Lenders and contractors beware: Timing and clarity is everything

Careful drafting of the agreements can help you avoid litigation

LeAnne Bremer

In a recent Washington Court of Appeals case, Top Line Builders v. Bovenkamp (Mar. 10, 2014), the court ruled in favor of a contractor over the claims of a lender, illustrating the importance of clarity in construction and lender agreements. The court’s resort to matters largely extraneous to the contract determined which party had priority to pursue claims against an owner in default. Reliance on general legal principles, rather than contractual language, injects more uncertainty on possible outcomes in the event of disputes.

Bovenkamp entered into a contract with Top Line Builders for a residence that would meet the gold certification standard of Leadership in Energy and Environmental Design (LEED). Top Line believed Bovenkamp would pay it on a cost-plus basis, but in fact the contract was for a fixed price of $845,286.80. The contract also required written change orders. Bovenkamp failed to obtain financing before Top Line began constructing, using his own funds for the initial construction. Eventually, Bovenkamp received lender financing in the amount of $995,000 – an amount over and above the contract price, to cover taxes and cost overruns. The lender recorded a deed of trust against the property after construction began to secure repayment of the loan.

Bovenkamp and Top Line executed a new agreement that required written change orders for any extra work requiring additional funds. Bovenkamp did request additional changes during the course of construction, which increased the contract price. Top Line performed this extra work without written change orders. The lender refused to pay for the cost overruns totaling $111,085.29 because the parties had not executed written change orders. Top Line filed a mechanic’s lien, and then sued to foreclose the lien, arguing that it had priority over the lender’s lien and, alternatively, that it should be paid for the cost overruns based on the theory of unjust enrichment (the owner would be unjustly enriched if it did not pay for work performed).

The lender agreed that Top Line had a lien for the unpaid balance under the fixed price contract and that its lien had priority over the lender’s lien in that amount. The lender also agreed that Top Line could recover amounts from Bovenkamp under its unjust-enrichment claim. The lender, however, disagreed that the amount representing the unjust-enrichment claim and the extra work was secured by Top Line’s lien that had priority over the lender’s lien.

The court of appeals found that Bovenkamp and Top Line had waived the requirement to have written change orders when Bovenkamp requested extra work through course-of-conduct and verbal communications. While the lender was a party to an agreement requiring written change orders, it had no right to object to cost overruns unless they exceeded the $995,000 loan amount. The lender also lost on its argument that Top Line’s lien for the extra work should not have priority over the lender’s lien because Top Line’s lien should cover only the contract price, which was fixed at $845,286.80. But based on the wording of the mechanic’s lien statute, the court found that the contract price in this case was the agreed price for extras and the reasonable value for extras if the price was not agreed on.

The effect of the ruling was that Top Line’s claim for the full amount owed was secured by a lien that had priority over the lender’s lien. This meant that Top Line was first in line in pursuing claims against Bovenkamp and his assets, and could get paid before the lender. As with many other disputes that end up in court, careful drafting of the agreements could have avoided litigation. At issue in this case were the concept of waiver, the meaning of “contract price,” and when consent to changes was required – all of which, in clear-view hindsight, could have been addressed in the agreements.

LeAnne Bremer is a partner at the regional law firm Miller Nash. Working out of the company’s Vancouver office, she focuses her practice on land use law, real estate and government affairs. LeAnne can be reached at 360.619.7002.

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