When contractors get stiffed

How to stop financing developers' projects

I get calls nearly every week from GC’s and Subs who are getting stiffed by the property owner. Here’s what I tell them about their options:

You could file a lien. Liens can be effective, but you must overcome many legal hurdles for liens to work. For example, they are only enforceable if you follow rigid timing and notice requirements. To make matters worse, if you file an unenforceable lien, you could be sued and made to pay the owner’s attorney fees.

You could hire a lawyer. You don’t need me to tell you how expensive lawyers can be. You are already out a bunch of money from being stiffed by the owner.

You could sue the owner yourself. There are a number of challenges associated with this option. Most are obvious, like not knowing the law and rules. But did you also know that generally speaking, corporations[1] cannot represent themselves in court? Yup. It’s true.

You could hire a collection agency. This is another costly, time-consuming route. It is costly because the agency gets a percentage of your invoice[2] and, if the agency settles for less than the invoice amount, their fee does not decrease. It’s time-consuming because agencies don’t pay until after the collection is made.

You could “write it off” as bad debt. If you are looking for a way to raise a ‘red flag’ for the IRS, this would be it. Attempts to claim write-offs for unpaid invoices have fueled audits for years. But there are advantages to writing off bad debt. Contact an accountant to find out if this is a good option for you.

You could get invoice financing. There are lenders that will advance you cash collateralized by your unpaid invoices. Naturally, restrictions and fees are involved, but this might be worth exploring depending on your situation.

But there is another, little-known option, and it doesn’t require a lien, a lawyer, the court system, or money.

Here’s how it works:

When a property owner, like a developer, wants to build and sell a home for profit, they will typically secure a construction loan. The lender gets repaid when the house is built and sold if all goes well.

However, if the project goes sideways due to mismanagement by the owner/borrower, lenders have built a clause into their loan documents that give them to power to take over the project. Among that power is the lender’s right to pay contractors directly.

How to make it work for you:

First, you’ll need the property address (including the county), the name of the owners, or the property tax parcel number.

Once you have this information, follow these five steps:

Step #1: Conduct a website search for the Registrar of Deeds, County Recorder, Tax Assessor, or a similarly titled office in the county where the property resides. For the sake of simplicity, I will refer to this as the Recorder’s website.

Step #2: Next, type in a search based upon the property address, owner name(s), or tax parcel number.

Step #3: Scroll through the list of documents until you find one where the “Grantee” or “Beneficiary” is a bank or other financial institution. Sometimes the lender is a bank, but often, especially in the construction loan industry, the lender is a private company. Look for Grantees/lenders whose name includes words like “Fund” or “Funding,” “Capital,” “Assets,” “Holdings.” You are looking for a “Deed of Trust” or other loan security document that is dated around the year you worked on the project.

Step #4: Open the document and scroll through it. Look for a clause or paragraph that allows the Grantee/lender/Beneficiary to take over the project. Sometimes this clause or paragraph will be entitled “Lender authorized to demand performance” or words to that effect.

Step #5: Call or email (preferably both) the lender once you have this information. Ask to speak to the agent managing the loan. Tell them that you are a contractor on the project and that the owner is not paying you. Explain that you have read their “Deed of Trust” (or similarly entitled document) and that you know they can pay you directly.

After explaining this to the lender, expect them to request time to verify your bill and speak to the borrower/owner before cutting you a payment. If they are a private company, they may also need to obtain permission from investors or a board of directors before agreeing to pay you. Let them know that you understand this, but politely give them a deadline to get back to you. Offer to email them a copy of your billing statement or invoice along with any evidence of your repeated requests for payment to the owner/borrower.

Lastly, follow up with the lender.

Remember, you don’t have to use this option to the exclusion of others. In fact, I encourage you to use all options available to you. Right now, you need to get paid. Don’t cut yourself short of any opportunity to make that happen.

Elizabeth Sweet, Attorney

Ms. Sweet is a Seattle area-based lawyer. Her practice focuses on breach of contract disputes.

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information and content are for general informational purposes only. This article does not create an attorney-client relationship between you and Elizabeth Sweet or Sweet Justice, PS.

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[1] Unless you are a sole proprietor, your corporation, LLC, or other business entity is prohibited from self-representation. [2] Sometimes the agency buys your debt, but this too is costly.