"Will serve" letters are fairly common requirements on construction projects. They normally are required by lenders to finance a project. Since the lenders want them before they will close on the financing for the project, owners "request" them from the construction team (construction manager, trade contractors, and possibly major subcontractors) to finalize the hire or award for the work.
Will serve letters are generally required at the inception of a project. However, if a project is being refinanced, a new lender will want some form of these documents to be signed by the construction team as part of a refinance package.
While these will serve and assignment letters have become pretty standard requirements by lenders (and, therefore, by owners/developers) for new financing or for refinancing on a project, it is critical not to underestimate the effect of these documents or the mischief that they can create for you on a project. Once you sign one, you've just added another layer of paperwork with which you must comply if and when there are issues or claims on your project. Further, these documents can create obligations and responsibilities that are different from the requirements under the construction agreement or subcontract.
Since these types of forms are fairly standard requirements on construction projects, you will likely be required to sign one at some point. Because they have the potential of creating significant issues for your company, let's take a look at some problems that can arise. Let's also see how you can address the language and better position your company to avoid problems.
What's in a Name?
At the outset, keep in mind that these documents can take a variety of names. They are commonly referred to as "will serve letters" or "contractor's assignment." I've also seen them called "completion guarantees" or simply "contractor's letter." Sometimes they are split into two or three different documents; sometimes, everything appears in one overall form. (For our purposes, let's refer to them as "will serve letters" (but without the quotes, since I am getting tired of typing the quotation marks)). Let's also assume that there is one overall document in play instead of multiple, overlapping forms.
Object of the Will Serve Letter
Regardless of the name, and regardless how many separate documents constitute the will serve letter, they all have the same general goal: create direct obligations and responsibilities for contractors or subcontractors to the lender and finance team. The forms also force the construction company to continue working for the lender and finance team (at their option) if the owner or developer defaults on the finance documents.
How can you better position your company if /when you are asked to sign a will serve letter?
Don't underestimate them. These may seem like harmless, routine documents. However, as noted, they create direct obligations, duties, and responsibilities for the signer to the lender and finance team. Therefore, if you do sign a will serve letter, be sure to review it periodically, especially if there are any issues that come up on the project. Will serve letters generally require separate notices to be given to the finance team in the event of a claim or default on the construction contract. Moreover, will serve letters can limit your options in the event of any claims, unless you comply with the conditions in the letter.
Don't think that you must sign whatever is given to you.Will serve letters usually are negotiable. They are often circulated as "take it or leave it" forms that must be signed in connection with the construction agreement. Owners/developers typically say that the lender requires it to be signed and you can't make any changes. However, as Max E. Greenberg (the name partner in my former law firm of Max E. Greenberg, Cantor & Reiss) used to say, "It ain't necessarily so." Despite the threat that you have to sign these or else you won't get the work, I've found that the forms are negotiable and that lenders tend to be reasonable when it comes to the requested changes. It also becomes a little more predictable when you have the same lenders on different projects, so you can predict what they will, and will not, agree to.
Also, you have some leverage since the will serve letter is normally a last-minute-type detail. Lenders and owners/developers are not going to let a project financing or refinancing fall through because a contractor wants some changes to the will serve letter.
Don't be forced to sign the will serve letter—negotiate.As mentioned, will serve letters and their related forms sometimes are treated almost as an afterthought. I've been involved in a number of transactions where we represented the contractors and spent many hours negotiating the general contractor agreement or trade contractor agreement before work started. After we worked out all the details on the construction agreement, the owner or construction manager then sends us a "by the way" email saying that we also have to sign a will serve letter to finalize the transaction. It's almost considered a minor inconvenience and usually presented with the owner or lender saying to the contractor or subcontractor, "Sign the will serve letter, or you will not be given the work."
Of course, the upper-tier owner or construction manager's leverage, at that point, is holding up the construction agreement unless the will serve letter is signed. However, the good part is that this usually occurs close to the closing date for the finance: while the owner or construction manager can threaten to withhold the work and find another contractor if you do not sign the will serve letter, the reality is that it is probably too late to find a new contractor who can step right in and meet a quickly upcoming date for the closing on the finance and loan transaction.
It is a little different if a project already is underway and is being refinanced. As noted, the new lender normally will want will serve letters to be signed by the construction team in order to finalize the refi and take out the original lenders. However, the owner or construction manager does not have much leverage, at that point, since the project is moving and they are not—realistically—going to replace your company if you refuse to sign the will serve letter. While they are not likely going to replace you, there are other leverage points that can be used, so it is worthwhile to go ahead and sign what is being requested with changes that you may want.
Areas of Concern
Here are some areas of concern in will serve letters.
All is well. The typical will serve letter has, what seems to be, an innocent clause that requires the signing contractor or subcontractor to confirm a variety of items under the construction agreement. Generally, the signer is required to confirm that the agreement is in effect and enforceable, that the upper tier (be it the owner, construction manager, or contractor, depending on who is signing the form) is not in default of any terms of the agreement, that the signing company has been paid all amounts due and owing to the date of the letter, that there are no open claims, and that the signing contractor has paid all amounts owed by it to its lower tiers and employees. While they may seem innocent, some of these representations and confirmations can raise problems. The following are examples.
