Surety bonds are most prevalent in the construction industry. With so many contracts being drafted, financial guarantees need to be established. Project owners need to protect themselves from bad business practices and assurance the contract will be completed in accordance with the mutual terms. If you are in the Houston construction industry and need a surety bond, look no further than the commendable Houston construction law attorneys at Guerra | Days Law Group. Our staff has the collective experience required to make sure our clients’ interests are served.
What is a Surety Bond?
A surety bond is a contract which answers for the duty of another. Generally, there are three parties involved: The principal, the primary party who promises to perform; the obligee, one to whom the principal is bound by the contract; and the surety company, one who assures the obligee that the principal can perform. A surety company makes the promise to pay the obligee if the principal fails to fulfill its obligations.
A Bond Claim in Texas
Payment bonds is a tool available which allows one to protect an owner and an owner’s property from claims and liens of claimants. In Texas, statutory obligations for payments bonds differ depending on whether the project is private or public (a McGregor project.) The varying requirements are governed by the Texas Property Code and the Texas Government Code. For private projects, projects where the owner is not affiliated with a government entity, the Texas Property Code is generally the prominent authority. This section will cover the requirements for a private works project.
The owner of a project can require the original contractor to file a bond in the real property records where the project is located and it must conform to the statutory requirements of §53.202 of the Texas Property Code. These requirements include:
- Be in a penal sum at least equal to the total of the original contract amount;
- Be in favor of the owner;
- Have written approval of the owner who endorsed on it;
- Be executed by the original contractor as principal and a corporate surety authorized and admitted to do business in Texas and licensed by Texas to execute surety bonds as surety;
- Be conditioned on prompt payment for all labor, subcontracts, materials, specially fabricated materials, and normal and usual extras not exceeding fifteen percent (15%) of the contract price; and
- Clearly and prominently display on the bond or an attachment to the bond the contact information for the surety for purposes of sending notices of claim or the toll free number maintained by the Texas Department of Insurance.
Once a valid bond is filed, a claimant on the bond may not file suit against the owner or the owner’s property. Additionally, it relieves the owner of obligations for withholding funds and retainage. A Houston construction law attorney from our firm will be able to clarify any misconceptions you may have.
Requirements for Perfecting a Bond Claim
If the claimant (either a subcontractor or sub-subcontractor or lower tier claimant) needs to file a claim on a bond there are very specific steps that need to be taken. The best way to perfect a bond claim is to satisfy the same requirements necessary for perfecting a lien claim. If a lien is properly perfected, so is a claimant’s bond claim. It is best practice to perfect the claimants claim as if it were a lien because, in the event the bond claim is defective, you can still recover funds through your perfected lien.
In the alternative, a claimant can elect to perfect its bond claim by sending the surety notices that were required to be sent to the owner for a lien claim. Although this is a way for claimants to perfect their claim, it is not recommended. Though providing the surety with notices will suffice, circumventing the owner of the project is generally not advisable.
Suit on Payment Bond
At least 60 days must pass after perfection of a claim on a payment bond for the claimant to be able to file suit on the bond. After the 60 days has passed, the claimant then has very particular time frame to follow:
- If the bond was recorded AT THE TIME THE LIEN WAS FILED, then the claimant has a year to sue on the bond following the perfection of the claim.
- If the bond was NOT RECORDED AT THE TIME THE LIEN WAS FILED, then the claimant has 2 years to sue on the bond following perfection of the claim.
The suit on the bond must be brought in the county in which the property to be improved is located.
Bond to Indemnify Against Lien aka Bonding Around a Lien
Situations may arise where a sub-contractor has already placed a lien on a property, but the general contractor wants to dispute the claim. The general contractor may choose to file a Bond to Indemnify which effectively rids the owner’s property of a cloud on title created by one or more disputes. The only other option for the interested party is to pay the lien amount owed.
The Bond to Indemnify must comport with the requirements set forth § 53.172 of the Tex. Prop. Code by:
1) describing the property;
2) refer to each lien claimed in a manner sufficient to identify it;
3) be in an amount double the amount of the lien referred to in the bond unless the total amount exceeds $40,000, in which case the bond MUST be in an amount that is the GREATER of 1.5x the amount of the lien OR the sum of $40,000 AND the amount of the lien;
4) be payable to the lien claimant;
5) be executed by: the party filing the bond as a principal; AND a corporate surety authorized and admitted to do business under the law in Texas and licensed by Texas to execute the bond as a surety; AND be conditioned substantially that the principal and surety will pay to the named obliges or their assigns the amount that the name obliges would have been entitled to recover if their claim has been proved to be a valid and enforceable lien on the property.
The county clerk is required to file a certificate of mailing in the real property records and must include a copy of the bond and notice sent to the claimant. However, if the court clerk fails to file the notice the lien release is still going to be effective.
Lastly, a claimant has one year from the date of the which the notice is served to file suit on the Bond to Indemnify. Don’t wait to contact a Houston construction law attorney from Guerra | Days Law Group. Get your bond today!