RECOMMENCING CONSTRUCTION ON A PROJECT DUE TO A CESSATION OR ABANDONMENT

Posted on October 21, 2017October 21, 2017 by Edward Garber

There 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. 5^th 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.

WHAT TO DO IF THE PAYMENT BOND IS NOT RECORDED WITH THE NOTICE OF COMMENCEMENT

Posted on November 20, 2015November 20, 2015 by Edward Garber

There is an unconditional payment bond for the project but it was not recorded with the Notice of Commencement. Now there are subcontractor construction liens recorded against the property. What do I do? I thought the point of the payment bond was to exempt the real property from subcontractor and supplier liens.

No need to worry! Liens can be transferred to the payment bond even though the payment bond was not recorded with the Notice of Commencement.

The payment bond operates to “secure every lien under the direct contract accruing subsequent to its execution and delivery.” Fla.Stat. s. 713.23(2). Even though the payment bond was not recorded with the Notice of Commencement as required, the owner or contractor can record a Notice of Bond with a copy of the payment bond that will operate to transfer the lien to the security of the payment bond.

To this point, Florida Statute s. 713.13(1)(e) states in relevant part:

[I]f a payment bond under s. 713.23 exists but was not attached at the time of recordation of the notice of commencement, the bond may be used to transfer any recorded lien of a lienor except that of the contractor by the recordation and service of a notice of bond pursuant to s. 713.23(2). The notice requirements of s. 713.23 apply to any claim against the bond; however, the time limits for serving any required notices shall, at the option of the lienor, be calculated from the dates specified in s. 713.23 or the date the notice of bond is served on the lienor.

Stated differently, just because the payment bond was not recorded with the Notice of Commencement does not mean the payment bond is worthless. Rather, it can still be used to transfer construction liens to the security of the bond.

Further, if discovered early enough, and within the effective period of the Notice of Commencement, an Amended Notice of Commencement can be recorded which attaches a copy of the payment bond. The Amended Notice of Commencement needs to be served by the owner “upon the contractor and each lienor who serves notice before or within 30 days after the date the amended notice is recorded.” Fla.Stat. s. 713.13(5)(b). But, the Amended Notice of Commencement can be used to clarify the omission of the payment bond in the original Notice of Commencement.

THE IMPORTANCE OF AN EFFECTIVE NOTICE OF COMMENCEMENT ON YOUR LIEN RIGHTS

Posted on August 6, 2014August 6, 2014 by Edward Garber

Contractors, subcontractors, and suppliers need to appreciate the importance of an EFFECTIVE Notice of Commencement. This recorded document, among other things, governs the priority of YOUR lien rights on a private construction project because a construction lien RELATES BACK in time to an effective Notice of Commencement.

The Notice of Commencement is recorded in the public records where the project is located. It is a statutory form (per Florida Statute s. 713.13) and gives the lienor the required information about the project so that the lienor can preserve its lien / bond rights. A copy of the Notice of Commencement form is included at the bottom of this posting. The Notice of Commencement must be recorded within 90 days of construction otherwise the Notice is invalid.

The Notice of Commencement is effective for 1 year unless a different expiration date is specified. If a project is going to last longer than a year, a more realistic expiration date should be specified. However, the Notice of Commencement can be amended at any time within its effective period to extend the expiration date. The amended Notice of Commencement should reflect that it is amending the original Notice of Commencement that is recorded (and specify the book and page of the recording) and a copy must be served by the owner on the contractor and any other lienor that served a Notice to Owner to preserve its lien rights “before or within 30 days after the date the amended notice is recorded.” Fla. Stat. s. 713.13(5)(b).

In demonstrating the importance of an effective Notice of Commencement, Section 713.13(6) provides:

“Unless otherwise provided in the notice of commencement or a new or amended notice of commencement, a notice of commencement is not effectual in law or equity against a conveyance, transfer, or mortgage of or lien on the real property described in the notice, or against creditors or subsequent purchasers for a valuable consideration, after 1 year after the date of recording the notice of commencement.”

What does this mean? The best way to explain is to apply this statutory language to the following facts of a condominium project:

Construction loan recorded on 1/1/09.

Notice of Commencement recorded on 5/1/09. It is only effective for 1 year and an amended Notice was never recorded.

On 6/15/10 a mortgage is recorded on a condominium unit. When this is recorded, the unit owner’s mortgagee secures a release from the construction lender relating to the lender’s mortgage relating to the unit.

On 7/1/10 a construction lien is recorded.

Under this factual pattern, the lienor that recorded a lien would absolutely want its lien to take priority over the unit owner’s mortgage. The lienor will argue it takes priority since the lien should relate back to the Notice of Commencement that was recorded prior to the mortgage on the unit. But, wait. The Notice of Commencement expired before the lien was recorded and an amended Notice of Commencement was never recorded. This means the lien takes priority as of the date it is recorded and, thus, the mortgage on the condominium unit takes priority.

