“Without Performance Specifications, Green Building Can LEED to Disputes

It’s been more than 20 years since the LEED standard was introduced, and green building has now become a significant percentage of new U.S. commercial real estate construction.  The benefits of green building techniques and products have made LEED certification a hot commodity and changed the construction industry.  But there are also risks involved if these new techniques and products don’t meet building users’ expectations.  In my recent article for the Daily Journal of Commerce, I discuss how incorporating accurate performance specifications into contracts can help address expectations before construction begins. Read the full article here.

 “Without Performance Specifications, Green Building Can LEED to Disputes” was originally published by the Daily Journal of Commerce on June 17, 2016.

 

KIRO 7 Interviews Joe McCarthy on Pitfalls of Washington Condo Act – Developers Beware!

Joseph McCarthy, a real estate attorney in Stoel Rives’ Seattle office, was recently interviewed by television station KIRO 7 in Seattle for a segment titled “Law meant to protect Wash. homeowners instead pushing up condo prices.” The piece discusses how the consumer warranties contained in the Washington Condominium Act, found at Chapter 64.34 RCW, fostered excessive construction defect lawsuits that have caused developers to avoid condominiums and to instead build apartments, which are not subject to the act.

In the last five years, 1,235 condo units were registered by developers in King County, while 34,100 apartment units were registered. Some advocates for condo owners (many of whom bring suits against condo developers) have argued the act provides important protection for the consumer, but developers, many of whom have been sued by condo associations, believe that the act, which McCarthy says is vague and does not explicitly state what is warranted, should be revised to clarify the warranties required by the developer.  “It’s vague, uninsurable, and expensive,” he said.  You may view the KIRO 7 news segment here.

The warranty provisions of the condo act are disliked by developers, because they are quite broad, and they are imprecise. The warranties require that each condo project is:

  • Free from defective materials;
  • Constructed according to sound engineering and construction standards;
  • Constructed in a workmanlike manner; and
  • Constructed in compliance with all laws.

These standards are open-ended, so it is easy for any hired expert to testify that some aspect of the building construction violates them. Neither the developer nor the condo owner can know what is warranted until a lawsuit is brought, the experts testify and the judge or jury decides whether the construction violated one of these standards.

When compared to the single-family construction industry, where warranties almost always contain specific measurable parameters for construction items, the condominium warranties are unpredictable and difficult to insure. Many developers have stories of projects built to very high standards that were nevertheless (and in their view unjustifiably) criticized by an expert hired to increase the value of a lawsuit.  This situation has consequently driven up condominium prices as high insurance premiums are required to deal with the construction defect claims that are routinely asserted against condo projects.  Some industry insiders estimate that a developer has more than a 90% chance of being sued on a condominium project, due to the ease of bringing a warranty claim. With the prevalence of construction defect claims that inevitably appear to follow from condominium developments, one can readily appreciate the chilling effect that the act has on developers considering condominium construction.

The Washington Condominium Act attempts to balance the interests of the claimants with at least some protection to the owner/developer community, such as specific condo defect claim limitations periods and detailed notice requirements.  For instance, RCW 64.34.452 requires that claims for breach of the express and implied warranty obligations under the act be brought within four years after the cause of action accrues.  A claim regarding the common elements (such as the building envelope) accrues at the time of the first unit sale. A claim as to a unit (such as interior flooring) accrues on the closing of the unit.  (This is shorter than the six-year statute of limitations period for general breach of contract claim.)  Additionally, the condominium declarant’s potential third party claims against its contractor and architect may be impacted, if not foreclosed, by the ultimate six-year statute of repose.  Under the act, the claim accrual (and hence the limitations) periods differ and very much depend on the type of claim being asserted (e.g., breach of warranty as to an individual condo unit or breach of warranty as to each common element) and such periods may not be reduced by either an oral or a written agreement.

These claim filing limitations also may be subject to the construction defect claims notice requirements of RCW 64.50.020, which could add another layer of complexity to the procedure for asserting causes of action arising from residential construction projects. The statute of limitations and statute of repose periods for construction-related claims appear to be tolled under the Washington Condominium Act (see RCW 64.34.452(4)) for 60 days after the period during which the filing of an action is barred under the construction defect notice statute (RCW 64.50.020).  However, provided the claimant has received, upon contract execution, a notice from the construction professional regarding the pre-litigation notice and the contractor/builder’s right to cure pursuant to RCW 60.50.050(1), a claimant may only enjoy the benefit of any tolled limitations period if the written notice of defect(s) is served within the applicable time for filing an action under the act, which, again, is greatly influenced by the particular factual basis for the claim. See RCW 64.34.452(4).

