Association Liability To Unknown Subcontractors – Beware!

Community Associations often take on the task of a capital improvement, restoration, or renovation project, whether it be repaving roads, significant clubhouse upgrades, or re-siding the exterior of the condominium building.  In virtually all cases a general contractor is hired to oversee and/or make the renovations. Often times the general contractor will retain the services of subcontractors to perform certain limited aspects of the project.  The construction contract is between the association and the general contractor placing these parties in “privity of contract”.  Subcontractors, however, are typically not in “privity of contract” with the community association meaning the subcontractor has no direct contract with the association.  While logic might dictate that since the community association has no actual written contractual connection with the project’s subcontractors the association could not be held liable to make payment to the subcontractor, that belief is simply incorrect. Florida’s Construction Lien Law, Fla. Stat. §713, et. seq. [formerly the Mechanics Lien Law] establishes a procedure to enable subcontractors to potentially force the association to pay for work performed at the community in a situation where the general contractor failed to remit payment to the subcontractor. If the subcontractor delivers to the association a document entitled “Notice to Owner” the association is on notice that the subcontractor is doing work on association property.  Subject to various procedures and conditions, the subcontractor could then demand payment directly from the association if the general contractor disappears or files bankruptcy for instance. Naturally, the question arises how does the association protect itself from double paying for the same work, once to the general contractor per the terms of the written general contractor’s agreement and then again to the subcontractor if the general contractor fails to remit payment to the subcontractor. There are two basic methods.  First, as part of the review, negotiation, drafting, and revising of the contract with the general contractor a key provision should be inserted which requires as a condition to the delivery of a “progress payment” the general contractor must supply the association with a “lien release” from the subcontractor for the work performed to date along with a partial payment affidavit.  General contractors are famous for resisting such contractual language claiming how could they pay the subcontractor without first being paid by the association. The association must insist the general contractor make payment first to the subcontractor out of its own funds, then be reimbursed by the association.  Otherwise, the general contractor who receives payment from the association, without obtaining the lien release from the subcontractor, who then proceeds to disappear or file bankruptcy will leave the association exposed to potentially paying twice, once to the contractor and then to the subcontractor, for the same work. Alternatively, in lieu of requiring the aforementioned contractual protection, the association can purchase a payment-performance bond which acts as an insurance policy in the event the general contractor fails to pay its subcontractors.  However, a bond could add as much as three to five percent to the total project cost.  Accordingly, the best option is a construction contract with appropriate protective conditions and language to avoid a monetary claim from a subcontractor when moving forward with a capital improvement, repair, or restoration project within your community.