By Taylor T. Dolan, Esq. and Daniel M. Eggleston, Esq..
Lee/Shoemaker PLLC

Most commercial construction projects involve financing arrangements between the owner and their lender, typically in the form of a construction loan or revolving loan. Although design professionals often know little about their clients’ financial arrangements, design firms play a crucial role in a lender’s decision to approve funding through their execution of an Architect/Engineer Consent Agreement or Architect/Engineer Assignment (collectively, a “Lender Consent”).

Owners present the Lender Consent to the design professional immediately prior to financial close, with the urgent request that the design professional sign without revisions or put funding for the project at risk. Instead of rubber-stamping a Lender Consent, the prudent design professional will scrutinize the document or request legal review to avoid assuming additional obligations and/or legal risks beyond what was agreed upon with its client in the contract for design services.

Defining the Lender Consent and Its Function
The Lender Consent is a standard document required by lending institutions as a condition to underwriting and approving a construction loan. At a high level, Lender Consents typically require the following certifications from design firm to lender:

• the plans and specifications prepared by the design firm are adequate to construct the project and were prepared in compliance with applicable laws and building codes;
  
• there are no defaults by either party (owner or design firm) under the design agreement and the design agreement has not been assigned;
  
• the lender has the right to use the design firm’s plans and specifications to complete the project in the event the owner defaults under the loan documents; and
  
• the design firm agrees to complete services for the benefit of the lender in the event the owner defaults under the loan documents.

While these certifications may seem harmless, they can expose the design firm to uninsured risk and impose unreasonable notice and audit requirements on design firms. Lender Consents may also contain representations and certifications regarding matters outside the design firm’s scope; for example, zoning, easements, surveys, and utilities. It is imperative not to cave to “deadline pressure” created by the lender and owner and instead “cue your red pen” and negotiate.

Examples of Pitfalls in Lender Consents
Just how overbearing a Lender Consent is may depend upon the risk profile of the project. Below are examples of “red flags” to look out for when reviewing these agreements.

• Granting an Unconditional License to the Instruments of Service. When a Lender Consent allows the lender to use the design professional’s Instruments of Service in the event of the Owner’s default on the loan, such use should be conditioned upon assignment of the design agreement from owner to lender. Otherwise, the Lender (1) is not subject to the terms of the design agreement, including appropriate limitations on the right to use Instruments of Service solely to construct the project for which they were prepared, and (2) has not assumed the Owner’s obligations under the design agreement.
  
• Jeopardizing Professional Liability Insurance Coverage. Design firms should look out for language in a Lender Consent requiring a certification or guaranty that their plans and specifications comply with applicable building codes and regulatory standards, without reference to the standard of care. Some Lender Consents take it one step further, asking the design professional to certify that construction will be completed in accordance with the plans and specifications and applicable law, which is the contractor’s responsibility. These certifications and/or guarantees compromise the design professional’s professional liability coverage and, in some cases, expose the design firm to claims asserted by a lender with whom the design firm has no contract.
  
• Waiving Payment for Additional Services. Many Lender Consents also require prior written approval by the lender of any amendment to the design agreement between owner and design firm, which applies to requests for additional services. If a design professional signs a Lender Consent with this language, and does not receive Lender consent prior to providing additional services, then in the event of Owner’s default under the loan, the Lender may refuse to pay for additional services already performed while maintaining the right to use the design firm’s Instruments of Service.

Conclusion
Negotiating an acceptable and favorable risk allocation in the design agreement can be time intensive and costly. Hastily agreeing to a Lender Consent can diminish and even nullify the design professional’s bargained-for protections if the owner defaults and the lender steps in to complete the project. The prudent design professional does not automatically approve a Lender Consent, and instead carefully reviews its terms, identifies heavy-handed or unfair provisions, and negotiates accordingly.

Taylor T. Dolan and Daniel M. Eggleston are lawyers at Lee/Shoemaker PLLC, a law firm devoted to the representation of design professionals, in DC, Maryland, and Virginia. The content of this article was prepared to educate related to potential risks, but is not intended to be a substitute for professional legal advice.