Renewable Energy Projects - Pitfalls for the Contractor / Subcontractor

This is a continuation of my previous post on the topic of renewable energy project contracts.  The first post focused on contract drafting and review concerns for landowners to note. Again, wind and solar projects in particular have been moving forward through local government approvals lately.  Since my first post, the McLean County Board has, on a 10- 8 vote, followed the recommendation of its Zoning Board of Appeals and approved one wind proposal.  See this recent article from the Bloomington Pantagraph.

In this post, I want to focus particularly on one of the contract issues I mentioned last time, as it affects certain third parties - namely, contract provisions regarding liens and lien rights that are within the easement agreement / lease.  These provisions typically indicate that the renewable energy system is personal property and not an improvement to the real property itself, and that as such will be exempt from the Mechanics Lien Act.  This may also be extended to concrete work and other construction work needed to install the system (say a windmill tower), and not merely the system itself.  If you are a contractor and considering bidding or entering a contract to help, you need to be aware of this, and factor into whether or not to bid at all, and if so what risk factor to include in your price proposal.

For at least one unfortunate contractor, the issue came to a head and the contractor was left hung out to dry.  In AUI Construction Group, LLC v. Vaessen, a subcontractor who had done concrete work for a windmill tower project, and was not paid for its work to the tune of $3 million,  filed suit to foreclose a mechanics lien to recover what payment it could for its work.  The subcontractor was essentially forced to attempt recovery from the lien, because the general contractor was insolvent and had filed a bankruptcy petition.  The issue then was whether the subcontractor's work building the foundation and tower for the project constituted a non-lienable trade fixture and personal property, or an improvement to the real estate itself.

The court noted three factors to consider in this analysis: (1) the nature of the equipment's attachment to the real estate; (2) the equipment's adaptation to and necessity for the purposes to which the premises are devoted, and (3) whether it was intended that the equipment should be considered part of the real estate.  The first two factors supported lien rights for the subcontractor, but the third factor was found to "strongly weigh" against that.  The problem was that the base easement agreement (the contract between the landowner and the energy company), had language declaring the tower to be a trade fixture and personal property, and not an improvement to the real estate.

 The subcontractor's own contract with its general contractor described the general contractor's contract as to design and build the foundation and tower for the facility "...owned by" and identified the energy company as the "owner," NOT the actual landowner.  The court found that by virtue of this language the subcontractor was on notice that the tower was not part of the property owned by the landowner, and therefore that it was separate, personal property.  The mechanics lien claim was therefore invalid.  Furthermore, the point was raised, and the court agreed, that the subcontractor in this case did not have a basis to have filed a personal property lien under the Uniform Commercial Code (UCC), because the work product in question was not a specific product or piece of equipment, but mere "ordinary building materials."

The troubling end result for the subcontractor, is that its only legal recourse to be paid for its work was contractual recovery from the general contractor, who was insolvent and in bankruptcy (where, with no lien available, this would be a mere unsecured claim).  So the subcontractor was left with a $3 million unsecured account receivable due from an insolvent debtor.

So if you are a contractor about to bid or sign a contract on a new wind or solar project, how can you protect your right to be paid for your work?

1. Read your contract / bid package very carefully (and consider hiring a lawyer to help!) to make sure if your mechanics lien rights are waived.  If you are a subcontractor and it isn't clear from the subcontract form, consider asking for a copy of the energy company's lease/easement agreement so you can be sure.  If the general contractor or project manager is not forthcoming with that, you can likely get it from the county recorder of deeds.  
2. If your scope of work includes providing tangible personal property / equipment, and not merely building materials, consider including UCC lien rights in your contract.  WARNING - Unlike Illinois mechanics liens, UCC liens generally require filing a form with the State in advance. If you do this, you should fill out and file the UCC notice immediately when the contract is signed, NOT wait until you are actually not being paid!
3. Consider requesting more payment up front, or staging draws as advances as the project progresses rather than payments for work already completed.  If this is not negotiable, make sure you understand the players involved with the construction escrow process and push for a third party (like a lender or title company) to be involved with processing draws.  Perhaps also ask for direct draws to you from the escrow, rather than being paid through your general contractor.
4. Finally, based on this decision, it may be reasonable for renewable energy projects to expect to have to pay contractors more, as a risk premium markup due to having no lien security.  If you are bidding on such a project, be careful to consider this in your bid, and be careful to manage the draws to prevent the amount of your exposure for unpaid work from getting too high.  I'm sure the subcontractor in Vaessen would agree, it's better to not be the low bid than to get the bid and wind up getting stiffed for $3 million worth of work.  

My colleague on the Illinois State Bar Association council for the Construction Law Section, Steven Mroczkowski of Carlson Dash, has written a very helpful article explaining the Vaessen decision and which I'd like to acknowledge as a reference for me in writing this. Here's a link to that article (it's an ISBA newsletter article and so may require ISBA membership or authorization to open the link, which is a great opportunity for me to plug the benefits of the ISBA and the Construction Law Section in particular!  If you are an Illinois attorney interested in this area, I encourage you to check it out!).

Nate Hinch is an attorney and partner at the law firm of Mueller, Reece & Hinch, LLC.  He has offices at 404 N. Hershey Road, Suite C, Bloomington, IL 61704, and 809 Detweiller Drive, Peoria, IL 61615, and can be reached by phone at (309) 827-4055 and email at nhinch@mrh-law.com.