Construction financing is hard to come by in today’s constrained credit market. This has enabled lenders to, in effect, take their money up front. Lenders are presenting construction loan agreements that reserve funds from the loan proceeds to pay interest and fees due under the note.

A recent California case illustrates this practice. The lending bank took more than $1.6 million in interest and fees out of the loan proceeds and then disbursed the balance to the property developer over a period of time. When an unpaid contractor served the bank with a stop notice – a lien on the construction loan proceeds – the bank responded that there were no more proceeds. The contractor ultimately prevailed. But, the situation shows that when the lender gets paid up front, funds for actual construction of the project are reduced.

Other cases this week involved an unlicensed architect who received an $881,000 fee and a disappointed bidder’s ability to recover its bid preparation costs. The imposter architect was forced to disgorge its fee and the disappointed bidder received its costs even though it was unable to obtain injunctive relief.