If you are involved in the construction industry, you have probably heard of or dealt with mechanic’s liens. The majority of work performed on private Texas construction projects will fall under Chapter 53 of the Texas Property Code, to which mechanic’s liens apply. However, certain projects involve work categorized as “mineral activities.” Projects involving contractors that provide labor or services relating to “mineral activities” are subject to Chapter 56 of the Texas Property Code, to which mineral liens apply.
“Mineral activities” are defined as digging, drilling, torpedoing, operating, completing, maintaining, or repairing an oil, gas, or water well, an oil or gas pipeline, or a mine or quarry. TEX. PROP. CODE § 56.001(a). According to this narrow definition of “mineral activities,” not all work performed on oil and gas related projects are subject to Chapter 56 and sometimes it may be difficult to determine if the work falls under Chapter 53 or Chapter 56. For example, projects related to crude oil storage, gas processing, and refineries likely do not involve “mineral activities” as defined by statute.
So why does it matter if the work performed on a project is subject to Chapter 56 or Chapter 53? It is important to evaluate the nature of the work being performed in order to analyze whether the work is a “mineral activity” because this will determine how to (1) secure your rights (for contractors) and (2) limit liability (for owners).
Secure Your Rights – The Chapter 56 Mineral Lien
Texas law provides that contractors who perform “mineral activities” may secure their rights exclusively through a mineral lien. “Chapter 56 is the exclusive statute governing liens against mineral property to secure payment for labor or services related to mineral activities. Persons entitled to liens under this statute are not entitled to liens provided by other statutes.” Noble Expl. v. Nixon, 794 S.W.2d 589, 597 (Tex. App.—Austin 1990). In other words, a mechanic’s lien secured under Chapter 53 is ineffective to secure a contractor’s lien rights for work that should have been liened under Chapter 56. Practice tip: if you are unsure about whether your work is a “mineral activity” or not, comply with the lien notice requirements of Chapter 53 and Chapter 56 to ensure you have secured your lien rights. While there are several differences in the requirements to secure Chapter 53 liens versus Chapter 56 liens such as the deadlines for pre-lien notice and recording, these differences will be saved for another blog. Stay tuned.
Limiting Liability – Retainage & Fund Trapping under Chapter 56
There is no requirement that owners withhold 10% retainage on Chapter 56 projects. However, retainage provides several benefits to owners. Practice tip: owners should incorporate a contract provision to withhold 10% retainage on every project regardless of whether the project is a Chapter 53 or Chapter 56 project. The retainage may be released no earlier than 30 days after final completion of the project.
Similar to Chapter 53, an owner is required to “trap” funds in its hands upon receipt of a subcontractor’s Chapter 56 lien notice. Shell W. E & P, Inc. v. Pel-State Bulk Plant, LLC, 509 S.W.3d 581, 590 (Tex. App.—San Antonio 2016, no pet.). Practice tip: in other words, if funds owed to the general contractor remain in the owner’s hands upon receipt of a lien notice, the owner must withhold funds sufficient to cover the amounts claimed by the notice.
In summary, whether you are an owner or contractor, it is imperative to consider whether the project involves “mineral activities” under Chapter 56 of the Texas Property Code in order to best determine how to mitigate your financial risk and preserve your claims and defenses.
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