Now, let’s add another realistic wrinkle to this fact pattern. Let’s say the Declaration of Condominium (the instrument creating the condominium) is recorded on 6/1/10, before the lien is recorded.

The Declaration of Condominium would need to be recorded before mortgages are recorded on individual units. For the construction of a new condominium, the lien would apply to the ENTIRE condominium property provided the lien relates back to the Notice of Commencement. This is because the lien would take priority before the Declaration of Condominium was even recorded. But, if the Notice of Commencement expired, then the Declaration of Condominium would take priority over the lien since the Declaration of Condominium would have been recorded first (since the lien would not relate back to the Notice of Commencement). This means that the lien would not apply to the entire condominium property, but would more equitably apply to each unit based on the unit’s pro rata share of the common expenses. See Fla. Stat. 718.121. In other words, if the lien is $100,000 and there are 100 units each responsible for 1% of the condominium association’s budget, each unit would be responsible for the principal amount of $1,000 in order to discharge the lien relating to the unit. And, mortgages on the individual units may take priority over the lien potentially nullifying the value of the lien based on the equity in the units.

Notably, even if a lien relates back to the Notice of Commencement and takes priority over the Declaration of Condominium, a court may still find the equitable result is that each unit is only liable for its pro rata share of common expenses. See Southern Colonial Mortgage Co., Inc. v. Medeiros, 347 So.2d 736 (Fla. 4^th DCA 1977). However, this equitable approach should arguably not apply because the lien would attach to the entire condominium property and the lienor should be entitled to foreclose that property including all units since the lien would have priority over any mortgage and deed associated with those units. At this point, the unit owner should look to its title insurance policy.

Take-aways:

Make sure the Notice of Commencement is recorded within 90 days from the start of construction. If not, there will be a strong argument that the Notice is not valid. This means that a lien would not be able to relate back to the Notice.

Make sure the lien is recorded within an effective Notice of Commencement. If not, the lien will not relate back to the Notice, but will take priority as of the date it is recorded. This is a big difference.

If the Notice of Commencement is on the verge of expiring, prepare and send a letter to the owner advising the owner that it needs to record an amended Notice of Commencement to ensure the parties are performing construction within an effective Notice of Commencement.

Understand the potential priority of your lien based on the recording of the Notice of Commencement, any amended Notice of Commencement, the Declaration of Condominium, and other recordings that may impact the priority of your lien if the Notice of Commencement expired.

NOTICE OF COMMENCEMENT

State of _____

County of _____

The undersigned hereby gives notice that improvement will be made to certain real property, and in accordance with Chapter 713, Florida Statutes, the following information is provided in this Notice of Commencement.

1. Description of property: (legal description of the property, and street address if available).

2. General description of improvement: __________.

3. Owner information or Lessee information if the Lessee contracted for the improvement:

a. Name and address: __________.

b. Interest in property: __________.

c. Name and address of fee simple titleholder (if different from Owner listed above): __________.

4. a. Contractor: (name and address) .

b. Contractor’s phone number: _____.

5. Surety (if applicable, a copy of the payment bond is attached):

a. Name and address: __________.

b. Phone number: _____.

c. Amount of bond: $_____.

6. a. Lender: (name and address) .

b. Lender’s phone number: _____.

7. Persons within the State of Florida designated by Owner upon whom notices or other documents may be served as provided by Section 713.13(1)(a) 7., Florida Statutes:

a. Name and address: __________.

b. Phone numbers of designated persons: __________.

8. a. In addition to himself or herself, Owner designates __________ of __________ to receive a copy of the Lienor’s Notice as provided in Section 713.13(1)(b), Florida Statutes.

b. Phone number of person or entity designated by owner: _____.

9. Expiration date of notice of commencement (the expiration date will be 1 year from the date of recording unless a different date is specified) _____.

WARNING TO OWNER: ANY PAYMENTS MADE BY THE OWNER AFTER THE EXPIRATION OF THE NOTICE OF COMMENCEMENT ARE CONSIDERED IMPROPER PAYMENTS UNDER CHAPTER 713, PART I, SECTION 713.13, FLORIDA STATUTES, AND CAN RESULT IN YOUR PAYING TWICE FOR IMPROVEMENTS TO YOUR PROPERTY. A NOTICE OF COMMENCEMENT MUST BE RECORDED AND POSTED ON THE JOB SITE BEFORE THE FIRST INSPECTION. IF YOU INTEND TO OBTAIN FINANCING, CONSULT WITH YOUR LENDER OR AN ATTORNEY BEFORE COMMENCING WORK OR RECORDING YOUR NOTICE OF COMMENCEMENT.