Texas Construction Law Updates

Pitfalls of Contractor’s Consents

Michael Lilly -

Friday, October 23, 2020

You’ve negotiated your Agreement with the Owner and you’ve started to mobilize.  The Owner is still trying to close on its construction financing – but they are “close.”  You receive a call from the Owner’s representative, the representative says “closing is scheduled for tomorrow, the lender just needs you to sign a document before they will fund, it’s no big deal, I’ll send it over to you right now – just sign it and get it to me as soon as possible.”  Finally!  The project is about to start!  You receive the document, a Contractor’s Consent, and you are inclined to just sign it and get to work. Should you?

What Is It Really?

In virtually every construction loan transaction with a commercial lender, the lender will require the borrower (owner) to assign the borrower’s interest in its construction contract with the general contractor, to the lender as additional collateral. This document is generally referred to simply as an Assignment of Construction Contract or Collateral Assignment of Construction Contract.  In connection with the borrower’s delivery of the Assignment of the Construction Contract, the lender will generally require that the borrower’s general contractor consent in writing to such assignment.  Thus, a Contractor’s Consent is first and foremost the general contractor’s written consent to the borrower’s collateral assignment of the construction contract.  However, lenders will ordinarily include multiple additional terms and concepts that the contractor should consider.

THE MAJOR ISSUES

If the Lender elects to assume the Construction Contract, when will it happen?

In the event of a borrower default under the loan documents, nearly every Contractor’s Consent sets forth a procedure allowing for the lender to either (i) terminate the project, or (ii) to assume the construction contract and take-over the project. Often, however, the consent will not require that the lender makes its choice, to either terminate or assume the construction contract, within a specific period of time.  Thus, should the lender declare the borrower in default, what is the general contractor to do?  The short answer is – the general contractor must stop work and wait on the lender to make a decision.  This will, in the very least, result in additional de-mobilization costs and potentially significant re-mobilization costs (should the lender elect to proceed with the contract).

What can the general contractor do?  Negotiate a specific time frame for the lender to make its election to terminate or assume the construction contract.

Lender consent to Change Orders.

Often Contractor’s Consents will include a specific obligation that the borrower and contractor obtain the Lender’s prior consent to any Change Orders.  The result – an already time consuming and often difficult change order process become infinitely more time consuming and difficult, as lenders are typically reluctant to agree to changes in cost and scope for a project.

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