by John J. McNamara and Mansoor Ahmed
Private construction projects often involve complicated financing and voluminous loan documents that can impact a general contractor’s rights and obligations over and above those set forth in the general contract. This article highlights issues regarding consent and assignment of contractor agreements between a general contractor, owner, and owner’s lender.
In private construction projects, in order to insure against the risk of an insolvent owner and incomplete project, lenders will require an owner to assign to the lender all rights to the contract between an owner and contractor. The contractor, in turn, must consent to this assignment between the owner and lender.
In its basic form, a consent to assignment of the contract is just that: A contractor consents to assignment of the contract to the lender in the event of owner default. Consents are often drafted by lenders to impose additional obligations upon the contractor that are not set forth in the general contract, and these provisions may cause problems to the contractor in the event of owner-default. Accordingly, a consent must be carefully examined in order to fully understand what a contractor is consenting to.
In case of an owner’s default, consents may prevent a contractor from exercising its rights or seeking remedies unless proper notice is given to the lender, and only after a significant time period has passed. Under such circumstances where a general contractor has not been paid, the contractor has no right to terminate the contract and must continue performance of its obligations. Such language must be modified to prevent the contractor from being forced to continue work without payment.
In addition, many consents state that a lender is not obligated to pay the contractor for any amounts owed by the owner if those funds have already been advanced by the lender to the owner, and the contractor must continue to perform the contract for the lender. The risk of nonpayment in these scenarios lies solely on the general contractor. Consents should be modified to require the contractor to perform work for the lender only if the contractor has been paid in full. Otherwise, it is simply not reasonable to expect a contractor to continue to perform work for the lender if the owner has not paid the contractor in full.
Consents often limit a contractor’s ability to recover for changed work. For example, a consent may require written notice to the lender and approval by the lender prior to change orders exceeding a certain amount. If prior approval was not received from the lender and the owner defaults, a consent may prevent the contractor from recovery. Oftentimes, this consent for change orders is overlooked during the project and the impact of this lack of consent may not be realized until after owner defaults.
Consents may limit the contractor’s right to recover for extended performance costs, delay claims, and other costs related to extended performance. Although such provisions are absent in the general contract, contractors may limit their rights by executing consents that preclude time-based claims. These rights are relevant to costs and time delays that occur when a lender takes over the project. Again, contractors must be aware of language that modifies the terms of the general contract and further limits the contractor’s right to recover for legitimate costs and claims.
A contractor must carefully review all contract documents at the outset of any construction project. Where a lender requires a consent, a contractor must fully ascertain its rights, obligations, and limitations in case of owner default.
John J. McNamara is partner, and Mansoor Ahmed is associate at Lane McNamara, LLP.