Notice Required to Trap Funds

In order to authorize and require an owner to withhold funds from payments to the original contractor, a lien claimant must give the owner or reputed owner appropriate notice at the owner’s last known business or residence address. If notice is sent in a form that substantially complies with Property Code Section 53.056, or Section 53.252, the owner may withhold the funds immediately on receipt of the notice. To authorize the owner to withhold funds, the notice must state that if the claim remains unpaid, the owner may be personally liable and the owner’s property may be subjected to a lien unless (1) the owner withholds payments from the contractor for payment of the claim, or (2) the claim is otherwise paid or settled. If this statutory warning language is not included, the notice will not trap funds in the owner’s hands. The statutory warning is a “condition precedent” to fund trapping, if the warning is missing, the funds will not be trapped; without it, no lien can be imposed under Property Code Section 53.081. A notice that does not contain this warning language but that otherwise meets the requirements of Property Code Section 53.056¬†operates to perfect a lien against the 10 percent statutory retainage under Property Code Section 53.103.

A notice for fund-trapping given by a subcontractor is effective only as to funds that are owed by the owner on the original contract through which the subcontractor performed its work. Accordingly, if an original contract is terminated or abandoned, and the owner hires a substitute contractor to complete the work, a fund-trapping notice provided by the subcontractor is ineffective to trap funds with respect to payments that the owner owes to the substitute contractor.

The notices must be served within specified periods of time following an event, such as the performance of labor or the delivery of material. Thus, when materials are provided or labor is performed over a period of time, several notices may be required to trap all of the funds to which the claimant is entitled.

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