THE REALITY WHEN THE CONSTRUCTION LENDER FORECLOSES

model homeSometimes, projects go bad and the developer’s (owner) lender forecloses on the real property, whether at some point during construction or after. When this happens, there are often unpaid contractors which may be named in the lender’s lawsuit so that their inferior interests to the property are foreclosed. Hopefully, the general contractor has a pay-when-paid provision in its subccontracts so that it is not responsible to pay subcontractors until it receives payment from the developer for the subcontractor’s work. While both the general contractor and subcontractors have lien rights (if the rights were preserved under Florida’s Lien Law), when the developer’s lender forecloses it more often than not means that the general contractor and its subcontractor’s liens are worthless since there will not be a surplus of funds after a foreclosure sale.

 
The recent case of CMH Homes, Inc. v. LSFC Company, LLC, 38 Fla. L. Weekly D1712a (Fla. 1st DCA 2013), illustrates a creative argument a general contractor tried to argue when the construction lender moved to foreclose on the construction loan and named the general contractor to foreclose its inferior interest to the property. In this case, a developer took out loans to finance a residential development. The lender recorded a mortgage.

 

Thereafter, the developer entered into a contract with a contractor. The contract provided that the contractor would construct a model home and would be paid for the model home when the model home was sold, but the model home could not be sold until other homes in the development were first built. (Also, in the contract, the contractor agreed that the developer possessed title to the lot in which the model home was built free and clear of all encumbrances except for the developer’s lender’s mortgage.)

 

 

The notes the developer executed and the mortgage were assigned to a new entity. The new entity filed a lawsuit to foreclose the mortgage and named the contractor as a defendant (in order to foreclose any interest the contractor may have relating to the real property). In defense, the contractor argued an unjust enrichment theory, that being it would be inequitable for the lender / new entity to take ownership of the model home without paying the reasonable value for the model home. The trial court rejected the contractor’s unjust enrichment defense. The First District Court of Appeal affirmed the trial court maintaining that the contractor conferred no benefit upon the new entity (or original lender) because the decision to loan money to the developer was made prior to the construction of the model home and prior to the developer defaulting on the loan. (Besides, the contractor contractually agreed that its interests in the real property the model home was built was inferior to the security interest of the lender’s mortgage.)

 

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.

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