Monday, December 19, 2011

Waivers and Releases for Liens and Payment Bond Claims

During the 82nd Legislative Session, House Bill 1456 was passed which provides statutory forms for waiver and release of mechanic’s liens and payment bond claims. Four statutory forms were created: (a) Conditional Waiver and Release on Progress Payment; (b) Unconditional Waiver and Release on Progress Payment; (c) Conditional Waiver and Release on Final Payment; and (d) Unconditional Waiver and Release on Final Payment.

The new law is effective for contracts entered into on or after January 1, 2012. In order for a waiver and release to be effective, the form of lien waiver and release must be in substantial compliance with the statutory forms.

The new law is set out in Subchapter L added to Chapter 53 of the Texas Property Code entitled “Waiver and Release of Lien or Payment Bond Claim.” The text of the new law can be found here.

Article by Sarah F. Berry

Tuesday, November 22, 2011

Disaster Remediation Contracts

The 82nd Texas Legislature passed House Bill 1711 to regulate “Disaster Remediation Contracts” which became effective on September 1, 2011. House Bill 1711 is now Chapter 57 of the Texas Business & Commerce Code and regulates contracts for “the removal, cleaning, sanitizing, demolition, reconstruction, or other treatment of improvements to real property because of damage or destruction to that property caused by a natural disaster.”

A disaster declaration is made by the governor and a recent example would include the wildfires throughout Texas. Other examples would include hurricanes and tropical storms that devastated the Gulf Coast.

The new legislation requires a written contract that includes specific terms and disclosures. Failure to comply is a “Deceptive Trade Practice” under Chapter 17, Texas Business & Commerce Code and can result in a wide range of penalties.

There are a few exceptions to the applicability of the new legislation. Notably, the new statutory requirements do not apply to “local” contractors which are contractors that maintained a physical business address in the county in which the property is located or a county adjacent to the county in which the property is located for at least one year preceding the date of the contract.

If you are soliciting contracts in areas under a disaster declaration, you should review your contracts to ensure that the new required terms and disclosures are included.

Article by Sarah F. Berry, Attorney

Monday, August 15, 2011

How is a Promissory Note Different from a Forbearance Agreement?

Under Texas law, a promissory note “is a written unconditional promise to pay another a certain sum of money at a certain time.” (Edlund v. Bounds, 842 S.W.2d 719, 724 (Tex.App. —Dallas 1992, no writ). The time need not be a specific date, but it must be a time that will certainly arrive. For instance, a note payable on demand or “on or before” a specified date may constitute a promissory note. A promissory note is also a contract subject to the rules applicable to interpreting contracts. DeClaire v. G & B Mcintosh Family Ltd. P’ship., 260 S.W.3d 34, 44 (Tex.App.—Houston [1 Dist.] 2008, no pet.).

The difference between a promissory note and a forbearance agreement is that a forbearance agreement is an agreement not to enforce rights you already have.

A forbearance agreement is an agreement typically between a creditor and a debtor whereby the creditor agrees to forgo some legal right in return for concessions from a debtor who is in default. Swilley v. City Inv. Co., 288 S.W. 485, 486 (Tex.Civ.App.—Galveston 1926, writ ref’d) (explaining that forbearance of a legal right is sufficient consideration for a promise of guaranty). A forbearance agreement is a powerful tool for creditors who face debtors in or near default on their obligations, and often should be used in lieu of entering into a promissory note.

In a typical forbearance agreement, a creditor will agree not to sue on a balance due in exchange for certain concessions by the debtor, such as an increased interest rate, as well as various admissions that can prove invaluable to a creditor should the debtor fail to fulfill the terms of the agreement.

It may also contain the remaining balance on the indebtedness, and an admission that the debtor is in default. A creditor might also receive an increased interest rate and a waiver of various notice requirements in the event of a future default. The agreement typically will also contain a provision that allows the creditor to reassert the rights that have been forgone under the agreement should the borrower fail to make a payment, or fail to fulfill any obligation of the agreement by a certain date. If this occurs, the debtor’s signed admissions concerning the original note could prove invaluable in a lawsuit.

Prepared by Chris Patterson. Reviewed and revised by Marc L. Lippincott.

Tuesday, July 5, 2011

Charging Interest in the Absence of a Contract Term for Interest

The best practice for businesses supplying goods and services on credit is to include a contractual provision regarding interest. However, a creditor can charge interest if there is no contract provision regarding interest. Under Texas law, this is called legal interest. Legal interest does not begin to accrue until 30 days after the debt was originally due, and it accrues at a rate of six percent a year. The legal interest rate of six percent per year is simple interest. That is, the interest accrued each year is not compounded by adding it to the principal balance before computing the interest due in each subsequent year. This interest rate is actually “read into the agreement” and becomes the maximum rate that may be charged.

A lender must be careful not to charge in excess of six percent in the absence of a contract provision to do so. Charging a higher rate of interest may result in penalties for usury. Unilateral charging of interest by the lender, even with advance notice, is not enough to establish an agreement to pay interest at a rate greater than the legal rate of six percent.

If a lender charges more than twice the amount allowed by law, or 12 percent, he or she may be subject to penalties under Texas law. These penalties include forfeiture of the principal amount of the loan, reimbursement of any amounts paid by the debtor that was subject to the usurious interest rate, and three times the amount of usurious interest charged, even if the interest was never collected. The lender may also have to pay the debtor’s attorney fees.

Blog prepared by Chris Patterson.

Blog reviewed and posted by Sarah F. Berry.