For most contractors, one of the biggest risk-management issues is getting paid. In today’s economic times, many lenders have been forced to foreclose on a loan made to a project owner or developer. When this happens, contractors can be left holding the bag if the lender’s claims wipe out the contractor’s lien rights. Minimize the chance of losing out by recognizing when a lender, through the owner/developer, asks the prime contractor to consent or subordinate the contractor’s rights to the lender by signing documents.
When a private owner borrows money for a project, there is likely a deed of trust furnished to secure the loan on the project’s property. A deed of trust is a written pledge of real property given by the mortgagor to secure a debt and operates in much the same way as a mechanic’s lien. Lenders try to protect their investments by, among other things, requiring the prime contractor’s consent to secure priority over mechanic’s lien claims from the contractor and its subcontractors and by asking for approval rights in connection with changes to the prime contract. Contractors should know that they can—and should—try to negotiate the best possible terms when faced with such requests.