RECOMMENCING CONSTRUCTION ON A PROJECT DUE TO A CESSATION OR ABANDONMENT

shutterstock_733809610There are instances where the owner of a construction project terminates its general contractor prior to the completion of the project.  There are instances where the owner suspends the work prior to the completion of the project, meaning there is a cessation in the construction.  And, there are instances where the project is simply abandoned.  I have been involved in all instances, and the owner’s reasons vary…from an owner claiming a termination for default, termination for convenience, or a suspension or abandonment due to the market or financial factors. Regardless of the owner’s reasoning, at some point—hopefully—the owner will want to resume or, more properly stated, recommence construction and complete the project. 

 

Based on the length of the cessation, when the owner finally recommences construction, oftentimes the right approach is for the owner to strictly comply with the recommencement procedure set forth in Florida Statute s. 713.07(4):

 

 

If construction ceases or the direct contract is terminated before completion and the owner desires to recommence construction, he or she [1] may pay all lienors in full or pro rata in accordance with s. 713.06(4) prior to recommencement in which event all liens for the recommenced construction shall take priority from such recommencement; or [2] the owner may record an affidavit in the clerk’s office stating his or her intention to recommence construction and that all lienors giving notice have been paid in full except those listed therein as not having been so paid in which event 30 days after such recording, the rights of any person acquiring any interest, lien, or encumbrance on said property or of any lienor on the recommenced construction shall be paramount to any lien on the prior construction unless such prior lienor records a claim of lien within said 30-day period. A copy of said affidavit shall be served on each lienor named therein. Before recommencing, the owner shall record and post a notice of commencement for the recommenced construction, as provided in s. 713.13.  [Per Florida Statute s. 713.13(5)(a), if an owner changes contractors, the owner must record either a new notice of commencement or notice of recommencement.]

 

Under this statute, when the owner wants to recommence construction, the owner has two options. 

 

First, the owner can pay all lienors in full or pro rata pursuant to Florida Statute s. 713.06(4), which lists the priority of payments to lienors.  I like the idea of getting final releases or a release through the date of payment with no carve-out (for retainage or otherwise).

 

Second, the owner can record an affidavit stating his/her intention to recommence construction and that all lienors giving notice (the contractor and those that served a notice to owner) have been paid in full except those specifically listed.   Thirty days after the affidavit is recorded, the rights of any person that acquires an interest in the property or liens the property is superior to any lien on the prior construction (before construction ceased) unless such lienor records a claim of lien within the 30-day window.   If the lienor already recorded a lien, the lienor would need to re-record the lien within this 30-day window to preserve its lien priority (although, importantly, the re-filing does not extend the one year period for the lienor to foreclose on its lien).   See Foy v. Mangum, 528 So.2d 1331 (Fla. 5th DCA 1988) (re-filing the lien ensures the lienor has priority over lienors performing recommenced work, but it does not delay the lienor’s requirement to timely foreclose the original recorded lien).  Any lienor identified in the affidavit would get served with a copy of the affidavit.

 

The owner also records a new notice of commencement / notice of recommencement for the recommenced work where any liens relating to the recommenced work would relate back, from a lien priority standpoint, to this notice of commencement.

 

A value to the owner complying with this procedure is that it can apply the remaining contract balance to the recommenced work and if the funds are expended the total amount the owner will be liable for liens recorded before the cessation could be reduced or eliminated (i.e., the proper payments defense). See Alton Towers, Inc. v. Coplan Pipe & Supply Co., 262 So.2d 671 (Fla. 1972) (if owner complies with the recommencement procedure, the owner’s liability is limited to original direct contract price, thus where completion costs exceeded defaulting contractor’s direct contract amount, supplier was not entitled to recover from owner).

 

If you are an owner or contractor involved in a ceased project, or a project where construction will be recommencing, it is in your interests to engage legal counsel familiar with the recommencement procedure.  It is important that you understand construction lien priority, how the recommencement can impact lien priority, and the owner’s potential liability if it properly complies with the recommencement procedure.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

TERMINATING THE NOTICE OF COMMENCEMENT (WITH A NOTICE OF TERMINATION)

shutterstock_259385300The notice of commencement is important for purposes of construction lien priority.   Stock Bldg. Supply of Florida, Inc. v. Soares Da Costa Const. Services, LLC, 76 So.3d 313, 317 (Fla. 3d DCA 2011) (“[A] notice of commencement serves to determine the priority of liens under the Construction Lien Law.”).   A lien relates back in time to the date the notice of commencement was recorded assuming the notice of commencement is still in effect when the lien is recorded (or an amended noticed of commencement is recorded).  Lien priority is very important and the reason why a contractor should always want to ensure there is an effective notice of commencement in place rather than an expired notice of commencement.

