Lenders offering construction loans are keenly aware of the risks that they may face when funding new construction—budget overruns, mechanic's liens, delays in labor or materials, local political opposition, and changing market conditions, to name a few. Perhaps less obvious are the dangers posed by poor loan administration, which can expose lenders to litigation and, in some circumstances, injunctive relief in favor of the borrower. The challenge presented to lenders in the construction financing context, and as the case law discussed herein indicates, is balancing the need for frequent communications with the borrower against the risk of such communications becoming discoverable in court proceedings and used against the lender if the relationship deteriorates. Further, a construction lender's course of dealing, established by such communications, may offer unique remedies to which borrowers are entitled in the construction loan context.

Unlike traditional commercial mortgage loans in which loan proceeds are advanced in full at closing and lenders retain few affirmative obligations throughout the term, construction lenders provide loan funds in a series of advances as building progresses and, whether personally or by way of a third party construction consultant, take an active supervisory role in the progress of construction as disbursement requests are reviewed and approved for lender funding. The combination of a construction lender's sense of how a project is progressing, joined with the market data readily available to them, may give such a construction lender an early indication that a particular project faces unforeseen construction challenges or market changes that threaten the economic viability of the final project. Nearly all construction loan documents entitle a lender to cease funding loan disbursements in circumstances where project delays or change orders have changed the construction budget until such time as the borrower has 'balanced' the loan with an infusion of additional equity equal to the shortfall.

However, very few, if any, construction loan documents permit a lender to cut-off loan funds due to larger market shifts that threaten the viability of the finished project. The cases discussed herein suggest that, in any event, courts will give a very narrow reading to provisions allowing a lender to cease construction funding and, further, a lender's course of dealing and communications with the borrower may deprive the lender of these protective provisions.