Buyer Beware: Oregon Courts Will Enforce Anti-Assignment Provisions in Insurance Policies

An anti-assignment provision in an insurance policy may prohibit the insured from assigning its rights under the policy. In my latest DJC article, I discuss a recent decision by the Oregon Court of Appeals, in which a claimant learned the hard way that Oregon courts will not hesitate to enforce an anti-assignment provision in an insurance policy to invalidate an insured’s assignment of its claim. Read the full article here.

“Buyer Beware: Oregon Courts Will Enforce Anti-Assignment Provisions in Insurance Policies” was originally published by the Daily Journal of Commerce on April 21, 2017.

The Devil is in the Details: Contractual Additional Insured Requirements

Owners frequently require their contractors to name them as additional insureds. Owners and contractors often include requirements seeking to have the obligation to name them as additional insureds “flow down” to parties with whom they lack a direct contractual relationship (e.g., subconsultants, subcontractors, and suppliers).  Despite the simplicity and appeal of this arrangement, contractual additional insured requirements can be worthless without the appropriate insurance endorsements.

The standard additional insured endorsement, ISO form CG 20 33, requires a direct contractual relationship between the named insured and the additional insured.  The problem is apparent.  Although CG 20 33 allows an owner to assert a claim as an additional insured under its contractor’s insurance policies, it does not allow an owner to assert a claim as an additional insured under subconsultants’, subcontractors’, or suppliers’ insurance policies.  This could undermine the benefits of additional insured coverage and expose a contractor or designer to a breach of contract claim based on its failure to procure, or require the procurement of, the required insurance coverage.

Insurance companies do offer a wide variety of additional insured endorsements, and endorsement CG 20 38 provides a solution for owners, designers, and contractors seeking to avoid the problem identified above. That endorsement provides broad contractual additional insured coverage to “any other person or organization you are required to add as an additional insured under the [same] contract or agreement.”  Owners should require use of CG 20 38 and confirm that the subcontractors have provided the endorsement.  Contractors should likewise require their subcontractors to use this endorsement to fulfill these contractual requirements or they may be in breach of their contractual duties to provide insurance.

Eight Things to Remember When Reviewing an Access Easement

An access easement is a key link in the legal chain when builders need to cross another’s land to develop property. A poorly drafted easement could hobble an entire development.  Counsel should always be consulted to avoid the crippling impact of a development held hostage.  Here are eight tips to remember in reviewing an access easement where the developer is seeking easement rights.

  1. State the clear purpose of the easement. At minimum, an access easement should provide for ingress and egress. However, a user of the easement will generally want the broadest possible use rights, which could include (in addition to access by passenger cars) use rights by commercial vehicles and pedestrians, time restrictions, storage of materials or vehicles, and restoration obligations following the identifiable method of the voluntary or involuntary termination of the easement. If the easement is also to be used for utilities, be sure to include that in the easement description. In a number of states “ingress and egress” does NOT include utilities.
  2. If at all possible, specifically describe the easement area and location of the access road. If the location is not specific, the parties could be left with dispute, delay or an undesirable location. Rules vary by state; but for example in Oregon where an easement is not specific courts are required to determine the intent of the original parties (a determination that could be dramatically different from the parties’ actual expectations and necessitates often costly litigation). See Tipperman v. Tsiatsos, 327 Or. 539 (1998). If it is not feasible to provide all details, specify that the beneficiary can submit more specific details for the location and parties will reasonably approve it and execute a supplemental easement document. A dispute resolution clause with mediation would also help focus the parties prior to any litigation.
  3. Describe the land to be benefited by the easement (the “dominant parcel”). Frequently, the builder/owner plans numerous future subdivisions. If so, the developer should specify that the easement rights extend to subdivided parcels and additional property acquired by the owner of the dominant parcel directly or indirectly accessible over the easement. Beware of laws that may prohibit use of an easement on land that does not itself allow the use being accessed on the dominant parcel(s).
  4. State the duration of the easement. Temporary agreements to access construction sites are common. However, if the easement is meant to provide long-term access, it should state it is perpetual (or otherwise provide for long-term use).
  5. Usually, an access easement benefitting the dominant parcel should be transferable to subsequent owners and users of the dominant parcel – what lawyers call an “easement appurtenant” that automatically follows the ownership of the parcels. Otherwise, access rights could be cut off when the developer sells the property – typically a costly unintended consequence.
  6. Describe the scope of the developer’s use rights. In addition to the right to build a road (and whether temporary or permanent, width and such), the developer may want to install utilities; build sidewalks; install lighting, signage and fencing; and use the easement area for storage and parking. Be specific. As a general rule, unless the easement specifies it is to be exclusive (used by grantee only), it will be presumed to be non-exclusive (others may use the easement).
  7. Even though most jurisdictions have default rules on responsibility for maintenance of easement areas (and may also have rules on easement improvements), future disputes between the parties can arise when the easement is not specific as to who is responsible. The easement can clearly state the rights and responsibilities of the parties for installation of improvements, maintenance and repair, replacement and relocation of the easement, as well as the liability and property insurance requirements.
  8. The easement should be recorded. Explore whether the easement can be insured under the title policy. Remember, prior liens or interests on the burdened parcel can defeat or limit easement rights, so having a title search and title policy covering the easement rights also helps avoid later surprises.