 

For the same reasons why a contractor wants to ensure there is an effective notice of commencement, there are times an owner wants to terminate a notice of commencement.  An owner may want to terminate the potential priority of a construction lien.  For instance, say the owner is refinancing or obtaining a construction loan in the midst of construction.  A lender will want to ensure its mortgage maintains first priority and certainly priority over a potential construction lien.  Otherwise, why would a lender finance the construction if it does not maintain first priority. It generally will not.  Thus, an owner needs to terminate the notice of commencement so that the closing occurs on the loan and the mortgage recorded before a new notice of commencement is recorded and construction continues.

 

Florida Statute s. 713.132 allows an owner to statutorily terminate the effectiveness of a notice of commencement by recording a notice of termination.  It is a statutory procedure that must be followed and it is important that an owner and contractor seek the assistance of counsel in following this procedure.  The statute contains in relevant part:

 

(3) An owner may not record a notice of termination except after completion of construction, or after construction ceases before completion and all lienors have been paid in full or pro rata in accordance with s. 713.06(4). If an owner or a contractor, by fraud or collusion, knowingly makes any fraudulent statement or affidavit in a notice of termination or any accompanying affidavit, the owner and the contractor, or either of them, as the case may be, is liable to any lienor who suffers damages as a result of the filing of the fraudulent notice of termination; and any such lienor has a right of action for damages occasioned thereby.

 

(4) A notice of termination is effective to terminate the notice of commencement at the later of 30 days after recording of the notice of termination or the date stated in the notice of termination as the date on which the notice of commencement is terminated, if the notice of termination has been served pursuant to paragraph (1)(f) on the contractor and on each lienor who has a direct contract with the owner or who has served a notice to owner.

 

If a notice of termination of a notice of commencement is recorded as a result of the cessation of construction, a new notice of commencement must be recorded before completion of the improvement may be recommenced.”  Stock Bldg. Supply of Florida, 76 So.3d at 317-18.    

 

From a lienor’s perspective, it is important that they understand that when a new notice of commencement is recorded, the lienor must re-serve any required notices to preserve lien or bond rights (such as a notice to owner or notice of intent to look to the contractor’s bond).  Stock Bldg. Supply of Florida, 76 So.3d at 318 (when owner recorded new notice of commencement, the project began anew and lienor was required to re-serve notices under Florida’s Construction Lien Law).

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

YES, LIEN PRIORITY IS IMPORTANT

UnknownWhen a construction lender forecloses, a lienor (e.g., contractor, subcontractor, supplier) is in a bad predicament because the lender’s mortgage will maintain priority over the lienor’s construction lien. The lienor would be named in the lender’s lawsuit (provided a lien has been recorded) because the lender will look to foreclose or wipe out the lienor’s inferior construction lien

 

From a real-world standpoint, if there is not enough equity in the real property to satisfy the lender’s mortgage / loan, there is not going to be any surplus from a foreclosure sale to satisfy the inferior construction lien(s).  Since a lien really is only as good as the equity in the real property being liened, if there is not any equity in the real property and/or the construction lender is foreclosing, pursuing the lien may be an exercise in futility.

 

Sometimes, due to the lack of equity in the real property at the time of the foreclosure, the lender will file the foreclosure lawsuit but delay in prosecuting the action.  One reason is that the lender knows the owner is under water and hopes the value in the property increases down the road.  The lender knows that it will ultimately take possession of the real property but at the time of the foreclosure the value of the property is much less than the amount owed under the loan. 

 

Unfortunately, irrespective of any delay by the lender in prosecuting the foreclosure, the lender’s interest in the real property will always take priority.  There is little the lienor can do to establish that its lien should jump priority over the lender’s mortgage.  This point was confirmed in the non-construction case U.S. Bank National Association v. Farhood, 39 Fla. L. Weekly D12594a (Fla. 1st DCA 2014), where the appellate court claimed that it was error for a trial court to sanction a lender in a mortgage foreclosure lawsuit for dilatory practices by deeming that a condominium association’s lien on a unit for unpaid assessments took priority over the mortgage.

 

So, yes, the priority of your construction lien is important and should always be a consideration in a lien foreclosure action.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.