Lender Assignment and Certification Requirements

In today’s economic climate, more and more, architects are being asked to address client issues relative to financing, assignment and certification.  Every architect should be knowledgeable on these issues and approaches.

When a client insists on assigning contractual rights to a lender that requires consent and certification of project information, most of the resulting issues are business-related and have little impact on professional liability risks. From a professional liability perspective, the concerns raised by an assignment center around whether the design professional is extending its liability through its statements to the lender and whether the instruments of service could be used in an unmanaged situation thus increasing the risk of meritless claims against the design professional.

Also of concern is whether or not the assignment contains express warranty or guarantee language. Perhaps most important to the design professional, however, are practice management and legal issues such as whether or not it is comfortable with providing services to an unknown client and whether or not it will be properly compensated for services after a loan default.

Contractual versus practical obligations

A design professional may have no contractual obligation to consent to an assignment, provide a certification, or furnish future services to a lender. In fact, the professional services contract may contain a provision prohibiting such an assignment or may be silent on the issue altogether, thus enabling a negotiation of acceptable assignment terms. A decision by a design professional to accept an assignment contingent on a loan default does not mean that a design professional also has to extend its risk by providing a certification to the assignee or otherwise extending rights to the lender that are not envisioned by the contract.

Although the contract language in standard forms of agreement limits the abilities of the contracting parties to assign the rights and obligations established during contract negotiations, design professionals increasingly face demands to consent to contingent assignments to lenders.
Prudent practice management would suggest consideration of the following questions:

• If a default occurs, can the integrity of the design and the reputation of the design professional be protected by permitting the firm to complete its services through the construction phase?
• Is the new client willing to assume the obligations of the original client?
• Is there any recourse for the payment of uncollected fees and future fees including any costs generated by the assignment?
• Does the design professional want to provide services to or through the lender? Is there the likelihood of a future assignment after default without the consent of the design professional?
• Is normal legal liability—both contractual and tort—being extended in time or in scope?
• Would consent to assignment create an uninsurable risk by including express warranties or guarantees such as might be included in an unqualified certification?
• Is there recognition by the involved parties that the instruments of service cannot be used without either the design professional’s continued participation or a release/indemnification agreement to negate potential harm from meritless claims?

Certification forms

Firms are, at times, requested by clients to respond to lending institutions’ demands to issue certification forms. By virtue of the language and the representations contained in their provisions, such requests result in additional liability exposure and involve uninsurable obligations such as express warranties and guarantees. Such certifications may violate the professional ethics of the firm, and they certainly run counter to prudent business practices.

Both legally and ethically, a licensed design professional can only certify facts that it knows to be truthful and factual through direct, first-hand knowledge. Otherwise, the design professional must proffer a professional opinion that relates to the knowledge of the design professional, the information available through his or her scope of services, and beliefs based on the information and the application of his or her knowledge.
Lenders, design professionals, and the clients of design professionals should acknowledge the following:

• The design professional’s certification can only relate to facts that became known to the design professional during the performance and furnishing of his or her professional services.
• Any information provided to the design professional by the owner or third parties should be identified as such.
• The design professional’s opinion on any aspect of the project practically and ethically can only extend to subjects within the design professional’s scope of services.
• The design professional should not acquiesce to the pretense that the lender’s decision is based primarily on the design professional’s certification unless there is a recognition of this assumed risk through compensation to the design professional for this unnecessary and significant risk

Using time pressures as negotiating advantages

A client and the lender may state that without immediate consent to the assignment and issuance of accompanying certifications by the design professional, the loan will not be issued. This is not a reason for the design professional to assume risks it would not normally assume or to forego protections that are entirely reasonable. In fact, such a sense of urgency adds to, rather than detracts from, the ability of the design professional to negotiate reasonable assignment terms and conditions.

Preventing unreasonable assignments

Professional liability exposure and uninsurable risk can increase significantly because of the language in consent to assignment. Special care is warranted when a lender states that the consent to assignment is a condition of the loan. Such a statement may represent an effort by the lenders to establish detrimental reliance on the statements made in the consent to the assignment, thus creating lender rights against the design professional that otherwise would not exist. One of the best protections against such unreasonable risks is to include language similar to that in the AIA or EJCDC documents, such as the following:

Neither party may assign, sublet or transfer any rights under or interest in this agreement without the written consent of the other. Unless specifically stated to the contrary in any written consent to assignment, no assignment will release or discharge the assignor from any duty or responsibility under this agreement.

With a little understanding of the issues, architects can continue to practice profitably while still addressing the owner’s concerns and needs during the project.

Victor and CNA work with the AIA Trust to offer AIA members quality risk management coverage through the AIA Trust professional liability insurance program, cyber liability insurance, and business owners program to address the challenges that architects face today and in the future.