In an ideal world, contractors would simply sign a contract to perform work, get the job done, and collect payment. Unfortunately, things rarely go this smoothly. Before they can even begin to build, contractors and their clients must navigate a host of complex issues that are often unrelated to the work itself. Many of these issues are related to legal compliance. And while construction law is made up of a variety of regulations, few govern the construction process like property law.
Property law impacts each stage of the building process — including planning and design, pre-construction, construction, and post-construction — and has the potential to stop a project in its tracks. These challenges are not simply abstract — they influence the building’s purpose and how it is designed.
Failure to effectively resolve property law issues could mean facing lawsuits and serious fines, which affect the contractor’s bottom line. Here are four property law concepts contractors should be familiar with.
1. Property ownership
It matters who owns the property. There are two kinds of project ownership in the construction industry: private and public. A project is privately owned if the owner is a private entity, such as a real estate developer. Public ownership means the project is owned by the government — i.e. a federal, state, or municipal agency.
The type of ownership is critical as it has tremendous ramifications for how the contractor can collect payment.
Private vs. public
When a contractor performs work on a private project and does not get paid, they can file a lien claim on the property. The lien makes it incredibly difficult for the owner to sell or refinance the property until the balance is paid.
A different set of rules apply to public projects. In fact, contractors are not able to file a lien claim on a project owned by the government. Instead, they must file a bond claim with the surety that provided the general contractor’s bond.
Note, the distinction between private and public projects isn’t always clear. A single project might have certain public characteristics while bearing some hallmarks of a private project. For example, the land the structure is on might be publicly owned, but the structure being built on the land may be owned by a private entity.
These public-private hybrids are known as P3 projects, and some examples include:
- A private hotel being built on the grounds of a public airport
- Repair work on a public highway that has been leased to a private company
- Using $100 million in private funds to renovate a public park
Residential vs. commercial
Within the private ownership category, there are two important subcategories: residential and commercial.
A project is residential if work is being performed on a single-family dwelling or a residential facility with no more than three or four units. A commercial project involves larger-scale living facilities, such as apartment complexes.
The residential/commercial distinction is important because it affects the way a contractor secures payment.
If the contractor isn’t paid for his work, he may file a lien claim against the property – this is true regardless of the property type. However, many states impose stringent laws governing how liens are filed against residential property, with the intention of protecting individual homeowners. These laws are generally more lax for commercial projects.
Preliminary notice requirements are one example. In Texas, if the project is residential, the contractor must send notice two months from the date the unpaid work was performed. For commercial projects, the contractor has three months from the date the unpaid work was performed.
However, as is the running theme, things are rarely so cut and dry. Determining if a property is commercial or residential can sometimes be trickier than it seems. There is an entire category of properties known as “mixed-use” that consists of both residential and commercial buildings.
For example, a private developer purchases an empty parcel of land. It decides to construct a large building on the property consisting of a shopping mall, a car wash, and also a small condo building with three residential units which have already been sold.
Clearly, the project is mixed-use. In this scenario, determining whether commercial or residential rules apply can be challenging. Contractors should seek professional help to ascertain the most effective means of securing payment.
2. Property identification
In some States, property law dictates that a property’s legal description must be included on notices and mechanics lien forms.
A legal description is the government’s means of identifying a property’s location. Instead of using street names and addresses, which are subject to change, a legal description uses some pretty antiquated surveying terminology to locate the property. Some states require the full legal description of a property on a mechanics lien claim.
Keep in mind that property description requirements can vary within the same state. New York is one example: for properties within New York City, the description must include the block and lot number — a requirement that does not exist for properties within New York State but outside of NYC.
3. Homestead requirements
Some states have special laws called homestead exemptions that prevent personal residences from being seized by creditors. Homestead protections impact mechanics liens, and in some cases, contractors must satisfy unique requirements to qualify for a lien.
Texas is one such state with Homestead protections. In the Lone Star State, any owner-occupied residence may be considered a homestead (Note: Residents may only claim one homestead).
In Texas, a lien claim against a homestead is only valid if there is a written contract between the general contractor and the homeowner. Furthermore, the contract must be:
- Executed and signed prior to the start of work
- Signed by both spouses, even if the property is in the name of only one spouse
- Signed by the County Clerk of the County in which the homestead is located
Relatedly, Texas contractors must provide homeowners with a residential disclosure statement prior to performing work on the property. The disclosure statement informs the homeowner of their rights and can be included in the contract or as a separate document.
4. Servitudes, right-of-ways, and other encumbrances
Besides the challenges and requirements listed above, contractors may encounter other property law obstacles that could hinder their work and affect their ability to collect payment.
For example, there are a number of legal mechanisms in property law that limit the way property can be used and developed.
A restrictive covenant is essentially a legally enforceable promise that limits how property can be used. They run with the property, binding whoever currently owns the property.
There are different kinds of covenants that can affect both property ownership and use of the property. For example, a restrictive covenant could prohibit the use of certain materials, like vinyl siding, on a project.
Easements create rights to the property for people besides the owner. For example, a trucking company is located behind a sawmill, and its trucks can only reach the highway by traversing land belonging to the sawmill. In this scenario, the trucking company may be granted an easement allowing its trucks to traverse over the sawmill property for the purpose of accessing the thoroughfare.
Some easements run with the land, meaning that the easement stays with the property, even if the benefited property changes hands. Others are personal, meaning either that they cannot be transferred or are transferable independent of a particular property.
Perhaps the most common type of easement encountered in construction is a utility easement. Careful attention must be paid if a utility easement is known or suspected, as a utility is more likely than most to vigorously defend its easements.
Property issues can interrupt or delay projects — and payments
Property law violations have serious consequences. Contractors may experience delays and have trouble collecting payment. They may even find themselves mired in legal disputes.
Contractors should remember that, while they need to be aware of the legal rights of property owners, a number of payment laws also gives them strong protection, too. If they performed work on a project, they are entitled to payment. The mechanics lien can be the most efficient payment collection tool available to contractors.
However, navigating lien requirements, such as those related to property law, can be tricky. The best way to ensure your lien is effective and enforceable is by seeking help from an experienced construction lawyer.