Table of Contents
- Introduction
- Consent to Assignment
- Lien Subordination Agreement
- Completion
- Lender's Right To Approve Change Orders
- Who Executes The Agreement
- Limitations On Right To Suspend Work And Or Terminate
- Architects And Warranties
- Conclusion
APPENDIX A -"Before" version of Contractor's Consent A-1
APPENDIX B - "After" version of Contractor's Consent B-1
APPENDIX C - "Before" version of Architect's Consent C-1
APPENDIX D - "After" version of Architect's Consent D-1
Abstract
Everyone is excited. After months of delays, the owner's project financing is about to close. The architect and contractor have each negotiated their contracts with the owner. The architect is looking forward to getting paid for the construction documents it has prepared out of the first loan advance and the contractor is anxious to break ground. At the eleventh hour of the loan closing, the contractor and the architect are presented with documents by the owner that they are told must be signed in order for the owner's financing to close. By normal construction documentation standards, these are very short agreements, consisting of only a few pages. Every lender has its own version of such agreements, and they are often called "Consent and Subordination" or something similar. Notwithstanding their rather diminutive size in comparison to the loan documents and the contract documents, make no mistake about it - the agreements the contractor and/or architect are being asked to sign are potentially powerful documents with far reaching and potentially catastrophic consequences for the unwary. This paper will address some of the larger issues typically facing the contractor or architect being asked to sign such an agreement.
The ultimate objectives of the parties in this scenario are simple. The owner desires to secure the financing necessary to construct its project, the lender desires to lend money to the owner on terms that will maximize the prospect for repayment of the loan and the lender's ability to complete the project in the event that the owner defaults on the loan. The architect and contractor simply want to be paid for their respective services in designing and constructing the project according to the terms of their contracts.
The project lender will typically require the collateral assignment of the various contracts the owner may have with its design professionals and contractors as part of its overall loan agreement. This is very understandable since the lender wants to be in a position to see the project completed if the owner defaults. Since most of the standard forms of design and construction agreements prohibit assignment of rights under a contract without the other party's written consent, the lender's request for consent to such collateral assignments is reasonable and prudent.
An owner can find itself in a dilemma if it has signed a binding contract with an architect or contractor and failed to insert provisions in that contract requiring the architect or contractor to agree to the terms substantially similar to what the lender will eventually require. If the architect or contractor refuses to agree to the terms with the lender, then the lender may refuse to close or fund the construction loan. The owner may face a breach of contract claim from the architect or contractor, if the owner tries to switch to another architect or contractor who may be willing to agree to the lender's terms. As a practical matter, such a switch late in the game is fraught with problems anyway. On the other hand a contractor or an architect who signs a contract with an owner including a provision requiring them to execute something tantamount to "any and all documents required by the construction lender" may find that they have little leverage in negotiating necessary or desirable modifications to the documents presented by the lender.
Of course, lenders have the "golden rule" in their favor. Since they have the money, they often believe that they can simply dictate the rules. Sometimes, lenders will go too far and try to dictate terms with which no prudent architect or contractor should agree. There are architects or contractors who have routinely signed whatever was put in front of them by lenders, only to learn that by doing so they have opened themselves up to risks and obligations far beyond what they agreed to assume under the contracts that they negotiated so carefully with the owner.
Sample "before" and "after" versions of contractor and architect agreements, based on forms similar to ones used recently by a national lender, are attached in the Appendix. Most lenders have their own unique version of these agreements, and most address, in one way or another, the issues discussed in this paper.
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