DEALING WITH HARD TIMES - PRACTICAL VERSUS LEGISLATIVE SOLUTIONS
By Nicholas R. Delaney

May 2008

The residential construction industry has seen its fair share of hard times lately. Home values are down. Contractors who took out loans to build spec homes are not being paid and are left floating loans, which they will unlikely cover with the sale of the home. Subcontractors with liens that take a back seat to a bank mortgage with priority see no money in a foreclosure sale because homes are not worth any more than the note securing the mortgage, if that. Subcontractors without liens are sometimes ignored and left out of the payment process altogether. Resolving this industry-wide problem will require thoughtful, measured consideration of unique circumstances and market conditions.

Certain proposed legislative modifications which have been pushed and continue to be pushed may create long-term negative impacts to the industry rather than help. Minn. Stat. § 337.10 requires prompt payment to subcontractors within 10 days of receipt of the undisputed services, but exempts out residential construction. There is push to get rid of this exception. In addition, a Bill was presented last legislative session (House File No. 3753), in which an amendment to Minn. Stat. 514.02 was sought. The proposed amendment provided as follows: 

“The [general contractor] must promptly deposit proceeds of the payment into a trust account at a financial institution and must not commingle these proceeds with other money of the person who received payment. The [general] must maintain separate accounting records for each project and for each lot of a multi-lot project, showing receipts and disbursements attributable to each lot.”

While the above Bill was not passed, it is possible that groups will push for it again. Is this the solution? If generals are required to make prompt payment within ten days of receipt of undisputed work and are required to have an accounting as proposed above, that will greatly increase management and administration costs for the general. Not only will this cause more headaches to the general contractors, but it will raise the bottom-line and likely drive up overhead costs and ultimately, the cost of new homes. This defeats the purpose. More expensive home-building costs will create even more problems in a saturated market. Also, legislative changes like those proposed may likely increase litigation and related expense.

Rather than change legislation, which may create long-term burdens on an already burdened industry, more practical business solutions are a better answer. Practically speaking, this is a time for subcontractors and generals to work together in weathering the storm. Subcontractors need to realize that many generals are broke. In many cases, generals owe more on their construction loan than the spec home is worth in today’s market. Because liens have less value, if any at all, a subcontractor taking a discount on what it is owed in order to help the general sell the property ensures some money in its pockets.

For homes to sell, many have done what they can to share the burden in order to recover some money rather than nothing. Not only does help the general sell homes and ensure some money in the pockets of subcontractors, but it also maintains long-developed relationships between general contractors and subcontractors that are rich with history. It is these relationships that the industry, and those involved, will need intact when it recovers.

Nicholas Delaney practices in the areas of real estate, construction law, land use and civil litigation.

© 2008 Rinke-Noonan.

This article is a general discussion of legal issues and is not intended to be legal advice. We would be pleased to review the specific facts and law regarding any given legal matter.