Based on the requirements and claims procedures of the Washington Condominium Act, condominium developers should work with their legal, marketing, sales and construction team to develop a robust risk management strategy as part of any condominium construction.

Construction Successes in the Seattle Area

It seems that lawyers spend a lot of time dealing with problems and crises, but it is healthy to celebrate successes as well. Here are a few things around Seattle that we can celebrate.

Sound Transit continues its expansion of the light rail system. The station next to Husky Stadium opened in March, connecting folks from the University of Washington to downtown and the airport.  Work is under way to extend the system further, through the University District and up to Northgate and eventually Lynnwood.  North of 90th Street, the line will emerge from its tunnels and proceed on or above the surface, but that is years in the future.

In April, most of the new and improved State Route 520 floating bridge opened to traffic with a celebration that included a fun run and bicycle events. The new bridge is elevated to minimize the need for closures during storms and to accommodate a water collection and treatment system that will help keep Lake Washington clean.  Challenges remain, including arrangements for disposing of the old bridge pieces and concerns about road noise, but after years of watching the new bridge gradually take shape, we can finally drive over most of it.

Even the troubled project to replace the Alaskan Way Viaduct with a highway tunnel seems to be gaining momentum. After a two-year stoppage to repair the tunnel boring machine, the contractor has resumed mining and successfully passed beneath the existing viaduct.  Now the tunnel boring machine will mine under the downtown core, so significant challenges remain.  The viaduct remains open, but its days appear to be numbered, which is a good thing because it is considered vulnerable to earthquakes.

Looking farther afield, work is progressing on I-90 through Snoqualmie Pass. Travelers over that route have had to cope with detours and narrow lanes for a long time, which made for difficult driving conditions during bad weather.  Now a large part of the work is completed from Hyak to the Keechelus Dam and it’s a much more comfortable drive.

Many more projects are getting done and put into service, to the advantage of all of us around Seattle. Others are in the planning stages.  It takes a lot of smart and experienced people to accomplish this work, and it’s a pleasure to acknowledge and applaud their efforts.

 

“From, For, and Against”: What’s the Difference?

Indemnity provisions are often among the most negotiated and least understood provisions of commercial contracts, and construction contracts are no exception to this rule. Despite, and perhaps because of, the importance of these clauses, they have evolved into an almost impenetrable jumble of legal terminology.

This jumble of words is not, however, without meaning. Although a comprehensive deconstruction of the various provisions of a sophisticated indemnity agreement is beyond the scope of this note, one simple example reveals the importance of a seemingly innocuous word choice.

Indemnity clauses often contain some formulation of the following: Contracting Party A agrees to indemnify Contracting Party B from, for, and against all claims arising out of the Contract.  An educated individual could reasonably assume that this provision could be edited to a simpler formulation—Contracting Party A agrees to indemnify Contracting Party B from all claims arising out of the Contract—without losing any meaning.

Such a seemingly straightforward revision could have dire consequences. Courts in Oregon have held that the omission of the terms “for and against” is evidence that the parties intended to limit the scope of an indemnity provision to third-party claims.  In other words, if Contracting Party A has only agreed to indemnify Contracting Party B from all claims arising out of the Contract, an Oregon court could conclude that Contracting Party B is not entitled to indemnification for its own damages.

If this was the parties’ intent, then this result will not be a surprise. But, if Contracting Party B had negotiated the other provisions of the Contract and allocated its risk based on a mistaken belief that Contracting Party A would be required to indemnify it for damages caused by Contracting Party A, Contracting Party B could find itself faced with a financial liability for which it had not accounted.

As this example reveals, the words used in an indemnity provision can have significance beyond their ordinary meaning. It is imperative that you understand the implications of the changes proposed to an indemnity clause, and the assistance of counsel is invaluable to that end.

No Crane Trespassing! Swingway Easements Make Good Neighbors

Earlier this year, my colleague Eric Grasberger authored a blog post about a crane collapse in Lower Manhattan.  In that post, he mentioned that neighboring landowners may seek to prevent cranes from intruding into the airspace above their property.  Contractors and owners alike are often surprised to learn that a crane swinging over adjacent property may infringe upon the adjacent owner’s property rights. 

Although there are potential technical solutions—such as using a crane with a luffing jib—project participants would be better served to address the issue before a crane is erected.  Obtaining a swingway easement from an adjacent property owner is the typical approach. However, the owner and/or contractor may ask:  Who is responsible for obtaining (and paying for) the swingway easement?

