originally published in the Florida Community Association Journal, February 2020 edition
The owner of real property can end up paying twice when they pay their general contractor who, in turn, fails to pay the subcontractors and suppliers. However, this very real consequence can be avoided, too. While drafted to protect contractors and suppliers, Florida law also provides substantial protection in favor of the consumer (a.k.a, the “property owner”) from having to pay twice for construction supplies and for the work itself. However, the property owner only has the protection if the process outlined in section 713.13, Florida Statutes (2019), is strictly followed. While the statutory regime can be difficult for the layman to interpret, it is not an overly complicated process to follow once understood. That said, even if an owner strictly follows the statutory regime to protect themselves from having to pay twice, many general contractors and their attorneys have found a way to dilute the consumer protection afforded by the statute and, thus, still expose the the owner of the property to the risk of having to double pay for the work. To understand the problem at hand, the overall payment process from the owner to the general contractor as contemplated by Florida’s legislation must be understood.
To start the process, the owner is required to file what is referred to as a “Notice of Commencement.” Amongst other things, the Notice of Commencement identifies the general contractor and the legal description of where the work is to be performed. It is recorded with the local county clerk’s office so that it is a part of the county’s official records. The purpose of the Notice of Commencement is to inform all subcontractor’s and suppliers that if they intend to provide goods and/or services to the property, and if they want to have proper legal standing to record a lien against the property in the event they are not paid, that the subcontractor and supplier must serve a “Notice to Owner” to the owner.
Most importantly, the Notice to Owner informs the property owner of all subcontractors working under the general contractor and all suppliers who provide supplies and materials to the job site under the direction of the general contractor or a subcontractor. In this way, the owner is informed of all of the subcontractors and suppliers working under the direction of the general contractor.
In exchange for payments to the general contractor, the general contractor provides the owner with partial payment affidavits for each payment and a final payment affidavit upon conclusion of the work at hand. The subcontractors and suppliers provide the owner “partial releases” for the payments received from the general contractor using the general contractor as the delivery conduit to deliver the partial release to the owner.
Because the owner enters into contractual “privity” (meaning, “a close connection”) with the general contractor, but not the subcontractors and suppliers, the owner provides all payments due to the subcontractors and suppliers to the general contractor who is responsible to pay all subcontractors and suppliers. But, how does the owner have assurances that the money paid to the general contractor is properly provided to the subcontractors and suppliers? Well, that is where the Notice to Owners received by the owner come in very handy. Since the Notice to Owner informs the owner of all subcontractors and suppliers hired by the general contractor expecting payment, the owner can, and most certainly should, contractually require that the general contractor provide the owner with partial releases from those subcontractors and suppliers as proof of payment. In fact, section 713.06(3)(c)2., Florida Statutes (2019), provides that “[l]ienors [referring to and meaning the subcontractors and suppliers] receiving money shall execute partial releases… to the extent of the payment received.”
Sounds simple, right? Pay the general contractor and receive partial payment releases (a.k.a, a receipt) from the subcontractors and suppliers so that they cannot later claim they are unpaid and thus, be in a position to record a lawful lien against the owner’s property. The question is when should the subcontractors and suppliers provide their partial releases? Should the subcontractors’ and suppliers’ partial releases be provided by the general contractor to the owner contemporaneously with a progress payment, or should the subcontractors and suppliers provide their partial releases only after payment is received meaning the partial releases will only be at least one progress payment behind.
In order to be fully protected from the risk of double payment, the general contractor must obtain the partial releases from the subcontractors and suppliers in advance of payment from the owner. It is as though the statutory process at hand contemplates that either the subcontractors and suppliers trust the general contractor to the extent that they provide their partial release to the general contractor in advance of payment so that the partial releases can be provided to the owner in immediate exchange for payment from the owner. Or, the statutory process implies that the general contractor has sufficient funds to pay the subcontractors and suppliers prior to payment from the property owner so as to be in a position to obtain the partial releases from the subcontracts and suppliers to provide to the owner in exchange for a partial payment. With the partial releases in hand, in the event the general contractor does not pay the subcontractors and suppliers, the owner is fully protected. It is important to understand that without the partial releases in hand, even if the owner paid the general contractor and received a partial payment affidavit from the general contractor, if the general contractor did not pay the subcontractors and suppliers, then they have a lawful right to demand payment from the owner and to record a lien against the owner’s property. Hence, without the partial releases from the subcontractors and suppliers, the owner remains in danger of paying twice for some or all of the work.
Some general contractors insist on providing the owner with the partial releases from the subcontractors and suppliers one payment behind the payments from the owner to the general contractor. Right off the bat, that should be a significant concern to the owner because it means if the general contractor fails to pay the subcontractors and suppliers for any reason whatsoever, be it due to bankruptcy, closing up shop, or running off to the Canary Islands with the money, the owner will still have to pay the subcontractors and suppliers and thus pay twice. In fact, the legislature has even gone so far as to warn the public of this danger.
Section 713.06(3)(c)1, Florida Statutes (2019), provides in relevant part that, “…[t]he owner may require, and, in such event, the contractor shall furnish as a prerequisite to requiring payment to himself or herself, an affidavit as prescribed in subparagraph (d)1., on any payment made, or to be made, on a direct contract, but the furnishing of the affidavit [by the general contractor] shall not relieve the owner of his or her responsibility to pay or cause to be paid all lienors [a.k.a., the subcontractors and suppliers] giving notice.” [Emphasis added.]
There are three methods to protect the owner from this problem:
- The safest method is to ensure that the contract between the owner and general contractor contains a provision that the owner is to be provided the contemporaneous and immediate partial release of lien from the subcontractors and suppliers in immediate exchange for payment to the general contractor.
- Hire a different general contractor.
- Purchase a payment and performance bond which act as an insurance policy where, among other protections, the insurer will pay the subcontractors and suppliers in the event payment was made by the owner to the general contractor but the general contractor failed to pay the subcontractors and suppliers. If the general contractor is not bondable, that should serve as a warning in and of itself to look for a different contractor. The performance and payment bonds will add three to five percent to the overall project cost and are, one way or the other, paid by the owner. If this route is selected, the owner must make absolutely certain the policy will provide the necessary coverage for this concern as not all insurers may provide this coverage.
Whether an owner decides to enter into contractual privity with a general contractor who insists on providing the subcontractors’ and suppliers’ partial releases only after the owner pays the general contractor and then the general contractor pays the subcontractors and suppliers is risky because there will always remain financial exposure of paying for all or part of the work, twice. If you, your company or community association are considering hiring a general contractor then you need to be aware of this issue. It is suggested that an owner never ever put themselves into a position where there is risk of paying more than once for the same work. Ask yourself this: if the general contractor cannot not afford to pre-pay their subcontractors and suppliers or the subcontractors and suppliers will not trust the general contractor with their partial releases to be provided to the owner upon payment, then should you be doing business with that general contractor in the first place?
Personal experience has demonstrated that some general contractors will tell property owners that delayed receipt of the partial releases is customary and quite ordinary. If you find yourself in that position be sure to tell the general contractor of the beachfront property for sale in Arizona, and go find yourself a different contractor.