Cypress Creek Update
- Jeffrey Winick and Daniel Dorfman
- November 26, 2013
By now most in the construction industry have heard the term Cyprus Creek but may not fully understand this 2011 Illinois Supreme Court decision. Since 1933 the Illinois Mechanics Lien Act was interpreted to give contractors priority over lenders. In the Cyprus Creek case, the Court ruled that lenders would have the same priority as contractors with respect to the value of improvements. In February of 2013 the Illinois legislature restored the intent, giving priority once again to contractors. As discussed in this piece, lenders are now attempting to regain these rights through consent to assignment agreements of which our members should be aware.
New Provisions in Consent to Assignment Agreements Affecting the Rights of Contractor
In 2011 the Illinois Supreme Court in the “Cypress Creek” opinion ruled in a manner that had significant implications for contractors relying upon the protections of the Illinois Mechanics Lien Act. The law had been interpreted since 1933 to give contractors priority over lenders with respect to lien rights associated with the value of improvements to the property performed by the contractor. In Cypress Creek, the Court ruled that lenders would have the same priority as contractors with respect to the value of improvements.
In February of 2013, the Illinois legislature, with support and advocacy efforts from trade organizations, like the Builders Association, enacted a new law which restored the legislative intent of the Illinois Mechanics Lien Act and provides that contractors once again have priority over lenders for all improvements to the land.
The lenders now appear to be attempting to re-gain the rights that they believed they had obtained through Cypress Creek through consent to assignment agreements. Traditionally, a consent to assignment agreement would provide that the contractor agree to assign the construction contract to the lender if the developer became financially insolvent. In return, the lender would agree to pay the contractor in full for all outstanding work. Consent to assignment agreements are now being re-drafted by lenders in a manner that not only removes any obligation on the part of the lender to pay for outstanding work, but often provide that the lender’s lien claims will take priority over those of the contractor. Contractors therefore should read carefully these consent to assignment agreements and be wary of the new forms. In particular, watch out for:
- SUBORDINATION OF RIGHTS TO BANK
Risk: These provisions give the lender the right to satisfy its claims before the contractor is entitled to any recovery on its lien claims. Given that the value of the property may not exceed the value of the mortgage, subordination can make lien rights worthless. Just as importantly, subordination necessarily removes the leverage that the contractor would otherwise have against the lender.
- COMMITMENT TO EXECUTE NEW AGREEMENT
Risk: The contractor shouldn’t subject itself to the time, expense and risk of negotiating a new contract under circumstances where it is obligated to execute the contract and therefore has limited leverage.
- NO REQUIREMENT THAT THE LENDER PAY FOR OUTSTANDING BALANCES
Risk: Although a consent to assignment obligates the contractor to continue to perform the work both through its own forces and by its subcontractors, the contractor would not be entitled to payment for outstanding balances by the lender. The contractor would therefore be at risk of being in the position of having to pay the subcontractors out of its own pocket to ensure continued performance while seeking reimbursement of those amounts through pursuit of its lien rights. At best, the Contractor would be subject to a long delay in reimbursement of those amounts and, at worst, could find itself out the value of the unpaid contract balance at the time of the assignment.
For any questions about the impact of these new provisions or any additional questions about consent to assignments in general, please contact Jeffrey Winick or Daniel Dorfman at Harris | Winick LLP.