirements for residential construction projects by deleting the requirement for a notice of contractual retain age agreement. It is the Committee's view that this notice letter is very confusing and, given the relatively short construction periods on typical residential construction, it would not unduly prejudice claimants to require them to send their notice letters and perfect their claims by sending a notice of claim under Sec. 53.252 even when a contractual retain age agreement exists. The former Sec. 53.059 relating to special notice and other requirements for the perfection of a lien on homestead property has been moved to subchapter K, Sec. 53.254. There has been no significant substantive change between former Sec. 53.059 and the new Sec. 53.254. The most striking aspect of the consumers' testimony during the Interim Study was the fact that, time and again, the consumers were not aware of the rights and protections the law gave owners in connection with construction defaults and mechanic's lien claims. While very sympathetic to the problems encountered by the consumers who testified during the Interim Study, the Committee believed that many of those problems could have been avoided or significantly minimized if the consumers had been better informed and had exercised the rights and responsibilities already provided by law. Accordingly, one of the most important features of C.S.H.B. 740 is to require those who contract with homeowners and those who lend the money for that construction to provide information to homeowners about their rights and responsibilities. Sec. 53.255 requires an original contractor to furnish a disclosure statement to the owner before a contract for the construction of improvements to the owner's residence is executed. Because any supplier who sells directly to an owner is technically considered an "original contractor" even though the supplier is a large retailer and the consumer has done nothing more than buy 50_ worth of nails, the disclosure requirement will be limited to those original contractors that enter into a residential construction contract. This will address the particular area where most of the problems occur -- when individual consumers enter into contracts to construct or repair improvements on the consumer's homestead. The disclosure statement is written in plain English and provides a general summary of the most significant rights and responsibilities an owner has under Texas law with regard to a number of construction issues, including selecting a contractor, entering into a contract, monitoring the work of the contractor and the payments to the contractor, and avoiding and dealing with claims made by subcontractors and suppliers. It is the intent of the Committee that contractors duplicate the statutory disclosure notice and provide that to consumers. The notice actually given to consumers does not have to be exact but must read substantially similar to the disclosure set forth in Sec. 53.255(b). To further inform the consumer, Sec. 53.256 requires original contractors under a residential construction contract to give the consumer a list of the subcontractors and suppliers the contractor intends to use on the project. As that list changes, the contractor is obligated to update the information. Sec. 53.257 requires lenders or those persons who furnish financing for the construction of improvements under a residential construction contract to deliver to the owner a copy of all the closing documents no later than one business day before the date of the closing. This requirement can be waived in the case of a bona fide emergency or other good cause. However, the lender must obtain the owner's written consent to waive this protection. To better ensure that the owner receives the disclosure statement under Sec. 53.255(b), the lender is also required to provide the statement to the owner with the closing documents. Of course, a lender may choose to provide the statement in advance of the closing to better inform the consumer. Under Sec. 53.258, an original contractor is also required to provide a signed disbursement statement to the consumer during the course of construction. This statement must list the bills and expenses that the contractor represents have been paid by the contractor. When coupled with the list of subcontractors, an owner can verify whether the contractor is paying the bills for work performed on the project. If not, the owner can take steps to avoid mechanic's lien claims and other problems that arise when a contractor fails to pay its bills on a project. If the owner finances the construction payments through a third party lender and that lender advances the loan proceeds directly to the contractor, the lender must provide the owner with a disbursement statement which reflects the loan advances made to the contractor and any other disbursements made by the lender. The lender is also obligated to obtain a disbursement statement from the contractor in connection with every request for loan advances from the contractor. The disclosure statement must list the bills and expenses the contractor represents that it has paid since the last loan advance and the bills and expenses it represents that it will pay from the loan proceeds to be advanced. The lender is required to furnish this disclosure statement to the owner prior to making the requested loan advance to the contractor. The method of furnishing the disclosure will be determined by the agreement between the owner and the lender. A person who intentionally, knowingly, or recklessly provides false or misleading information to the consumer in connection with a disbursement statement will be guilty of a misdemeanor and subject to a fine up to $4,000 and/or confinement in jail up to one year. The person may not receive community supervision for the offense. In connection with the disclosure and disbursement statements, there are no specific remedies provided against the contractor or the lender who fails to provide these statements because the Committee believes that there are sufficient statutory causes of action available to consumers who are injured as a result of the failure to comply with a statutory disclosure requirement. With regard to the disbursement statement the lender receives from the contractor and furnishes to the owner, the lender is not responsible for the accuracy of the information obtained from the contractor. Further, the failure to provide the disclosure or disbursement statements will not invalidate the lien which arises under Chapter 53. This is very important because lenders and third