SUGGESTED FORMS OF OWNER SECURITY DOCUMENTS
To encourage compliance with the new law, CEA has promulgated form documents for each of the three types of owner security. These forms, along with a brief explanation of each, are attached for your convenience and are for informational purposes only. These forms may be revised from time to time. They are designed to be "middle of the road" forms, which attempt to balance the legitimate interests of both owners and contractors. In each of these forms, changes could be made to make the forms more favorable to either the owner or the contractor. As no form can be designed to address all the issues that arise in all transactions, CEA urges you to consult with your attorney concerning the use of these forms for any specific transaction. CEA cannot provide legal advice.
- Insert to Construction Contract to Provide for Payment Bond as Owner Security. (Revised 4/17/02)
This is a sample provision to be included in a construction contract providing for the owner to deliver a payment bond to the contractor as security pursuant to Section 3110.5. CEA has not provided a form of payment bond, as most sureties prefer their own forms. It will be important to verify that the contractor is named as the obligee under the payment bond and to carefully review the language of any payment bond. It is also advisable to obtain the consent of the owner's surety to any change orders during the course of the job, to avoid exoneration of the surety due to changes in the contract.
- Insert to
Construction Contract to Provide for Letter of Credit as Owner Security. (Revised 4/16/02)
This is a sample provision to be included in a construction contract providing for the owner to deliver a letter of credit to the contractor as security pursuant to Section 3110.5. The statute says that the terms of the letter of credit are to be determined by agreement between the owner, the contractor, and the issuer of the letter of credit. The CEA provision allows the contractor to draw on the letter of credit under three circumstances: (1) if the letter of credit is going to expire within 30 days and it has not been extended or replaced by the owner and sums remain outstanding under the contract; (2) if the contractor obtains a judgment or arbitration award against the owner; or (3) if the owner files bankruptcy. The parties may desire to negotiate different conditions for drawing on the letter of credit. For example, the contractor may wish to have the right to draw on the letter of credit before obtaining a judgment or arbitration award against the owner. In attempting to fashion a "middle of the road" form, the CEA form does not provide for this alternative, in recognition that the contractor will ultimately be protected if it can draw upon the letter of credit after obtaining a judgment or arbitration award, and that allowing a draw at an earlier time (other than in the case of impending expiration of the letter of credit or in the event of bankruptcy of the owner) is best left to the negotiations between the owner and contractor on a case-by-case basis.
- Sample Form
of Letter of Credit as Owner Security. (Revised 4/16/02)
This is a sample of a letter of credit, which satisfies the requirements of the CEA suggested contract language providing for a letter of credit to be the form of security. This is by no means the only form that would satisfy the requirements of the CEA suggested contract language, and many banks have their own general provisions and format they like to use for letters of credit. Consultation with legal counsel to evaluate a specific form of letter of credit offered by an owner is strongly advised.
- Insert to Construction Contract to Provide for Construction Security Escrow Account as Owner Security. (Revised 4/26/02)
This is a sample provision to be included in a construction contract providing for the owner and contractor to establish a construction security escrow account as a means of providing security pursuant to Section 3110.5. One notable feature, under the statute, of a construction security escrow account, which is different from the other forms of security, is that the owner is required to deposit retention or retainage in the escrow (in addition to the initial deposit of 15 or 25 percent of the contract amount), and the funds in the escrow account are to be disbursed to pay the last dollars due under the construction contract. This provision also grants the contractor a security interest in the escrow account and the funds deposited by owner therein. The contractor must take additional steps to perfect this security interest. Consult with legal counsel to assure that the proper steps are taken. The CEA provision provides for the Escrow Holder to disburse funds from the escrow account only upon the joint instruction of contractor and owner or pursuant to a court order, which is consistent with the provisions of the statute. The statute, however, also allows the parties to agree upon additional conditions for the disbursement of funds. This form does not include any such additional conditions, which are best left to the negotiations between the owner and contractor on a case-by-case basis.
- Sample Form
of Construction Security Escrow Agreement. (Revised 4/16/02)
This is a form of Escrow Agreement, which is designed to work with the CEA suggested contract language providing for a construction security escrow account to be established. This form of Escrow Agreement has been approved for use by three of the major title insurance companies in California. In addition, CEA will list on its website any additional title and escrow companies that approve the use of this form in the future. CEA does not recommend or endorse the use of any specific company to act as Escrow Holder, but merely lists companies that have approved the CEA form as a service to its members and other interested parties. The companies listed below are willing to act as Escrow Holders of construction security escrow accounts, and to use the CEA form of Escrow Agreement:
- Chicago Title Company
388 Market Street, Suite 1300
San Francisco, CA 94111
Contact Person: Greg Oliver
Phone: (415) 788-0871
- LandAmerica Financial Group
Commonwealth Land Title Company
Lawyer's Title Insurance Company
Transnation Title Insurance Company
525 Market Street, Suite 1560
San Francisco, CA 94105
Contact Person: Karen Guthrie
Phone: (415) 442-0199
- Stewart Title of California, Inc.
505 North Brand Blvd., Suite 800B
Glendale, CA 91203
Contact Person: Edmund Neil
Phone: (818) 500-5693
- The Mechanics Bank
2030 Franklin Street
Oakland, California 94612
Contact Person: Judith King/Stacy Cesmat
Phone: (800) 933-6324
- Chicago Title Company