What is the Difference Between “Retainage” and “Reserved Funds” Under the Texas Property Code?

What is the difference between “retainage” and “reserved funds” under the Texas Property Code?
In amendments that were effective as of January 1, 2022, the legislature changed the terminology in the Texas Property Code – “required retainage,” or the amount of funds that an owner is required to hold back, is now called “reserved funds,” while “retainage” generally refers to funds that must be withheld by contractors and subcontractors as required by their contracts.
In this article, we will discuss the change in terminology, including:

• The definition of “retainage” under the amendments to the Texas Property Code,
• The definition of “reserved funds” under the new code sections, and
• The requirements for a provider of labor, services, or materials in Texas to perfect their lien and claim the reserved funds as payment.

The Texas Legislature Changed the Definitions of “Retainage” and “Reserved Funds,” Effective 1/1/2022
Under the old Texas property code, the construction funds that the owner is required to hold back were referred to as “required retainage,” found in the old § 52.101.
Effective January 1, 2022, the new Texas property code no longer refers to the funds that must be withheld by the owner as “required retainage,” and now these funds are called “reserved funds.”
The term “retainage” now refers to funds withheld by contractors and subcontractors per the terms of their contracts, which may cause some confusion until contractors and attorneys catch on to the new terminology used in the property code.

What Does “Retainage” Mean Under the Texas Property Code?
The term “retainage,” which was once found in § 52.101 of the Texas Property Code, is now used in the Code to refer only to contractor and subcontractor funds that must be withheld pursuant to their contracts.
In the definitions found in § 53.001(11) of the new Texas Property Code, “retainage” is defined as “an amount representing part of a contract payment that is not required to be paid to the claimant within the month following the month in which labor is performed, material is furnished, or specially fabricated material is delivered.”
Other references to “retainage” in the new Code apply to funds that are required to be withheld contractually, and there is no statutorily required percentage. For example, as to retainage liens, § 53.025, “limitation on ordinary retainage lien” says that “a lien for retainage is valid only for the amount specified to be retained in the contract, including any amendments to the contract, between the claimant and the original contractor or between the claimant and a subcontractor.”
Funds that an owner is required to hold back are no longer referred to as “retainage,” but are now called “reserved funds.”

What are “Reserved Funds” Under the Texas Property Code?

• 53.101 of the new Texas Property Code describes the funds that must be reserved by the property owner and requires the owner to withhold 10% of the value of the project:

During the progress of work under an original contract for which a mechanic’s lien may be claimed and for 30 days after the work under the contract is completed, the owner shall reserve:
(1)  10 percent of the contract price of the work to the owner; or
(2)  10 percent of the value of the work, measured by the proportion that the work done bears to the work to be done, using the contract price or, if there is no contract price, using the reasonable value of the completed work.

Why is the Owner Required to Reserve Funds?

• 53.102 is specific about whose payment is secured by the reserved funds and says:

The reserved funds secure the payment of artisans and mechanics who perform labor or service and the payment of other persons who furnish material, material and labor, or specially fabricated material for any contractor, subcontractor, agent, or receiver in the performance of the work.
If anyone who provides labor or materials to the contractor does not get paid, they will have the opportunity to claim the reserved funds once the work is complete.

How Can a Subcontractor Claim the Owner’s Reserved Funds?
An individual or company that provides labor, services, or materials to a contractor during construction has a lien on the reserved funds under § 53.103, but they must comply with the notice requirements for mechanics liens in Texas.
A claimant must:

1. Send the notices required to perfect their lien, and
2. File an affidavit claiming the lien no later than 30 days after the work is completed, the contract is terminated, or the original contractor abandons the project.

Artisans and Mechanics Get Preference to the Reserved Funds

• 53.104 ensures that individual artisans and mechanics get paid first from the reserved funds, while other claimants divide the rest in proportion to the extent of their claims:

(a)  Individual artisans and mechanics are entitled to a preference to the reserved funds and shall share proportionately to the extent of their claims for wages and fringe benefits earned.
(b)  After payment of artisans and mechanics who are entitled to a preference under Subsection (a), other participating claimants share proportionately in the balance of the reserved funds.
What Happens if the Owner Does not Set Aside the Required Percentage of Reserved Funds?
If the owner does not set aside 10% of the contract price as reserved funds, the claimants will then have a lien on the property up to the amount that should have been set aside. § 53.105 says:
(a)  If the owner fails or refuses to comply with this subchapter, the claimants complying with Subchapter C or this subchapter have a lien, at least to the extent of the amount that should have been reserved from the original contract under which they are claiming, against the improvements and all of its properties and against the lot or lots of land necessarily connected.
(b)  The claimants share the lien proportionately in accordance with the preference provided by Section 53.104.
Going forward, to avoid confusion, construction attorneys and participants in construction projects will need to take care to use the term “retainage” when referring to funds that must be withheld pursuant to the contract and “reserved funds” when referring to the 10% that an owner must withhold during the progress of construction.
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Please feel free to contact one of our Murray Lobb attorneys to obtain our legal advice regarding retainage, reserved funds, mechanics’ liens, pre-lien notices, lien affidavits, and lien foreclosures. We also remain available to help you with all your general construction law, business, corporate, and estate planning needs.