In some cases, that question may be answered by the parties’ contract.  For example, Section 2.2.2 of the AIA A201 requires the owner to obtain such easements, by stating that the owner is responsible for obtaining “easements . . . required for construction . . . of permanent structures.”  ConsensusDocs 200 (Paragraph 4.4) and DBIA 535 (Sections 3.2.1.3 and 3.2.2) include similar provisions.  In contrast, EJCDC C-700 Section 5.02.A.1 states that the contractor must confine its construction equipment to the project site “and adjacent areas that Contractor has arranged to use through construction easements or otherwise . . . .”  

Of course, these provisions could be modified by the parties during negotiations.  For example, an owner may want the contractor to obtain any swingway easements.  After all, determining how materials and equipment will be hoisted into place generally is considered a means or method of construction for which the contractor is responsible.  However, there may be valid reasons why an owner would want to obtain the easement.  These include avoiding markup on easement costs and managing relations with neighboring property owners. 

Regardless of how the owner and contractor may divvy up this responsibility, it is always better to address the issue before the neighbors complain—and seek to enforce their rights to prevent a crane from intruding into their airspace.

 

Watch Out for Forum-Selection Clauses

When developing construction contracts, parties frequently focus on what they consider to be the “essential terms” and may not be aware of “boilerplate” provisions.  In my recent article for the Daily Journal of Commerce, I address one of these important provisions — the forum-selection clause — and discuss its potential impact as well as things to consider when deciding whether to insert or agree to a forum-selection clause. Read the full article here.    

 “Watch Out for Forum-Selection Clauses” was originally published by the Daily Journal of Commerce on May 20, 2016.

 

A New Wrinkle In Time To Claim Construction Defects

Oregon’s law on statutes of limitation and/or repose periods on construction claims is complex and ever-changing.  A recent Oregon Supreme Court ruling has introduced yet another instance of differing time limits on construction defect claims. In my recent article for the Daily Journal of Commerce, I discuss Schell v. The Schollander Companies, Inc. and the implications this ruling has on both buyers and builders, and what you can do to help manage risk and and avoid unintended consequences.  Read the full article here.

 “A New Wrinkle In  Time To Claim Construction Defects” was originally published by the Daily Journal of Commerce on Apr. 29, 2016.

 

2016 Utah Legislative Session Summary

This post was guest authored by Stoel Rives partner Martin Banks.

A record number of bills were introduced during the 45-day Utah Legislative Session for 2016. While many of the bills dealt with education and legalizing medical marijuana, a few dealt with the foreclosure and the mortgage lending industry.  The bills listed below were all signed by Governor Herbert:

  1. H.B. 17 3rd Sub. ASSESSMENT AREA FORECLOSURE AMENDMENTS

    HB 17 3rd Sub. amends foreclosure provisions in the Assessment Area Act (Utah Code Ann. §§ 11-42-202; 11-42-207; and 11-42-502) and enacts § 11-42-502.1.  Specifically, this bill modifies the methods by which a local entity may enforce an assessment lien and makes technical and conforming changes.  If a governing body intends to enforce an assessment lien on the property, it must appoint a trustee that satisfies the requirements of Section 57-1-21, gives the trustee the power of sale and explains that if an assessment or an installment of an assessment is not paid when due, the local entity may sell the property owner’s property to satisfy the amount due plus interest, penalties, and costs, in the manner described in Title 57, Chapter 1, Conveyances. Furthermore, the bill separates out “Pre-May 2016 procedure” and “Post-May 2016 procedure” on enforcement of an assessment lien.
  2. S.B. 22 1st Sub. FORECLOSURE OF RESIDENTIAL RENTAL PROPERTY

    SB 22 1st Sub. Enacts and amends provisions related to foreclosure of residential rental property.  Specifically, this bill, under certain circumstances, allows a pre-existing tenant to continue to occupy, for a limited amount of time, a residential rental property after a forced sale at public auction; repeals a sunset provision; eliminates a sunset repeal date; and provides a repeal date for certain sections (Utah Code Ann. §§ 57-1-25; 631-1-257; 631-1-278; and 78B-6-802).  Publication of the Notice of Trustee’s Sale shall be for: (1) at “least” once a week for three consecutive weeks; and (2) in at least “three” conspicuous places on the property to be sold.  If the property is sold, tenants may continue to occupy the rental unit until the rental agreement expires, or 45 days after the date they are served with a notice to vacate.  Before, it was 90 days.
  3. S.B. 220 2nd Sub.  NON-JUDICIAL FORECLOSURE AMENDMENTS