parties, particularly the secondary mortgage market, must be able to rely upon the validity of the lien. For homestead property, it is the lien of the contractor which is assigned to the lender and which allows the lender to obtain a lien on the property to secure the loan to the consumer for the cost of the improvements. Sec. 53.259 requires an original contractor on a residential construction project to provide the owner with a final bills paid affidavit as a condition to final payment. A seller of residential property on which improvements were constructed must provide the bills paid affidavit as a condition of the sale. A person who intentionally, knowingly, or recklessly makes a false or misleading statement in the affidavit will be guilty of a misdemeanor and subject to a fine up to $4,000 and/or confinement in jail up to one year. The person may not receive community supervision for the offense. SECTION (24) Repeals Section 53.059, Property Code. Sec. 53.059 is repealed because it has been renumbered as Sec. 53.254 and moved to the new Subchapter K relating to residential construction projects. SECTION (25) Effective date. The effective date of the changes in the law will be September 1, 1997, for all original contracts (that is, direct contracts between the property owner and the contractor) which are entered into on or after September 1, 1997. An original contract is entered into when the parties have become legally and mutually bound by a valid offer and acceptance. The date a written contract is signed by both parties is often the date the contract is entered into. For original contracts entered into prior to September 1, 1997, the former law will remain in effect. For claims arising from subcontractors and suppliers who do not have a direct contract with the owner, the effective date will depend upon the original contract under which the claim arises. In other words, a subcontractor must look to the date of the original contract in determining whether the changes in the law are effective. This may be somewhat confusing to claimants; however, the alternative would be chaos with different contracts and subcontracts being subject to different laws on the same project. SECTION (26) Emergency Clause. COMPARISON OF ORIGINAL TO SUBSTITUTE SECTION 1. The substitute deletes the proposed amendments to Section 28.002 of the Property Code relating to prompt pay. This is the subject of separate legislation. Section 1 of the substitute renumbers the section relating to homestead liens in Sec. 41.001 of the Property Code. SECTION 2. The substitute deletes the proposed Sec. 28.0021 of the Property Code relating to the release required in connection with the prompt pay statute. This is the subject of separate legislation. Section 2 of the substitute defines "residence", "residential construction contract", and "residential construction project." These terms are necessary in order to determine which claims and contracts are subject to the new Subchapter K relating to residential construction. With these definitions, the special procedures and disclosure mandated by the new Subchapter K will relate to construction on property owned by individuals who use or intend to use that property as a residence or dwelling. It will not include speculative or tract building where the contractor or developer owns the property and sells the house after construction has been completed. It will also not include residential structures an individual is building for resale or lease to a third party. It will include homestead property as well as second homes or vacation homes. It will also cover the situation in which the consumer is living in its homestead but is building a home which it intends to be homestead when the improvements are completed. SECTION 3. The substitute deletes the proposed amendments to Sections 28.006 of the Property Code relating to prompt pay. This is the subject of separate legislation. Section 3 of the substitute inserts the reference to the new Subchapter K in Section 53.003. SECTION 4. The substitute deletes the proposed amendments to Sections 28.007 of the Property Code relating to prompt pay. This is the subject of separate legislation. Section 4 of the substitute amends Sec. 53.026 which is commonly referred to as the "sham contractor statute". Currently, if an owner controls the general contractor through ownership or otherwise, they are deemed to be a single party of interest for purposes of determining the appropriate notices and time periods. The substitute provides that, if the contractor controls the owner, they will also be deemed to be a single party of interest. This will assist subcontractors and suppliers who must file lien or bond claims. SECTION 5. The original HB 740 changes the name of Chapter 53 to conform to its proposed addition of a new Chapter relating to residential mechanic's lien laws. Section 5 of the substitute deletes that proposed change because a new Chapter is not created. Instead, a new subchapter K is created for residential construction contracts. Section 5 of the substitute changes the time for filing a mechanic's lien affidavit in connection with a lien on a residential construction project. It shortens the time for claimants to file the affidavit by one month. SECTION 6. The original bill created a new Sec. 53.0011 which distinguished between claims under Chapter 53 and claims covered by the new Chapter relating to residential construction. Because the new Chapter is not created, this new Section was deleted. Section 6 of the substitute makes several changes in the requirements for the content of the lien affidavit. Most are relatively minor (adding last known addresses). However, a claimant will have to state the month or months in which the work was furnished and for which payment is sought. Also, the claimant must provide a statement as to when the notices of claim were sent and the method by which they were sent. SECTION 7. The original bill's proposed amendment to Sec. 53.021 is deleted because the new Chapter is not created. Section 7 of the substitute changes the time period in which a claimant must sent a copy of the lien affidavit to the owner. Currently, a claimant may have up to ten days to send an owner a copy of the affidavit. Under the substitute, the claimant will have to send a copy of the affidavit no later than one business day after the affidavit is filed or record. SECTION 8. The original bill's proposed amendment to Sec. 53.022 is deleted because the new Chapter is not created. Section 8 of the substitute inserts the reference to the new Subchapter K in Section 