If there was any doubt about the current hostile lending environment, consider an encounter New Jersey architect Gregory La Vardera had recently with a regional bank. Mere hours before his clients’ construction loan settlement, the bank required his signature on an “assignment of architect’s contract.” In normal conditions, this is routine paperwork ensuring that, if the client defaults, the architect will service the project for the bank under the original contract terms.
Now, however, it included language pressuring La Vardera to give up basic rights. It stated, for example, that even before default, the bank would have to vet any contract changes. It also proposed that he would accept any third party to whom the bank assigned his contract, and that the bank would have full rights to use and reuse his design without additional compensation.
“It was perhaps the most outrageous contract request I’ve ever been presented with, and done in the context of, ‘You’d better sign this or you’re going to screw up your clients’ settlement,’” La Vardera says.
It’s just one example of the shenanigans banks are pulling these days as clients, who are tentatively trickling back, try to get projects funded. Although architectural services skew to higher income brackets, most clients still depend on banks for financing. And banks, still stuck with toxic loans and taking the heat for the real estate bust, are making it difficult for even the most financially sound clients to hire architects.
The assignment-of-contract glitch, though panic-inducing, is fairly easily resolved. A more systemic funding farce is low-ball appraisals. Almost everyone has stories of projects that shut down when appraisers failed to offer a value that made sense. More on that later. But suffice it to say that the road to housing recovery will be long, thanks in part to dysfunctional lending practices. Like it or not, banks get to call the shots. Architects and their clients will have to be patient—and resourceful—because there is no quick fix.
The assignment of architects’ rights can surface at any time, even years after the original architect-owner contract is executed. Basically, it says that if party A goes under, party B takes over the contract to get the project done. Now, though, banks are trying to make changes in their favor. “They’re often asking the architect to provide services beyond the normal scope, such as ensuring that all utilities are in place and permits are secured, which is the contractor’s job,” says Ken Wortley of Philadelphia-based Wortley/Poole Professionals, a risk manager and insurance broker for design professionals. “Banks literally see them as a wholesale opportunity to make changes to the agreement, or ignore it entirely and make their own provisions.”
The situation is tricky because not only are architects exposing themselves to greater liability on the job, but they’re also at risk for crashing the client’s settlement. Wortley advised La Vardera to sign the bank contract but strike the offensive language and ask for payment of any outstanding fees the client owed. The settlement proceeded on schedule.
But there’s more architects can do. Attorney Randy Koenig, FAIA, Koenig Jacobsen, Irvine, Calif., says he reviews at least one urgent assignment of architect’s contract a month. “With stalled projects on the rise, lenders are placing more onus on these assignment of contracts,” he says. “And the timing is interesting. It’s always under drama because it must be done immediately. The architect gets severe pressure from the owner to accommodate, which can lead to a careless transfer.”
His advice: Make sure an original owner-architect contract is in place before the client applies for a loan. Include an anti-assignment clause (legal leverage for negotiation) stating that “the architect shall have no obligation to execute any documents or agree to any assignment of architect’s rights or obligations after the execution of this agreement without the architect’s express written consent.”
A careful reading of the bank’s contract can keep architects from undoing in one fell swoop what they’ve negotiated with the owner, Koenig says. Scope creep is the main red flag. When an owner defaults, banks expect the architect to protect their investment by overseeing construction, usually without compensation. Architects should demand payment for additional services, but limit their exposure. “The bank wants to obfuscate that separation between design and construction. We can’t be responsible for construction errors, and we fight hard to promote that distinction,” Koenig says.
When liabilities blur, the standard indemnity agreement also is in jeopardy. Koenig counsels architects never to “hold harmless” the lender or agree to pay its legal fees if a dispute arises. “In my 25 years of practice, this has been the biggest legal issue affecting architects’ businesses,” he says. “I’d add a phrase—it won’t be in there—stating that the architect’s liability is limited to the amount of the fee or available insurance, whichever is less.”
Koenig draws one more pre-emptive line in the sand: Architects must insist that all outstanding bills be paid before they start working for the lender. That’s critical, he says, because banks like to insert that the lender won’t be responsible to pay the architect’s fees if the lender paid the owners for those fees. But that doesn’t mean the owners paid the architect. And until they do, the bank doesn’t have license to use the plans.
San Diego architect-developer Jonathan Segal, FAIA, takes self-protection a step further. His original contracts require a $25,000 fee to change parties. “The assignment of contract is a horrible document,” he says. “I have had limited success striking clauses in loan documents.”