July 27, 2016

How to Balance Lender and Contractor Interests on Alternative Energy Construction Projects

Lenders who finance wind and solar farms often require the EPC contractor to consent to the developer’s assignment of the EPC Contract to the lender to secure the developer’s obligations under the loan documents. Such consents are typically included in a “Consent and Assignment” or “Consent and Agreement” that also includes other promises and representations by the contractor. Because lenders usually depend on the value of the project as collateral for the loan, if the project is not completed, the value of that collateral is severely limited. The Consent and Assignment ensures that the lender can step in for the developer to have the contractor complete the project if the developer defaults on its loan obligations. Contractors, on the other hand, want to ensure that they get paid for the labor, materials and equipment provided to the project. Careful drafting of a Consent and Assignment can protect both lenders and contractors.

Consent to Assignment

The first substantive section in most Consent and Assignments is the contractor’s express consent to the collateral assignment of the EPC Contract to the lender. It requires the contractor to acknowledge that the lender has the right to take over the developer’s role in the EPC Contract, exercising the developer’s rights as the “Owner” under the EPC Contract. This provision gives the lender the assurance that it will be able to have the contractor complete the project even if the developer defaults.

Contractors want to make sure they get paid for their work. Lenders will often agree to pay only for the work of the contractor after the lender steps in, but not for work performed before the takeover. However, the contractor will have difficulty paying its subcontractors and suppliers if the contractor does not receive payment for the previous work. If they are not paid, subcontractors and suppliers may walk off the project or become uncooperative. Then the contractor could have difficulty completing the project, subjecting the contractor to potential liability under the Consent and Assignment. Thus, contractors will want language requiring the lender to cure all payment defaults by the developer under the EPC Contract before the contractor agrees to complete performance. 

Beyond payment, a contractor might depend upon numerous other contractual promises by the developer, such as:

  • Access to the site
  • Developer permits
  • Developer furnished equipment
  • Indemnity protection for claims caused by the developer
  • Additional compensation for differing site conditions
  • Protection from hazardous materials discovered on site
  • Information about the project and the site
  • Property insurance protection

It may be impossible or much more costly for a contractor to complete the work if such developer duties are not being performed. As a result, it is important for contractors to have language requiring the lender to cure all defaults by the developer under the EPC Contract and to perform all duties of the developer in the event the contractor continues performance for the lender. 

Continued Performance by Contractor

If a lender elects to take over the developer’s role in an EPC Contract, the lender usually wants to make sure that the contractor will continue performance so that the project can be completed as expeditiously as possible. If the contractor terminates before the lender is able to cure a developer default, completion of the project could be delayed significantly, if it is completed at all. Accordingly, most Consent and Assignments require the contractor to give the lender notice of a developer default and to provide the lender a cure period before the contractor is entitled to terminate the EPC Contract.

On the other hand, because the extended cure period can be as long as three to six  months, the contractor could lose millions of dollars while continuing to perform for several months if the lender ultimately decides not to take over the EPC Contract and cure any payment default. To protect themselves from such large potential losses, contractors often negotiate a provision allowing them to suspend performance after a reasonable period if the lender has not yet elected to pay the contractor for continued performance. The contractor may also negotiate the payment of extra costs resulting from such a suspension, as well as an extension in the construction schedule, should the lender take over after the contractor suspends performance.

A contractor will also have potential ongoing costs of standing by, even if the contractor has suspended performance. For example, there may be continuing equipment rental costs or stand-by costs for subcontractors or suppliers. The contractor may also need to keep employees committed to the project in case the lender accepts the assignment. As a result, a contractor may ask the lender to commit to pay the contractor compensation for extending the cure period, even where the contractor is allowed to stop work.

Change Order Approval and Notice of Claims

Lenders do not want to be surprised by material modifications to the EPC Contract. For that reason, some Consents and Assignments provide that all change orders (or change orders over a certain dollar amount) must be approved by the lender to be effective. This can make the change order process more cumbersome. More importantly, if the requirement for lender approval of change orders is not incorporated into the EPC Contract, the requirement could conflict with provisions in the EPC Contract that require the contractor to comply with change order directives from the developer. A contractor may want to provide in the Consent and Assignment that the contractor is not obligated to perform any change order for which there is no lender consent. In addition, there are usually provisions in an EPC Contract entitling a contractor to change orders under proper circumstances, such as force majeure, differing site conditions or changes in law. Because these are not optional change orders, a contractor should clarify in the Consent and Assignment that lender consent is not required for such change orders.

Some Consent and Assignments may require the contractor to provide notice of any “request or demand” to the developer. Such vague language can be difficult for a contractor to comply with, essentially requiring the contractor’s project personnel to copy the lender on all communications with the developer. Contractors may want to limit the types of written notice they are required to provide to lenders.

Representations by Contractor

Almost all lender-required Consent and Assignments also contain a series of representations and warranties by the contractor to give the lender additional comfort that the EPC Contract and Consent and Assignment are valid and binding and that the contractor is capable of performing its obligations under both agreements. Typical required representations include:

  • The contractor is duly organized under applicable law and authorized to do business in the place where the project is located.
  • All necessary corporate action has been taken by the contractor to enable the contractor to enter into the EPC Contract as well as the Consent and Assignment.
  • The EPC Contract and the Consent and Assignment have been properly executed by appropriate officers of the contractor and are in full force and effect.
  • There is no pending litigation that could adversely affect the contractor’s performance under, or the enforceability of, the EPC Contract.
  • The execution and performance of the EPC Contract and the Consent and Assignment will not violate any applicable law or contractor’s corporate policies.
  • The contractor is not aware of any current default under the EPC Contract.

A contractor required to make such representations should perform due diligence to confirm they are completely accurate and should request modifications to representations that are overly broad or speculative. For example, if a contractor is asked to provide a representation regarding the actions of the developer, or regarding possible present or future conditions that could impact the enforceability of the EPC Contract, the contractor may want to limit the representation “to the best of the contractor’s knowledge.”

Parties to Consent and Assignment

Many Consents and Assignments are set up to be signed only by the contractor or only the contractor and developer. However, if a contractor wants to include provisions in the Consent and Assignment as discussed above that are binding on the developer and lender, it is essential that the Consent and Assignment include the lender and developer as parties and be signed by them.

Summary

Contractors understand that lender financing is necessary for most solar and wind farm projects, and that such financing cannot happen without adequate safeguards to protect lenders’ interests. For that reason, most contractors will not object to signing a Consent and Assignment, but they may request reasonable modifications to protect their rights under the EPC Contract.

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