Rogers Towers: Lender Workouts: Avoid the Money Pit - Don't Forget the Assignments

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The economy has touched virtually every business and individual. One of the most impacted industries is the financial market. Lenders' business practices have adjusted significantly from financing projects and purchases to collection and enforcement of security interest. A large portion of these cases result in litigation.  However, in an increasing number of instances, workout arrangements and/or settlement agreements are executed between the borrower and lender. Many of these matters involve recently constructed improvements or improvements that are still under construction. In these situations, the lender should thoroughly evaluate the improvements as part of the due diligence process while negotiating workouts and/or settlement agreements. This process should include a facility assessment performed by a qualified expert such as an architect, engineer or general contractor, followed by an analysis of viable avenues for recovery of damages associated with identified construction defects. This evaluation will provide the lender with a better understanding of the soundness of the improvements. If defective construction is identified, the lender should be certain to acquire an assignment of the construction contract as well as any and all claims against the parties responsible for the defective construction. (While many construction contracts contain language prohibiting assignment, the claims arising from the contract are still typically assignable.) Even if the party responsible for the defective construction is no longer a viable business, an insurance policy is typically available to provide coverage for damages.

Keep in mind that these avenues for potential recovery of damages resulting from construction defects may also be available in a standard foreclosure where the construction contract was not assigned. Under Florida law, an owner can maintain a claim against a party responsible for a building code violation independent of contractual privity.

These precautionary measures can help provide a lender with greater assurance that it is acquiring security in a solid improvement rather than a money pit.