The “Contractor’s Consent to Assignment” or “Contractor’s Consent” is a common form requested at the start of a commercial construction project and required by the lender. Many times, owners will wait until the prime contract is signed to present contractors with this document, which they present as a matter of housekeeping.
The purpose of the Contractor’s Consent is to allow the owner’s bank to assume ownership in the event that the owner defaults on its loan in order to allow the bank to compel the contractor complete the project. These documents serve a legitimate purpose in ensuring that the bank will not be left with a hole in the ground; however, the contracts have significant legal consequences and often include substantial waivers and promises that contractors would never accept during negotiation of the prime contract.
When reviewing these documents, contractors should keep an eye out for the following clauses, which can drastically affect their rights regardless of whether the owner actually comes to default on their loan.
Limitation on Change Orders
Most Contractor’s Consent forms include provisions barring a contractor from entering into an agreement with the owner to amend the Construction Contract without the written approval of the lender. These provisions ensure that the business terms of a deal the bank is financing don’t change without the bank’s express consent.
While reasonable in purpose, these provisions can present a problematic roadblock as project schedules rarely allow for the additional time needed to obtain these approvals, and the stated obligation means that even legitimate change orders signed by the owner for work already performed may be deemed invalid if the contractor did not wait for the bank’s approval.
To correct this provision, contractors should request that approvals either be limited to change orders exceeding a certain threshold amount for individual change orders or exceeding a total amount for all changes. This not only allows the project to keep moving without unnecessary delays, but also ensures that significant changes won’t be made without the bank’s knowledge.
Limitation on Termination Right
Many forms also include language that restricts the contractor’s right to suspend or terminate the contract without the bank’s approval. Contractors should strongly resist such provisions, as they need the ability to stop work (and to stop incurring obligations to their subcontractors) in the instance they are not being paid—regardless of whether the owner is making its loan payments.
To address this concern, most banks will allow contractors to amend these provisions to suspend or terminate, but only after they have given the bank advance notice. This adjustment helps both the contractor and the bank, giving the contractor the ability to put more pressure on the owner by notifying the bank of any default and to stop work if needed, while simultaneously allowing the bank to receive earlier notice of problems on the project.
Waiver or Subrogation of Mechanics’ Lien Rights
Many banks ask the contractor to waive their mechanics’ lien rights (or allow the bank to step in front of the lien) as part of the Contractor’s Consent. Contractors should push back strongly on such provisions as liens are powerful and are often the only way to receive payment if the owner becomes bankrupt. In many instances, banks will agree—albeit reluctantly—to accept this change, but contractors should expect some pushback, and this may be a sticking point.
Waiver of Unpaid Amounts
Nearly all Contractor’s Consent forms include language that requires the contractor to continue performance once the bank takes place of an owner, as long as the bank pays all bills from that point forward. While this may seem reasonable on the surface, this provision leaves the contractor unpaid for all amounts owed at the time of the default, and these amounts almost always remain unsatisfied.
Instead, contractors should insist that if the bank assumes the contract, then the bank must also assume the owner’s obligations—including payment of outstanding amounts. Again, banks will push back on this modification to the terms but, in the end, most will accept some version of this provision.
Ability to Sell and Assign
Many forms include language allowing the bank to sell or assign the project to a third party in the event of an owner default. Because most banks are not in the business of owning and operating projects, this can leave the contractor at significant risk if the bank selects either a disreputable owner for the new assignment or an entity presenting a payment risk.
To avoid this risk, contractors should insist that they must be allowed to accept or reject the bank’s chosen assignee, with the caveat that approval will not unreasonably be withheld.
Contractors should be aware that some banks will balk at some of these positions, and negotiation may be tense at a time when all parties are anxious for the project to start. Nonetheless, contractors that insist on fair contracts will have greater protections and will be in better position to avoid the significant pitfalls that could otherwise result.
