Guest blog post written by Taylor T. Dolan, Esq., of Lee/Shoemaker PLLC. Taylor Dolan is an associate at Lee/Shoemaker PLLC, a law firm devoted to the representation of design professionals, in DC, Maryland, and Virginia. The content of this article was prepared to educate related to potential risks, but is not intended to be a substitute for professional legal advice.
In the months since COVID-19 halted life as we knew it, business owners and professionals of all industries have been navigating through an uncertain economic climate. With construction projects on hold in some areas, owner loan defaults and bank foreclosures appear inevitable. It’s important for design firms to consider potential risk exposure arising from such economic calamities wherever possible. One area where design firms can minimize risk, that may have been overlooked in the past, is “Consent and Assignment” forms forced by banks on owners just before they close the construction or acquisition loan. The owner inevitably sends this form in emergency fashion to the design professional: “It must be signed or I’ll lose the loan.”
Every business is doing what it can to minimize loss, maintain productivity and protect against foreseeable delays and defaults. This includes banks and other lenders. Owners typically obtain financing from a third-party lender for commercial construction projects. These lenders, knowing that most agreements between owners and design professionals contain provisions otherwise preventing assignment of the contract, may require the architect to execute what’s often called an “Architect or Engineer Consent” or “Architect or Engineer Assignment” (“consents”). This lender form permits the lender to step into the shoes of the owner in the event the owner defaults on the loan or, in some cases, breaches the design contract. Typically, the lender has no obligation to pay the past due fees of the design professional and usually wants to be able to use the construction documents with a design professional other than the author.
In short, these consents usually grant rights to the lender (who writes them) beyond what the owner was afforded in the design contract and take away the design professional’s rights under the signed contract with owner. In the current environment, it is anticipated that lenders will be more aggressive in the language they include in consents and that more projects may be subject to a default by the owner. While a design professional may be told that pushing back on a consent may jeopardize their relationship with the owner and/or impact closing on project financing (from which their fees may be paid), the prudent design professional recognizes the substantial risk that a typical lender-drafted consent creates and will seek appropriate modifications to protect itself. When reviewing a consent, being cognizant of the following issues will assist in knowing when to push back.
What Does Your Design Contract Say?
Usually a design professional who is asked to sign a consent will have already executed a design contract with the owner. The key to reviewing that consent is to know and understand the owner’s and design professional’s rights and obligations under the design contract that was already negotiated. If the consent is asking you to grant any right to the lender that the owner would not have had under your original contract, then the lender is asking too much and you should request appropriate revisions to the consent.
Ownership and Use of Instruments of Service
Consents should not permit the lender to assume owner’s rights under a contract without also assuming the owner’s obligations, past and future. The consent should not grant lender a license to use your instruments of service without conditioning such license on payment of all fees owed to you as required in your design contract. Whether you are paid by the owner or the lender is immaterial; you want to avoid a situation where you have outstanding invoices, the owner defaults, the lender takes over the project, and the lender takes the position you are obligated to continue performing, notwithstanding the outstanding fees owed. Now the owner has stepped away from the project, the lender is licensed to use your instruments of service and is permitted to use them to finish the project, and you have not been compensated.
Representations and Warranties
Lenders may also include language in a consent requiring that the design professional make certain representations and warranties about its design documents, or the project more generally, that the design professional either did not agree to make in the design contract or is not in a position to know or warrant. For example, the lender may request a design professional represent and warrant that:
- it adhered to or will adhere to a heightened standard of care;
- that conditions at the project site are proper for construction and all permits have been acquired for such construction; or
- the design professional will continue to perform its services despite nonpayment of the owner.
Design professionals should not make any representations or warranties above what was agreed to in the design contract.
Notice to Lender
Many consents contain notice provisions requiring the design professional give notice to the lender of any default of the owner under the design contract or any add services exceeding a certain sum. If you agree to provide notice to the lender of an add service, but fail to do so, then the lender may question the enforceability of the add service if it were to take over the project. If the lender insists on receiving notice of add services, you should give thought to how such a requirement may be modified so that you and your team can adhere to the obligation. Moreover, any language conditioning your entitlement to be paid for add services on approval by the lender should be stricken.
While immunity from the adverse impacts of the COVID-19 pandemic is unattainable, design professionals seeking to minimize risk exposure should internally discuss both the overall purpose of consents and the substantial risks associated thereto.
Victor will be hosting a webinar featuring Jonathan Shoemaker, of Lee/Shoemaker. He will address the impacts of the pandemic on design professionals while using industry standard documents as a foundation.
Don’t Just Flatten – Get Ahead of the Curve in Risk Management
Wednesday, May 27, 2020
1:00 – 2:30 pm EDT