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Real Estate and Construction Law

Subordination by Subcontractors: “Flow Down” Clause

March 10, 2014    •    2 min read

file000282347295In KeyBank National Association v. Southwest Greens of Ohio, LLC, the Tenth District, Franklin County Court of Appeals (988 NE 2nd 32, March 29, 2013), held that a so-called “flow down” clause contained in the subcontracts for the construction of a continuing care retirement community project bound the subcontractors to the subordination clause contained in the AIA contract between the owner and general contractors, thereby defeating the priority of the subcontractors’ mechanic’s liens.  Several contracts were involved between the contractor and owner and each contained provisions incorporating by reference the AIA A201-1997 General Conditions.  The General Conditions contained the following two sections:

“§ 13.1.2  To the extent permitted by law, the Contractor and all Subcontractors * * * are hereby subordinate to any and all statutory, constitutional and contractual liens, security interests and right each may now or in the future may have against the Project or any portion thereof to the liens, security interests, and rights of any lender having a lien against all or any portion of the Project, from time to time.  Contractor and all subcontractors agree to execute and deliver to Owner, such documents as may be requested by Owner to acknowledge such subordination.”

* * *

“§ 16.1  The Contractor [and] all Subcontractors * * * are hereby subordinate to any and all statutory, constitutional, contractual and constitutional liens, security interests and rights it may now or in the future have against the Project or any portion thereof to the liens, security interests and rights of any lender * * * having a lien against all or any part of the project.  Contractor shall include this provision of this Article 16 in each agreement between Contractor and Subcontractor.”

The subcontracts included a “flow down” provision which provided in pertinent part:

Article I – Work to be Performed

* * *

Subcontractor shall be bound by the terms of the Prime Contract and all documents incorporated therein, including without limitation, the General and Supplementary Conditions, and assumes toward the Contractor, with respect to Subcontractor’s Work, all of the obligations and responsibilities that the Contractor, by the Prime Contract, has assumed to the Owner.”

In holding that the subcontractors’ mechanic’s liens were subordinated to the construction financing, the court cited a Georgia case (L&B Constr. Co. v. Ragan Ent., Inc., 267 GA 809, 812 (1997), as well as the Ninth District Court of Appeals decision of Christe v. GMS Mgt. Co., 124 Ohio App. 3rd 84, 88 (9th Dist. 1997).

In the course of its decision, the court also cited as supporting authority Gibbons-Grable Co. v. Gilbane Bldg. Co., 34 Ohio App. 3d 170 (8th Dist. 1986), Matrix Technologies, Inc. v. Kuss Corp., 2008- Ohio-1301 (6th Dist.), and E.D. Masonry, Inc. v. R.P. Carbone Constr. Co., 63936, 1993 WL 4729 (8th Dist. Jan. 7, 1993), which similarly interpreted flow down clauses with respect to mandatory arbitration provisions.

Contact attorney Frederick M. Lombardi for more information.

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