Here is what you should have done. You should have written to the contractor a letter by certified mail to request that the contractor resolve his payment issues and correct/complete his work. In that letter, you should advise generally what work needs to be corrected/completed. You should also indicate that if the contractor does not return to correct/complete his work, you will have to retain another contractor, and will hold the first contractor responsible for the costs. Finally, indicate in your letter that if the contractor does not advise that he will return to correct/complete his work within one week, you will presume that he has no intention of doing so, and you will hold him responsible for the costs of correcting/completing his work.
When the contractor does not return, you can retain another contractor to correct/complete the first contractor's work. Make sure that the second contractor itemizes his invoices and lists the costs to correct/complete the first contractor's work. You cannot charge the first contractor with the cost of work that was not within the first contractor's scope of work. For example, if the first contractor was supposed to install carpet, you cannot charge him for the second contractor's installation of ceramic tile.
Once you have tallied the costs associated with correcting/completing the first contractor's work, you can consider suing him to recover those costs. The jurisdictional maximum for small claims court in Texas is $10,000. So, if your claim exceeds that amount, you will have to sue in County or District Court. In small claims court, you can represent yourself. In County or District Court, you will have to retain an attorney. However, under Texas law, you would be entitled to recover attorney's fees if you prevailed.
Make sure that you take a lot of photos of the first contractor's work. Digital photos with the date of the photo imprinted on the photo are best. You should document the condition in which the first contractor left the work and what it took to correct/complete the work.
If the project involves your house, the house is your homestead, if it is in your name and you must live there. If so, for a contractor to be entitled to file a valid mechanic's lien on the homestead, he would have to comply with Chapter 53 of the Texas Property Code. Among the requirements are a written contract signed by the owners of the homestead (husband and wife), certain homestead warnings, and filing of the contract with the county clerk. Those formalities do not usually happen. Without them, any attempted mechanic's lien filing would be invalid.
If the contractor did not properly perfect a homestead mechanic's lien contract, you should write a letter by certified mail to demand that the lien be released, pointing out that the property is your homestead, and why the contractor has not perfected a homestead mechanic's lien. If the contractor does not voluntarily release the lien, he could be liable for a fraudulent lien under Chapter 12 of the Texas Civil Practice & Remedies Code. Chapter 12 can award damages of $10,000 or actual damages whichever is greater, plus attorney's fees.
You can also demand that the lien be released under Section 53.160 of the Texas Property Code, which provides for a summary procedure (no trial necessary) for the removal of an invalid lien on someone's homestead.
I have a lot of mechanic's lien materials (the law, notice forms, deadline charts, etc.) at my web site, The Construction Report. The web address for The Construction Report is:
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Precision in an answer for these types of issues are difficult by e-mail. Let me give you these broad guidelines, if the contractor breached the contract, and your out-of-pocket increases, then the original contractor is liable for the reasonable difference between the contract price and the actual, reasonable cost. The contractor will probably claim you breached the contract by firing him. If he was not timely working the job or had to ask for more money to buy materials for which you had paid, you probably had good grounds to fire him. If he files a lien, you can either 1) wait for the limitations period to expire for a homestead for one year; or 2) sue to remove the lien. If you sue for damages, you could bring the suit in Justice of the Peace court in the precinct where the contractor resides.
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I generally concur with the analysis of the law provided by the other attorneys. Rather than reiterate the same legal precepts, I will give you a practical approach. First, you should always thoroughly investigate the background of any contractor with whom you anticipate doing business. I say this because unfortunately there are many "fly-by-night" contractors out there who are willing to take your money. Even if you have a valid legal claim against the contractor, you may not be able to recover anything from him. We call this "judgment proof." You may not want to spend additional sums with an attorney when your chances of recouping the funds are only minimal. Moreover, my experience with such contractors is that they are usually all talk and no action.
With respect to his threat to file a lien, if the property is your homestead, I seriously doubt he has taken the steps necessary to have properly perfected lien under the Texas Property Code. Without an enforceable lien claim, the mere filing of a lien affidavit does not improve his position. As others have stated, the lien claim becomes unenforceable as a matter of law after the expiration of one year if no action is taken by him to enforce the lien. My advice is that unless you are intent on selling or refinancing your homestead in the next year, just ignore it.
However, if you need peace of mind or it is matter of principle, then hire an attorney to take the steps necessary to have the claim declared invalid or unenforceable, but just understand you may not get back the money you paid to the attorney.
Good luck. I hope this helps you. See more info on my website: www.trflienlawyer.com