BILL ANALYSIS

C.S.H.B. 3040

By: Chisum

Business & Industry

Committee Report (Substituted)

BACKGROUND AND PURPOSE

According to certain sources, a lender on a construction project in Texas currently is not required to give any notice to a contractor or subcontractor on the project when a default on the construction loan or financing agreement occurs. These sources further assert that, without such notice, contractors, subcontractors, and suppliers continue to expend labor and materials, unaware that the funding for the project is in default and that payment for work and supplies may never be received.  C.S.H.B. 3040 proposes to remedy this situation by requiring a lender that provides financing through a construction loan or certain financing agreements to notify in writing any contractors and subcontractors affected by a default on such a loan or agreement.

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.

ANALYSIS

C.S.H.B. 3040 amends the Property Code to make its provisions applicable to a lender that provides financing through a construction loan or under a financing agreement for an improvement to real property for which the real property or improvement is collateral. The bill requires a contractor, for an improvement to real property for which such financing is provided, not later than the 30th day after the date the contractor begins work to improve the real property or otherwise provides construction services for the improvement, to provide to the lender the contractor's name and address and the name of the person to whom any notice should be sent under the bill's provisions.

C.S.H.B. 3040 requires the lender, except as otherwise provided by the bill and not later than the seventh day after the date a lender takes an action for which written notice is required by the bill's provisions in response to a particular event described by those provisions, to give written notice of the action, including the date of the action, to the property owner and to each contractor providing labor, materials, equipment, or services for the improvement.  The bill requires such written notice if the lender exercises a default remedy provided by statute or the loan or financing agreement, gives a notice of default to the borrower, or fails to timely fund, wholly or partly, a payment request submitted in proper form by the borrower or a contractor. The bill requires notice to the contractor to be sent by certified mail to the person identified to receive such notices when the contractor began work and provides for the content of the notice.

C.S.H.B. 3040 establishes that a lender is not required to give notice with respect to a particular event described by the bill if, on or before the seventh day after the date of the occurrence of the particular event, the default is cured or the payment request is fully or substantially funded. The bill sets out requirements for the contractor to provide notice to each of its subcontractors of the action taken by the lender and for the subcontractor to provide such notice to each of the subcontractor's subcontractors. The bill requires the lender to give written notice of the cure or payment to each contractor if the default for which the notice is required is cured or the requested payment is fully or substantially funded and sets out requirements for the lender to give written notice of the cure or payment to each contractor, for the contractor to give such notice to each of the contractor's subcontractors, and for the subcontractor to give written notice to each of the subcontractor's subcontractors.

C.S.H.B. 3040 authorizes a contractor or subcontractor, after the 10th day after the earliest date on which the lender takes an action for which written notice is required in response to a particular event described by the bill, to suspend contractually required performance without penalty or liability for damages on giving the owner written notice of the contractor's or subcontractor's intent to suspend performance and, if the notice is given by a subcontractor, to the subcontractor's contractor. The bill authorizes the contractor or subcontractor to suspend performance until the contractor and subcontractor receive a notice of cure or payment from the lender in accordance with the bill's provisions or the lender or the borrower provides the contractor and subcontractor a written payment guarantee acceptable to the contractor and subcontractor for all labor, materials, equipment, or services provided or to be provided for the improvement to real property after the action is taken.  

C.S.H.B. 3040 entitles a contractor or subcontractor that has suspended performance in accordance with the bill's provisions to a reasonable period without penalty to remobilize and recommence performance after receipt of a notice or payment guarantee. The bill establishes that a subcontractor is a third-party beneficiary of a lender's obligations with equal standing to a contractor to enforce remedies.

EFFECTIVE DATE

September 1, 2011.

COMPARISON OF ORIGINAL AND SUBSTITUTE

C.S.H.B. 3040 differs from the original by establishing that the substitute's provisions apply to a lender that provides financing through a construction loan or under a financing agreement for an improvement to real property, whereas the original specifies that such real property is owned by the borrower.

C.S.H.B. 3040 contains a provision not included in the original requiring a contractor, for an improvement to real property for which such financing is provided and within a specified period, to provide to the lender the contractor's name and address and the name of the person to whom any notice should be sent under the substitute's provisions.

C.S.H.B. 3040 differs from the original by requiring the lender, except as otherwise provided and not later than the seventh day after the date a lender takes an action for which written notice is required by the substitute's provisions in response to a particular event described by those provisions, to give written notice of the action, including the date of the action, to the property owner and to each contractor providing labor, materials, equipment, or services for the improvement, whereas the original requires the lender, on the earliest date a lender takes an action for which written notice is required by the original's provisions in response to a particular default by the borrower, to give written notice of the action to each contractor and subcontractor known to the lender to be providing such items.

C.S.H.B. 3040 differs from the original by requiring such written notice if, among other conditions, the lender fails to timely fund, wholly or partly, a payment request submitted in proper form by the borrower or a contractor, whereas the original requires such written notice if, among other conditions, the lender fails to fund, in whole or in substantial part, a draw request submitted in proper form by a contractor.  

C.S.H.B. 3040 contains provisions not included in the original setting out requirements relating to the delivery method, recipient, and content of the notice and establishing that a lender is not required to give such notice under certain conditions.

C.S.H.B. 3040 differs from the original by specifying that the notice the contractor is required to give  to each of the contractor's subcontractors of the action taken by the lender is a copy of the written notice, whereas the original does not include that specification in that requirement. The substitute contains a provision not included in the original requiring the subcontractor to give a copy of the notice to each of the subcontractor's subcontractors within a specified period.

C.S.H.B. 3040 differs from the original by requiring the lender to give written notice of the cure or payment to each contractor if the default for which the notice is required is cured or the requested payment is fully or substantially funded, whereas the original requires the lender to give written notice of the cure to each contractor and subcontractor known to the lender if the default in response to which the action for which the required notice is taken is cured. The substitute contains a requirement not included in the original that the written notice of the cure or payment be given to each contractor not later than the third day after the date the default is cured or the payment is funded, as applicable.

C.S.H.B. 3040 contains a provision not included in the original requiring the subcontractor to give written notice of the cure or payment to each of the subcontractor's subcontractors within a specified period.

C.S.H.B. 3040 omits a provision included in the original establishing that, if a lender does not give a contractor or subcontractor notice as required by the original's provisions, the lender's security interest in the project is subordinate to the value of all labor, materials, equipment, or services provided by that contractor or subcontractor after the date on which the notice should have been given.

C.S.H.B. 3040 differs from the original by authorizing the contractor or subcontractor, after the 10th day after the earliest date on which the lender takes an action for which written notice is required, to suspend contractually required performance without penalty or liability for damages on giving the owner written notice of the contractor's or subcontractor's intent to suspend performance and to the subcontractor's contractor, as applicable, whereas the original authorizes the contractor or subcontractor, after the sixth day after the earliest date on which the lender takes an action for which written notice is required, to suspend contractually required performance without penalty on sending to the lender written notice of the contractor's or subcontractor's intent to suspend performance and to the subcontractor's contractor, as applicable.

C.S.H.B. 3040 contains provisions not included in the original entitling a contractor or subcontractor that has suspended performance in accordance with the substitute's provisions to a reasonable period without penalty to remobilize and recommence performance after receipt of a notice or payment guarantee and establishing that a subcontractor is a third-party beneficiary of a lender's obligations with equal standing to a contractor to enforce remedies.

C.S.H.B. 3040 contains conforming changes not included in the original.