Imposing Third-Party Requirements on Construction Managers and Contractors

| Jul 3, 2013 | Surety Bonds and Construction Insurance

With a few exceptions, on each project on which we represent a developer, the developer enters into agreements with a lender, a landlord, or both. While the developer may be able to fulfill the obligations imposed on it pursuant to the terms of such agreements, problems may arise when those agreements impose obligations on third-parties, including construction managers and contractors. Based on the foregoing, we are available to work with our clients in negotiating construction-related provisions in loan agreements and leases.

The following examples help to illustrate the problem.

When a developer enters into a ground lease, as tenant, the developer must meet certain insurance requirements in connection with its construction on the subject property. While fulfilling such requirements may not be an issue for the developer, if a contractor cannot meet the insurance requirements imposed on it under the ground lease, the developer may find itself in breach of the ground lease. For example, if the ground lease requires all contractors to maintain umbrella or excess liability insurance policies with a limit of not less than $10,000,000, the ground lessor could declare a default if a smaller contractor cannot obtain such insurance.

A developer may find itself in a similar predicament with respect to loan agreements. A lender often requires a developer to obtain from its construction manager either a corporate guaranty or performance and payment bonds. In many instances, the lender dictates the form of the bonds. In such an instance, the developer, through its construction manager, has the unenviable task of negotiating the terms of the bonds, while sureties are notoriously loath to do so.

The foregoing are but two examples of construction-related provisions in loan agreements and leases. Other common issues that arise in loan agreements include a lender’s approval rights of change orders, and consents to assignment to be executed by construction managers.

As illustrated above, it is of paramount importance to review with us all construction-related provisions in loan agreements and leases before such documents are signed.