Construction Lending

Question 1

What is the definition of “lender” in Chp 713:?

Answer 1

Any person who loans money to an OWNER for construction of an improvement to real property, who secures that loan by recording a mortgage on real property, and who periodically disburses portions of the proceeds of the loan for the payment of the improvement.

Question 2

In order to be an enforceable contract, a construction loan, like any credit agreement, must ___________________.

Answer 2

Be in writing, be signed by the creditor and debtor, express consideration, and contain the material terms. These requirements are imposed on loan modifications, also.

Question 3

At a minimum, what are the material terms of a construction loan agreement?

Answer 3

The money is being given as a loan, the amount of the loan, basic repayment terms, and the interest rate.

Question 4

A lender can be held liable for violating the terms of the construction loan just as any party can be held liable for breach of K. In addition, a defendant in a foreclosure suit may have an ________________ if the lender _________ mismanaged or ____________ disbursed the proceeds of a loan.

Answer 4

affirmative defense
grossly
negligently

Schaeffer case

Question 5

If a lender participates in the marketing/sale of real property he may be liable pursuant to Johnson v. Davis if he ________________.

Answer 5

Knows of material defects or issues affecting the value of the property and fails to disclose them to the buyer.

Question 6

Can a lender ever assume the liability of a condo developer?

Answer 6

Yes. If the lender forecloses on a condo project and undertakes to complete the project and sell the units, he has assumed the role of developer and will have liability just like a typical developer for those aspects of the project he completed. Keep in mind the developer warranties of 718.203(1) would apply to the lender also.

Question 7

Lenders routinely perform periodic inspections of the improvements they are financing. Does a lender assume any duty to third parties by doing so?

Answer 7

As a general rule, the lender does not have liability to an owner or contractor arising out of the lender’s property inspections, as the lender is performing those inspections primarily for his own benefit. However, the terms of the construction loan agreement could alter this general rule of law.

Question 8

If a lender is disbursing the loan proceeds directly to the contractor, the lender has a duty to the owner to __________________.

Answer 8

make proper payments pursuant to Chp 713.

Question 9

If a lender is disbursing the loan proceeds directly to the contractor, the lender has the obligation to _______________ before disbursing any funds.

Answer 9

record the Notice of Commencement

Question 10

A lender disbursing the loan proceeds directly to the contractor must retain final payment until ________________.

Answer 10

the contractor has provided a Final Payment Affidavit.

Question 11

If the contractor’s Final Payment Affidavit lists unpaid lienors who have given notice and the lender chooses make payments directly to those lienors, the lender must _____________.

Answer 11

send written notice to the contractor 10 days prior to making payment stating which lienor it intends to pay directly and how much it intends to pay the lienor.

Question 12

If the contractor’s Final Payment Affidavit to the lender shows that lienors giving notice are owed more than the amount of loan proceeds left, the lender may not pay anyone until ________________.

Answer 12

the contractor has paid the lender the difference. If contractor fails to do this within 10 days of demand, the lender can proceed to pay the lienors giving notice directly.

Question 13

Must lender misconduct rise to the level of fraud in order for a claimant to have a valid claim for an equitable lien?

Answer 13

No. Fraud is not necessary. Keep in mind the claimant must not have an adequate remedy at law in order to have a valid equitable lien claim.

Question 14

If a lender decides to cease funding, it must give the contractor and all lienors giving notice written notice within _____ days of the decision.

Answer 14

5

Question 15

Will a lender have any liability to the contractor and lienors if it provides them with written notice within 5 days of its decision to cease funding?

Answer 15

No.

Question 16

If the lender fails to give the contractor the written notice of its decision to cease funding, or gives a late notice, is the lender liable to contractor and, if so, to what extent?

Answer 16

Yes, the lender is liable for contractor’s actual costs of material and labor incurred between the time he should have received notice of the decision to stop funding and the date he actually received the notice, plus 15% for OH, profit, and all other costs. However, the lender cannot be liable for more than the amount left in the construction loan, unless the lender’s failure to give notice was done for the purpose of defrauding the contractor.

Question 17

When does a Notice of Termination effectively terminate a Notice of Commencement?

Answer 17

30 days after recording is the default timeframe, but the Notice of Termination can state an effective date further out than 30 days (but cannot set it sooner than 30 days).

Question 18

A Notice of Termination can only be recorded in two scenarios. What are they?

Answer 18

1. Construction is complete, OR,
2. Construction has been ceased prior to termination and all lienors have been paid in full or pro rata pursuant to the lien law.

Question 19

A Notice of Commencement that does not specify its effective duration is effective for how long?

Answer 19

1 year from recording.

Question 20

What information must be included in/with a Notice of Termination?

Answer 20

• the same information as is on the NOC
• the recording information for the NOC and the date of the NOC
• the date the NOC is terminated, which may not be less than 30 days from recording the NOT
• a statement specifying whether the NOT applies to all the real property that is subject of the NOC or only a portion
• a statement that all lienors have been paid in full
• a statement that the NOT has been served on the contractor and all lienors giving notice prior to recording
• the contractor’s Final Payment Affidavit must accompany an NOT

Question 21

Is an owner (or lender who pays the contractor directly) entitled to rely on the accuracy of the contractor’s Final Payment Affidavit.

Answer 21

Yes, but not as to lienors who have given notice.

Question 22

Must the Notice of Termination be sworn?

Answer 22

Yes.

Question 23

The owner must ________ the Notice of Termination on _____________ prior to recording it.

Answer 23

serve

the contractor and all lienors giving notice (who have not provided final lien waivers)

Question 24

Subordination clauses are generally enforceable in FL, but can they be used to require a contractor to give up his priority position regarding his lien rights such that the lender attains a priming lien or other position of priority?

Answer 24

Unknown. No case has addressed this. However, there would be an argument it would run afoul of 713.20, which says a right to claim a lien may not be waived in advance.