53.056. SECTION 9. The original bill's proposed amendment to Sec. 53.026 is deleted because the new Chapter is not created. Section 9 of the substitute inserts the reference to the new Subchapter K in Section 53.057. SECTION 10. The original bill's proposed amendment to Sec. 53.085 is moved to Section 13 of the substitute (see below). Section 10 of the substitute inserts the reference to the new Subchapter K in Section 53.058. SECTION 11. The original bill's proposed amendment to Sec. 53.105 is deleted because the new Chapter is not created. Section 11 of the substitute amends Sec. 53.081 to conform to the new provisions in Subchapter K. SECTION 12. The original bill's proposed amendment to Sec. 53.123 is deleted because the new Chapter is not created. Section 12 of the substitute inserts the reference to the new Subchapter K in Section 53.084. SECTION 13. The original bill's proposed amendment to Sec. 53.155 is deleted because the new Chapter is not created. Section 13 of the new bill amends Sec. 53.085 relating to the bills paid affidavit. The original bill had proposed several changes to the bills paid affidavit provisions. Many of those changes are carried forward in the substitute; however, some additional changes are made. In the substitute, there is an express recognition that the affidavit may include additional contractual provisions relating to a conditional waiver of liens, a warranty or representation that bills will be paid, and an indemnification for loss caused by inaccurate information. The substitute also deletes the reference to a statutory form which could actually detract from the legal effect of the affidavit (could a person be prosecuted for a false affidavit if it varied from the statutory form?). Also the substitute expressly provides that the person signing the affidavit is personally liable for false or incorrect information. SECTION 14. The original bill created a new Chapter 62 which covered claims arising from residential construction. This new Chapter would cover all forms of residential construction, including tract or speculative homebuilding (i.e., where the developer actually builds the improvements and sells a completed home to the consumer). Tract or speculative building makes up a large percentage of new home construction in Texas and the consumer complaints in the Interim Study were not directed to this segment of the industry. Accordingly, this broader Chapter 62 was deleted in the substitute. Instead of creating an entirely new Chapter in the Property Code separate and apart from the current lien laws, a new Subchapter K in the lien laws (Chapter 53) was created which mandates special notices and requirements for lien claimants on consumer type residential construction. Section 14 of the original bill required disclosures to be provided to the owner by the contractor and lender. It also imposed payment monitoring requirements on the lender. The substitute (in various Sections of the bill) actually expands the disclosure requirements imposed on both the contractor and lender. The substitute eliminated the active monitoring requirement imposed on lenders but does impose a requirement on lenders of obtaining and furnishing a disbursement statement to the owner before loan proceeds are advanced to the contractor. To assist owners in removing questionable lien claims from their property, Section 14 of the original bill created a rather cumbersome procedure which would have required claimants to file legal proceedings in order to perfect lien claims. It was felt that this might discourage invalid claims; however, the substitute takes a different, more efficient approach. It amends the current statutes to make it easier to obtain a bond to release or remove a disputed lien. Most significantly, it creates a summary proceeding in any litigation between the owner and the claimant which allows the owner to obtain an expeditious hearing on the validity of the disputed lien and gives the owner an opportunity to have an order entered which would remove the lien and the cloud on the owner's property. Section 14 reduced the time periods imposed on claimants for sending notices and filing liens. It also eliminated the statutory retain age requirements on all residential type construction. The substitute also reduces the time periods but those reduced time periods only apply to residential projects in which the consumer owns the property and is having the improvements built or repaired for its own, personal use. At the strong urging of the supply and subcontractor industries, statutory retain age (which can benefit the owner as well) is not eliminated in the substitute. Section 14 of the substitute amends Sec. 53.106 relating to the Affidavit of Completion. SECTION 15. The substitute deletes the proposed amendments to Section 162.001 of the Property Code relating to construction trust funds. This is the subject of separate legislation. See discussion of Section 15 in Bill Analysis above. SECTION 16. The substitute deletes the proposed amendments to Section 162.003 of the Property Code relating to construction trust funds. This is the subject of separate legislation. See discussion of Section 16 in Bill Analysis above. SECTION 17. The substitute deletes the proposed amendments to Section 162.005 of the Property Code relating to construction trust funds. This is the subject of separate legislation. See discussion of Section 17 in Bill Analysis above. SECTION 18. The substitute deletes the proposed amendments to Subchapter A of Chapter 162 of the Property Code relating to construction trust funds. This is the subject of separate legislation. See discussion of Section 18 in Bill Analysis above. SECTION 19. The substitute deletes the proposed amendments to Section 162.032 of the Property Code relating to construction trust funds. This is the subject of separate legislation. See discussion of Section 19 in Bill Analysis above. SECTION 20. This Section has been renumbered in the substitute as Section 24. See discussion of Section 20 in Bill Analysis above. SECTION 21. This Section has been renumbered in the substitute as Section 25. The effective date has been changed in the substitute to provide that the changes in the law will be effective as to all matters arising under original contracts entered into on or after the effective date. See discussion of Section 21 in Bill Analysis above. SECTION 22. This Section has been renumbered in the substitute as Section 26. See discussion of Section 22 in Bill Analysis above. SECTIONS 23 through 26. These Sections are new in the substitute. See discussions above.