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Apr 20 Attorney Articles, Recovery Resources

Construction Projects: Post-COVID-19 Financial Environment

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With a potential economic downturn, and both credit and cash flow tightening in the aftermath of COVID-19, many segments of the real estate and construction industry are likely to experience a heightened claims environment and, accordingly, the inevitable “money grab.”

As a tool to assist those of you facing these issues, HFM has prepared a Timeline of Construction Remedies Under California Law applicable to all segments of the construction and real estate industry which contains deadlines by when many of those statutory remedies must be exercised.

Even though construction (at least in California) has been deemed “essential,” the COVID-19 situation has caused a cataclysm of financial events, the depth of which is still yet to be assessed. Many lenders are shutting down construction lending in the interim. Projects are being halted and shelved accordingly. The hospitality industry has been obviously hard hit, which will likely impact hotel and entertainment facility projects. Shopping malls, as well as their tenants, are likely to be affected by reduced consumer confidence and continued social distancing even as consumers slowly returns to public places. Meanwhile, residential construction such as houses, condominiums, apartments and other mixed-use multi-family projects are likely to be affected by a market downturn and unemployment, both of which may drive prices down at least in the interim. While the public sector has seemed to be going strong nevertheless, the future is uncertain particularly given the current financial burdens on public resources. Moreover, many contractors are experiencing lost productivity due to social distancing guidelines and are likely to feel the financial impacts and pursue claims, whether under force majeure or other contractual and equitable remedies. All of this is occurring in a construction market that has been “overheated” for some time with many contractors undertaking more projects than they could comfortably handle from the perspective of cash flow in the first place even in a healthy economy.

The unfortunate reality is that while construction work is ongoing for the interim, it does not necessarily mean that everyone will ultimately be paid. For contractors, this means that they may need to climb to the top of the list to be paid on a particular project. For owners, preserving cash flow and preventing further asset value dissipation may be of utmost importance.

The reason that HFM has prepared the Timeline of Construction Remedies Under California Law is because during this time, all segments of the industry are likely to be tested by the sufficiency of their paperwork and processes. For contractors, that means making sure that 20-day preliminary notices, mechanics’ liens and other construction claims have been timely served or filed, as applicable, because the statutory scheme can be strict and unforgiving. For owners, that means sorting through which mechanics’ liens are untimely or valid, and conserving cash flow accordingly.

By way of example, where a mechanics’ lien claimant failed to timely serve a 20-day preliminary notice, that claimant will be unable to prosecute a mechanics’ lien or stop notice claim as the preliminary notice was a precondition to maintaining that claim, although there may be other remedies available to that contractor. Similarly, a late-filed mechanics’ lien, stop notice or bond claim could be fatal to recovery for a contractor.

On the other side of the equation, an owner faced with multiple mechanics’ liens on a project may need to prioritize the payment of those liens to maximize its own cash flow and will necessarily be looking at whether those liens are valid or timely. Owners may wish to record notices of completion or cessation in the land title records, if appropriate, to limit the timeframe during which claims can be submitted.

Similarly, sureties will be looking to sort out invalid and valid claims as quickly as possible, and technical and other defaults in the timing of bond claims and other notices may prove fatal to claimants whose only recovery may be on a bond.

In the event of an owner or general contractor bankruptcy, the rules are different, and the claim is submitted to the jurisdiction of the bankruptcy court where it will be imperative to perfect rights within the bankruptcy case in the manner specifically authorized by the Bankruptcy Code. HFM can assist if you find yourself in these circumstances.

We hope that you will find the Timeline of Construction Remedies Under California Law a valuable tool to evaluate and protect your remedies. The timeline does not contain every remedy available but covers many of the most common ones. Other remedies may be available as well depending upon the specific circumstances. As always, you are more than welcome to call to discuss the particulars of specific project claims, and we wish you well in your endeavors.