Beginning a development project can be an exciting, albeit maybe a bit nerve-racking, time. However, after the vision has been cast and the development contract has been signed, the parties may have a falling out for a host of reasons. The good news is that if you’re a developer and the property owner is not holding up to their end of the bargain, you have some options.
The development contract may provide relief for developers in the event of a property owner’s failure to fulfill his or her contractual duty, such as the failure to pay. Communicating favorable contractual terms to a property owner via informal methods or a demand letter from counsel may be a cost effective way of saving the transaction and returning to the contract and the project. However, these communications can also have the opposite effect and leave property owners with their only hope of recovery to be found in litigation. Many development contracts include provisions for arbitration and mediation for controversies arising from the contract. Either of these would generally be a good next step to attempt to avoid litigation.
The developer may assert a breach of contract claim. In Texas, a breach of contract can be proved where (1) a valid contract exists, (2) the developer has performed, (3) the property owner has breached the contract in a material way, and (4) the developer has suffered damages due to the breach. The remedies awarded to a developer under this claim of action include (i) holding the developer to the terms of the contract (although this is not usually sought if enforcement would result in forced labor), (ii) payments for losses because of the breach, (iii) compensation for lost time, (iv) reimbursement of expenses, (v) compensation for future time or money lost, and (vi) attorney’s fees.
The Mechanic’s Lien
A mechanic’s lien is a lien created by Section 53.001 of the Texas Property Code. The mechanic’s lien is a powerful tool because it allows the developer the ability to secure payment with a lien that is filed in the property records. The mechanic’s lien is available to a wide array of players involved in development projects per Texas law. The mechanic’s lien may be filed by builders, subcontractors (with limitations), persons providing labor or materials for a house, building or improvement, architects, engineers, surveyors, and real estate brokers for commercial property.
The mechanic’s lien on a homestead requires developers to jump through a few extra hoops in order to obtain a valid lien. To fix a mechanic’s lien on a homestead, the developer must have (1) a contract executed before materials are furnished or labor is performed, (2) signatures by both spouses (if the property owner is married), and (3) the development contract filed with the county clerk where the homestead property is located. There are also other requirements relating to mechanic’s liens and homesteads which are not mentioned here.
The mechanic’s lien has certain timing requirements, some of which follow. Mechanic’s liens arising from a residential construction project are required to be filed by the 15th day of the 3rd calendar month after the day the indebtedness accrues. Generally, a developer is required to release a lien against a property no later than the 10th day after the date of receipt of payment and a written request.
When payment has not been received, there are specific steps that mechanic’s lien holders must take to exercise their rights against property owners who are not paying. A suit to foreclose on a property pursuant to a mechanic’s liens must be filed for non-residential construction projects within the later of the date 2 years after the last date that the developer could have filed the lien or within 1 year after completion, termination or abandonment of the work under the original contract.
Going through the process of a breach of a development contract will likely be a struggle unless there is a unique relationship between the property owner and the developer that makes the process smoother. The best bet when the owner-developer relationship goes sour and the property owner has breached the contract is to attempt to remove the stress from the equation and seek a negotiated solution. However, this may not always work, and there are means such as mediation, arbitration and litigation should private negotiations fall through. Don’t hesitate to call us at Dodson Legal Group to schedule a consultation if you are looking to resolve an owner-developer dispute.