Misleadingly labeled "An Act Concerning Fairness in Financing in the Construction Industry," this Act substantially modifies mechanic's lien rights and dictates contract language requirements for commercial construction projects in Connecticut. The Act has significant implications for owners, general contractors and subcontractors involved in commercial and industrial construction projects, landlords and tenants involved with tenant fit-out work, and financial institutions and title companies involved in such projects. Most provisions of the Act only apply to construction contracts for commercial or industrial properties entered into on or after October 1, 1999. It is unclear whether an apartment building or condominium project is considered a commercial or residential building, and what rules apply to a mixed use project (e.g., project with both residential and retail components). The Act does not apply to publicly owned projects, but does apply to projects owned by non-profit owners. One provision of the Act specifically permits mechanics liens to attach to leasehold interests in both commercial and residential properties.

The language in the Act is very poorly drafted and vague in many respects. This legislation is the result of several years of effort by State Senator Colapietro, of Bristol, to shift the balance of legal rights among subcontractors and other parties to construction projects. The Senator first introduced a bill on "equity" in the construction industry in the mid-1990s following an unfortunate experience of a relative on a construction project, where subcontractors were not paid for their work and had little legal recourse. In its earlier versions, the bill had even broader impact, mandating arbitration in all construction contracts, and prohibiting town building officials from issuing certificates of occupancy when subcontractors had not been paid. The bill as originally presented was opposed by much of the construction community, and was vetoed by the Governor in two earlier legislative sessions. In the 1999 session, coalitions of contractors lenders and surety companies participated in revisions that scaled back the impact of the bill. At the same time, the drafters found that their efforts to clarify the vague parts of the bill only led to more disputes. The statute was left unclear in order to make its passage possible.

Anyone who is currently drafting a construction contract, purchase agreement with a construction component, lease with construction component or any related document for a project affected by this statute should carefully review the statute. The term construction contract is broadly defined and includes all agreements for work which, upon completion, requires a certificate of occupancy.

Set forth below are certain key provisions of the Act.

• At or before the commencement of any construction work at a commercial or industrial building, the owner must post, in a conspicuous place at the site, a sign stating (1) the name and address of the owner and any agent authorized to accept service of process in a lawsuit arising out of the construction activities, (2) the legal description of the land (to facilitate preparation and filing of a mechanic’s lien), and (3) whether a payment bond exists, and, if so, the name and address of the surety on such bond.
• The Act eliminates the effectiveness of prospective lien waivers (i.e., lien waivers for services or labor which have not yet been performed and paid for) in commercial construction projects. Partial lien waivers for work already performed and paid for are still valid, but should be approached with caution. Subordinations to lenders’ mortgages and liens are still allowed, but it is not clear whether subordination to other interests is permitted.
• Retainage cannot exceed 7.5%.
• A contractor may now file a mechanic's lien against a tenant's interest in an owner's premises. It is unclear whether such a mechanic's lien would survive a default under the lease.
• The Act establishes certain payment procedures with respect to payments from both owners and general contractors to contractors and subcontractors. They include a 15-day payment deadline from the date of an owner's or general contractor's receipt of a request for payment, the requirement that an escrow be established with respect to a disputed amount, the provision of statutory interest at the rate of 12% (plus 10% damages, if bad faith is found) for nonpayment of amounts due, the ability to collect attorneys’ fees and costs in an action to collect on an improperly withheld amount, and restrictions on the ability to withhold payment.
• The turnaround time for payment from a notice of request for payment substantially reduces the period of time during which a design professional can review payment requisitions. While the 15-day turnaround may be varied in the contract, it is likely that a variation will require a statement of specific intent as to such variation.
• Under the Act, Connecticut law must apply to any contract relating to a project to be constructed in Connecticut. Any dispute involving such a project must be adjudicated in Connecticut.
• While applicable to contracts with contractors and subcontractors, contracts with design professionals are not covered. This may raise an issue regarding joinder of parties in dispute resolution procedures. Design professionals who draft contracts may be unaware of the requirements of this Act, creating liability problems for owners.
• All of the foregoing will require multiple modifications to standard AIA and other standard form contracts, including construction management, contractor, subcontractor, architect, engineer, etc. contracts.

 

For more information, please call  Michael J. Hinton, at 203.351.4492 or  .