Texas Construction Law Blog

Bonds can play an essential role in protecting owners from the financial risk associated with liens and other contractor claims on Texas construction projects. Two types of commonly used surety bonds are (1) bonds to indemnify against liens, and (2) bonds to pay liens or claims. When and how to utilize these bonds are often misconstrued—they differ in application as well as the protection afforded to the owner. This article provides an overview of these two types of bonds, their respective requirements to be valid, and the claims associated with each.

Bonds to Indemnify Against Lien (Texas Property Code, Chapter 53, Subchapter H)

A bond to indemnify against a lien is a type of surety bond often used during or after completion of a construction project after a mechanic’s and materialman’s lien has been filed against the owner’s property. When a contractor, subcontractor, or supplier files a lien against a property, it can create financial risk for the property owner and cloud the title, in effect preventing a potential sale or the refinancing of a project. A bond to indemnify against a lien removes the lien from the property, and instead, the lien attaches to the bond. This bond offers protection to the property owner by clearing the property’s title and guaranteeing payment for perfected liens. These bonds can be procured by the owner or a contractor. The following are requirements of a valid bond to indemnify against a lien:

• describe the property on which the lien is claimed;
• refer to the lien claimed (typically by document number and date);
• be in an amount that is double the amount of the lien referred to in the bond unless the total amount claimed in the liens exceeds $40,000, in which case the bond must be in an amount that is the greater of 1 ½ times the amount of the lien or the sum of $40,000 and the amount of the lien;
• be payable to the lien claimant;
• be executed by:
  • the party filing the bond as principal; and
  • a corporate surety authorized and admitted to do business under the law in this state and licensed by this state to execute the bond as surety; and
• be conditioned substantially that the principal and sureties will pay to the named obligees or to their assignees the amount that the named obligees would have been entitled to recover if their claim had been proved to be valid and enforceable lien on the property.

This bond must be recorded in the real property records where the property is located and the county clerk must issue notice of the bond to the obligee lien claimant. Each county clerk’s policies and procedures are different with respect to recording of the bond and issuance of the notice. For compliance assistance, please contact our office.

Once this bond is recorded and noticed, the lien claimant may file suit against the surety who issued the bond, as well as the non-paying contractor.^[1] A claim against the bond must be asserted by the earlier of: (1) within one year of the bond notice being served, or (2) within one year of the last date claimant could have filed a lien.

Bonds to Pay Liens or Claims (Texas Property Code, Chapter 53, Subchapter I)

In contrast, a bond to pay liens or claims is a type of bond usually procured prior to or at the beginning of a construction project before any lien has been filed. Sometimes referred to as a “Chapter 53 Payment Bond,” this type of surety bond is procured by the general contractor under a contract with the owner. The benefit of this bond is that it precludes claimants from filing suit against the owner’s property and the owner is relieved from any obligations to withhold retainage for the benefit of lien claimants or to trap funds in response to a lien notice. The following are requirements of a valid bond to pay liens or claims:

• be in a penal sum at least equal to the total of the original contract amount;
• be in favor of the owner;
• have the written approval of the owner endorsed on it;
• be executed by:
  • the original contractor as principal; and
  • a corporate surety authorized and admitted to do business in this state and licensed by this state to execute bonds as surety;
• be conditioned on prompt payment for all labor, subcontracts, materials, specially fabricated materials, and normal and usual extras not exceeding 15 percent of the contract price; and
• clearly and prominently display on the bond or on an attachment to the bond:
  • the name, mailing address, physical address, and telephone number of the surety company to which any notice of claim should be sent; or
  • the toll-free telephone number maintained by the Texas Department of Insurance, and a statement that the address of the surety company to which any notice of claim should be sent may be obtained from the Texas Department of Insurance by calling the toll-free telephone number.

This bond as well as a copy or memorandum of the construction contract must also be recorded in the real property records where the project is located.

If a claim remains unpaid for 60 days after perfecting a claim against the bond, the claimant may file suit against the surety and the principal on the bond. Suit must be brought in the county in which the property being improved is located, and must be filed within one year of perfecting the claim against the bond. If the bond is not recorded in the real property records, a claimant has an extended two-year limitations period to file suit from the date of perfecting its claim.

Not all surety payment bonds provide the protections afforded by a Chapter 53 Payment Bond, so it is important to understand how to procure one that complies with Chapter 53 of the Texas Property Code, and the differences in the applicable protections and claims.

^[1] One Texas case indicates that the lien claim against the property owner remains regardless of a bond to indemnify against a lien. Stolz v. Honeycutt, 42 S.W.3d 305, 312 (Tex. App.—Houston [14th Dist.] 2001, no pet.). The Stolz court evaluated whether the lien claimant still had rights to assert a claim against the owner despite the existence of a bond to indemnify because the claimant had missed its limitations deadline to assert a bond claim against the surety, but limitations had not run to assert a lien claim against the owner. Statutory changes to Chapter 53 enacted after Stolz made the limitation deadlines the same for claims against the surety on the bond and against the owner under the lien. Due to the statutory changes and the unique facts of the Stolz case, it is unclear whether a court would still find the underlying lien claim against the owner exists after a bond to indemnify against a lien is filed.