The agreement is in effect and enforceable: I don't see an issue with this language. Normally, you want to be sure that your agreement is effective and enforceable, so it does not hurt to confirm it in the will serve letter.
The upper tier is not in default of any terms. Make sure this statement is accurate. It is easy to confirm this if you are just starting the work. However, if this is a refi and you are well down the road, then I would not be so quick to agree to this language if the upper tier has not complied with some sections of the construction agreement. If you confirm that there is no default, but there actually is a problem, that can come back to haunt you later on, especially if you then try to say that the upper tier was not in compliance with your agreement.
All amounts due have been paid to date. This is easy to confirm if you are at the inception of the project. However, again, in the situation of a refi, it is likely that your company is owed some amounts, on one or more open requisitions, at the time the will serve letter is being signed. If you are owed money, then I would make that clear in this part of the will serve letter.
There are no open claims. This, again, is more of an issue for a contractor or subcontractor who is asked to sign the will serve letter as part of a refi. I would hesitate to agree to this language if there are open claims at the time, especially for things like extra work or change orders. Normally, we will agree to this language but with some kicker listing what is open.
Agreeing to this language at the inception of the project is a bit easier. There probably aren't any claims at the inception of the work, so it may be easy to confirm that there are no open claims at that point. Having said that, I will mention that a client recently was asked to sign a will serve letter before the actual work started. However, there was a 4-month delay, up front, in getting access to the site. So, even though work had not started, there was a potential claim for delay or for an extension of time. Therefore, we could not agree to the specific language in the will serve letter saying that there were no claims.
All amounts owed to your lower tiers have been paid. I normally do not have a problem with this language with a minor tweak. I like to add language that confirms that the lower tiers have been paid "or will be paid when due." It's dicey to confirm that everyone has been paid through the date of the will serve letter since that probably is not accurate. It is more likely that the contractor or subcontractor does owe workers or lower-tier subs or suppliers at the time the will serve letter is signed. However, those entities will be paid when required. The language that I add (noted above) covers you for amounts that may still be open but that will be paid.
Other Typical Clauses
You may find any of the following common clauses in a will serve letter.
I'll be there. The standard will serve letter requires the signing construction company to commit to continue working even if there is a default in the agreement by the upper tier (owner/developer, construction manager, or prime contractor) and to permit the lenders and financing team to take over the agreement under a variety of circumstances, including default by the owner or developer under the loan documents. (My memory is that this is basically where will serve letters started. Each contractor had to commit to continue working even if the owner/developer was in default of the loan documents. Somehow, I guess as expected, these letters got lawyered up and go far beyond that original intent.)
Normally, I do not have any issue for our construction clients to agree to continue working if the owner or developer is in default on the loan documents. However, the two main conditions are that we get paid everything that is owed for all work performed through the date of the takeover and that we get paid for work performed after the takeover in accordance with the time frames in the main contract. Sometimes, a will serve letter will say that the contractor agrees to continue to work as long as the contractor gets paid for the work performed after the takeover by the lender. However, to me, that is not good enough. We will continue to work as long as we get paid for new work and as long as we are paid for all work performed up to the date of the takeover.
Added default and termination notice. Your construction agreement normally will have detailed language on what you have to do in the event you are not paid, or there is any other type of default by the owner/developer, construction manager, or another upper tier. However, the will serve letter adds more requirements since you will now have to give notice to the lender and finance team before your notice will be completely effective. Normally, I do not have a problem with these requirements as long as the time for notice is the same as in the main construction agreement.
Many times the will serve letter will increase the notice time frame, saying for example that you have to give the lender 30 or 60 days' notice before you can suspend work or terminate for nonpayment or other default. However, those timeframes normally are much longer than what is in the main construction agreement. We will not agree to the new time frames in the will serve letter.
Also, since there are added notice requirements, it is important that you check the will serve letter periodically to make sure you are aware of the added requirements. I know that I already stated this, but it is worth repeating. I have been practicing construction law for over 35 years, and it is hard enough to get my contractor clients to read the construction agreement (let alone a will serve letter) after the project starts.
Change orders. Will serve letters typically place restrictions on the dollar amount of change orders that are permissible. So, even though your construction agreement allows for change orders, a will serve letter may limit the amount that you can be paid for changes and may add requirements for notice to the lender before certain change orders can become effective. The will serve letter may also say that the project finance funds will not be available for changes over a certain threshold, so be mindful of that. You may want to negotiate a separate agreement with the upper tier in which the upper tier agrees to be responsible for the amounts due for changes, regardless where the funds come from.
Development work. Do you have skin in the game? Keep an eye out for language that can haunt you if you are involved in the development work along with the construction work. For example, a contractor may have a development arm that is a signer of the loan documents. In those situations, be sure that the will serve letter does not make the contractor responsible for any defaults in the loan documents. I worked on a transaction recently where the will serve letter stated that the contractor agreed to cure any default by the developer in any of the loan documents. The contractor and developer were affiliates. Still, we would not agree to language that forced the separate contractor to be liable for defaults by the developer even though they were affiliates.
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