    S.B. 220 2nd Sub. Amends, enacts, and repeals provisions related to non-judicial foreclosure.  The bill amends provisions related to the appointment or resignation of a trustee; enacts provisions related to joinder of a trustee in a legal action against a beneficiary that does not involve the obligations of the trustee under the law or the trust deed; amends provisions related to notice of default; provides that a trustee in a trustee’s sale may require a successful bidder to make a deposit; provides that a successful bidder in a trustee’s sale who fails to pay the bid amount forfeits the bidder’s deposit; provides that a trustee shall provide an unrecorded copy of a signed trustee’s deed to a purchaser upon the purchaser’s request; amends a provision limiting the time within which a person may bring a non-judicial foreclosure action; amends a provision related to notice of a foreclosure proceeding on a reverse mortgage; and repeals a provision related to notice to a trustor of intent not to defer notice of sale (Utah Code Ann. §§ 57-1-22; 57-126; 57-1-27; and 57-1-28).
  4. H.B. 177 1st Sub. MORTGAGE LENDING AMENDMENTS

    H.B. 177 1st Sub. Modifies provisions that address mortgage lending.  It defines terms and addresses the application of Mortgage Lending and Servicing Act to mortgage lenders and makes technical changes (Utah Code Ann. §§ 70D-2-102 and 70D-2-201).

 

Termination Clauses a Must for Owners

The recent termination of the joint venture of Skanska-Hunt from the Washington State Convention Center project (article here) is a good reminder of the importance of well-written termination clauses in your owner-contractor contracts.  The reasons for termination (or “severance,” a slightly kinder word) can be many, including failure to agree on pricing (the reason given here), slow performance, poor fit, or a host of owner issues, such as loss of funding or political jeopardy.  In the context of design-build and CMGC projects, the contractor must first perform a variety of other tasks, including design and preconstruction services, before the physical construction work begins.  The pricing for the physical construction is usually delayed until the design and preconstruction services are sufficiently complete to allow the contractor a sound basis to estimate the work.  It is often at this critical juncture that the owner decides it wants to find an off-ramp from the existing contract.  When the owner wants a change, the contract clauses allowing termination are paramount.  The clauses should broadly allow for termination at any time (not just at the pricing juncture) and for either default (cause) or convenience (no cause).  The right to terminate should be accompanied by clauses that preserve the owner’s right to make claims for the work completed and paid for up to termination (including claims for defects, delays, liquidated damages, etc.).  Also included should be the owner’s right to continue to work with the design team and/or the subcontractors already engaged on the project.

Termination clauses typically give the owner a distinct advantage under the circumstances of the Skanska-Hunt challenge, but the court ruling thus far suggests that the project owner did not have robust termination clauses it could rely on before taking the off-ramp. It will be interesting to see whether a full trial will vindicate the owner’s right to find a better price, or the contractor’s position that you must accept its price, like it or not.  The public interest should favor the former.

Recent Survey Lauds Integrated Project Delivery (IPD), But Are There Risks with IPD?

According to an October 15, 2015 report published in the Engineering News-Record, covering the broadest survey performed to date on IPD, the industry is moving toward more collaborative contracting schemes, with what appears to be an overwhelmingly positive response strongly supporting risk and reward sharing multi-party agreements.  Conducted by the University of Minnesota and sponsored by Canada’s Integrated Project Delivery Alliance, the study canvassed 108 IPD veterans of 59 unique IPD projects located largely in the United States and Canada.  Data was collected from July 9 to September 15, 2015 (with the survey remaining open until September 15, 2016).  Respondents, including owners, architects, contractors and other team members, compared performance in areas such as schedule predictability, cost and budget control, quality of building outcome, quantity of changes, handling of changes, morale of the stakeholders and overall value delivered.  Significantly, 60% of the respondents said IPD teams performed “significantly better,” and more than 80% said IPD performance was “better” than non-IPD.  (A copy of the survey can be found here)

Although the survey indicated an overwhelmingly positive response from responders, those less than satisfied responders noted some key IPD challenges of which prospective IPD participants should take heed: (a) the unwillingness of some team members to let go of traditional roles; (2) disruption of the whole team due to poor performance of any single stakeholder; (c) mid-project changes in personnel; and (d) team members that do not grasp what it takes to succeed in an IPD world.

With the blurring of lines between design and construction means and methods that is often associated with IPD contracts, especially with the increasing use of Building Information Modeling (BIM) technology, IPD may open up a whole new realm in risk management and risk allocation (including potential impacts to the economic loss/independent duty doctrines, erosion of the Spearin doctrine, contractor/designer licensing and registration issues, impacts to the standard of care, untested standardized IPD contracts and clauses, insufficient insurance products, and issues with sharing in means and methods and third party design responsibility).  While IPD is garnering accolades for its benefits realized through a new collaborative team approach to design and construction, where the project members drive the project toward a common goal, this relatively new and untested model is still fraught with risk.  For the unwary IPD participant, IPD may pose some unique or amplified legal challenges that need to be considered before undertaking an IPD project.

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