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Design professionals may receive requests for a “consent to assignment” from their clients' lenders. But some consents ask too much of the A / E, including giving the lender third-party-beneficiary status.

When you're involved in a project for which the owner seeks financing, it's not uncommon to receive from the owner a generic “consent to assignment” form that the owner's bank has prepared for you to sign. The consent to assignment allows the transfer of the owner's rights to the lender under your agreement, should the owner default on the loan. The owner often presents the consent form to you after your contract has been signed and the project is underway; you may find yourself under pressure to sign the consent as presented and within a tight deadline.

Why the hurry? According to Nancy M. Rigassio, Vice President, Executive Claims Counsel, AXA XL Design Professional, project financing is usually at stake and the owner has a short window to obtain it. “Some owners pledge their contracts with the design team and the contractor, along with the real estate, as collateral for the construction loan,” she says.

“It's common to see a lender try to get the design consultant's consent to assign the owner / consultant agreement to the lender,” Rigassio adds. “If the owner defaults on the loan, the assignment allows the lender to complete construction, sell the project, and recover as much of the money as possible.”

Rigassio notes that this arrangement could benefit A / Es who might otherwise not get paid. “But problems may arise if the lender tries to change the contractual agreement and introduce onerous duties for the design professional,” she says. “Perhaps because of today's very low interest rates, lenders feel they can get more rights from the owners.”

The consent-to-assignment documents (also known in the banking industry as “will-serve” documents) may contain a host of onerous requirements. For example, they may require you to transfer ownership rights to your plans and specifications to the lender, even if your professional services agreement appropriately keeps ownership rights with you, the party who created those plans. “The consent to assignment should reflect the arrangement you've made with the owner regarding ownership of instruments of service,” Rigassio says.

Payment of your fees is another topic that the consent to assignment may attempt to revise. If the owner defaults on the loan, the design professional is expected to continue providing services even if the lender doesn't exercise its right to cure the default. “Who pays your fees when this occurs?” Rigassio asks.

Lender as third-party beneficiary
Another objectionable clause in the consent to assignment grants third-party-beneficiary status to the lender before any default. You may see a clause in the consent that reads: “Consultant acknowledges and agrees that Lender is an expressly intended third-party beneficiary of the Consulting Agreement.”

“In this case, you have two ownership entities that enjoy the benefits of contract requirements placed on you,” Rigassio says. “But the lender / third-party beneficiary receives the benefits without the contractual obligations.

“Giving the lender the status of third-party beneficiary means that even without a default by the owner, the lender has standing to pursue a breach of contract action against you, entitling the lender to demand damages consisting of economic loss and, in some jurisdictions , recovery of lawyers' fees incurred by the lender in prosecuting a breach-of-contract claim against you.

“Your agreement remains with the owner. The lender may step into the owner's shoes in the event the owner defaults on the loan, but not before. But that's what will happen if you consent to give the lender third-party-beneficiary status.

Carefully review any language that gives one or both parties the ability to transfer the rights under the contract.

Your contract
How do you protect yourself? Work with your lawyer to be sure your agreement with the owner (your client) protects you from having to sign any onerous documents the owner's lenders may put in front of you. If such documents are presented, review them carefully with legal counsel and your professional liability insurance specialist to determine whether there are legal or insurance coverage implications.

Rigassio recommends you address the issue of assignment in your client agreement, with a clause that prohibits both you and your client from assigning rights and duties to any other party without written mutual consent. This is, generally, the position of the standard agreements published by the American Institute of Architects (AIA), the Engineers Joint Contract Documents Committee (EJCDC), and the Royal Architectural Institute of Canada (RAIC).

If you're not using one of the standard agreements, carefully review any language that gives one or both parties the ability to transfer (assign) their rights under the contract; delete any clause that gives your client the unilateral right to assign the contract to others.
You should also add language to your agreement that expressly addresses the issue of third-party beneficiaries. While the standard professional services agreements disclaim any implication that the contract provisions are for the benefit of third parties, client-written contracts may not. Speak with your lawyer about adding language such as, “Nothing contained in this Agreement shall create a contractual relationship with or a cause of action in favor of a third party against either the Client or the Consultant.”

You'll also want to delete any language that would require you to “totally and fully” cooperate with the owner in every respect or execute “any and all documents” that relate to financing or that are requested by the lender.

“Failing that, at least modify it to state that you will refuse to accept any requirements that materially change the terms of the agreement with your client, or that you will comply with only those lender requirements that are, in your judgment, reasonable and consistent with your agreement with your client, ”Rigassio says. She adds that your contract could also require that you be given sufficient time to review and make any necessary changes to documents presented to you for execution by lenders.

Scrutinize lender documents
Even if you have contractual protection, it isn't unusual to be told that if you don't sign a consent to assignment immediately, you'll delay the funding of the project or even cause the loan to be denied. While Rigassio understands that design professionals want to support their clients, she urges them to take the time to review and modify these documents as needed.

“If you've protected yourself in your contract, you should be able to agree to execute reasonable lender documents that have been purged of onerous requirements and give you some basic protections,” she says.

“Be on the lookout for any language that would give the lender third-party-beneficiary status and delete it,” Rigassio adds. “You can explain that the lender still has recourse. If the lender truly believes that the design professional caused harm, the lender may pursue a negligence-based theory against you.

“The terms in lenders' consents to assignment can vary widely and careful review is crucial,” Rigassio concludes. “Many will need some modification before you can safely sign them.”


Resources
1. “Will-Serve Letters: Don't Get 'Banked' into a Corner,” November 2014 issue of  Communiqué
2. “Assignment,” “Lenders' Requirements,” “Ownership of Instruments of Service,” and “Third-Party Beneficiaries” chapters in  AXA XL's Contract Guide.

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