Underestimating the access agreement can be a critical mistake. The developer’s lenders may not lend on the dominant parcel without firm access rights, and the dominant parcel will be always be vulnerable to challenges to the easement.  For specific analysis of crane easements, see our colleague Eric Grasberger’s prior articles here and here.

Alter Ego: The $5MM personal danger of neglecting corporate formalities and utilizing substandard building materials

Many building developers utilize a single purpose entity limited liability company (an “LLC”) to purchase and develop property, such as an apartment complex, a subdivision, or a shopping center. Generally, an LLC’s debts, whether incurred or judicially imposed, belong only to the LLC, not to its members.  However, an LLC’s individual member may be subject to personal liability under the doctrine of alter ego liability if (1) the individual and the LLC share a unity of interest and ownership such that the separate personalities of the two no longer exist, and (2) treating the debts as the LLC’s alone would impose an inequitable result that rewards the bad faith of the individual.  A recent legal decision from Southern California highlights the dangers of disregarding an LLC’s corporate formalities during any construction project.

In 1426 North Laurel Avenue Homeowner’s Ass’n v. Sunset, No. B257815, 2016 Cal. App. Unpub. LEXIS 3875 (Cal. Ct. App. May 26, 2016), developer Sunset on Sunset, LLC (“Sunset”) built a 19-unit condominium at a North Hollywood location.  Sunset had two members, Avraham Hassid and his wife, although as Mr. Hassid’s wife had no involvement with the entity Sunset was operated exclusively by Mr. Hassid himself.  As built and sold to individual owners, the condominium building suffered from unlevel floors that prevented its doors and windows from closing properly and substandard roofing materials and tiles that resulted in catastrophic leaks during rains.  The condominium association sued Sunset and Mr. Hassid, among others, for the cost of repairing the building’s construction defects.  The trial court found Sunset and Mr. Hassid negligent and negligent per se, and awarded the association $4.978 million for the cost of repair, lost use, and the cost of investigation.  Importantly, the trial court held Mr. Hassid jointly and severally liable for the full $4.978 million judgment, finding he was the alter ego of the LLC and therefore personally liable.

The appellate court concluded there was substantial evidence to support the trial court’s alter ego finding and affirmed the ruling. First, the evidence showed Mr. Hassid and the LLC shared a unity of interest and ownership because the LLC was “‘undercapitalized; was operated without respect for its separate entity existence; some of its expenses were paid by other entities; its assets were used to pay liabilities of [Hassid’s] other businesses…; and he “loaned” [the LLC] funds when and as needed and did not either get repaid or document the loans he made.  In short,’ the court concluded, Hassid ‘did not respect the separate legal existence of the very entity he created to shield himself from liability.’” Id. at *3-4 (brackets and ellipsis in original) (quoting trial court).  Second, the court found an “‘unjust result’” would occur if Mr. Hassid and Sunset were not jointly and severally liable, because “‘the plaintiff[s] would be deprived of an effective remedy for the extremely cavalier choices made personally by [Hassid] which resulted in such catastrophic damages to the structure that its occupants must vacate it for at least 270 days while it is being reconstructed.’” Id. at *4 (brackets in original) (quoting trial court).

While the decision in this case is unpublished and non-citable in subsequent actions, the lessons learned from the court’s analysis are significant: (1) establish and follow standard corporate formalities with any LLC used on a construction project development, and (2) ensure that the building materials selected are accepted as standard and reasonable in the industry for the application.  Finally, as questions arise regarding any LLC’s construction operations, consult an attorney to determine the best legal obligations and course of action for the corporate entity.

Brokers Beware: Acting as a Dual Agent Means Expanded Fiduciary Duties in California

It is well known that under California law a real estate broker may act as a “dual agent” for both the seller and the buyer in a property transaction, provided both parties consent to the arrangement after full disclosure. In such representation, a dual agent owes fiduciary duties to both buyer and seller.  Pursuant to a recent case, Horiike v. Coldwell Banker, these fiduciary obligations have now been expanded to also apply to “associate licensees” acting on behalf of a brokerage firm (or the salespeople of the given brokerage firm, as they are more commonly known).  In a unanimous decision, the court ruled that when an agent representing a seller is working for the same firm as the agent representing the buyer, they are considered an “associate licensee” and must properly investigate and disclose all important information related to the property subject to the transaction.

In Horiike, the seller and buyer of a luxury Malibu mansion were represented by separate real estate agents.  However, both of these agents were acting under the license of a single brokerage firm, Coldwell Banker.  The seller’s agent had reason to know that residence’s square footage was significantly different than what was represented in the sales material.  The buyer purchased the property and began making renovations.  Upon reviewing a building permit previously obtained by the prior owner, the buyer discovered that the property had thousands of square feet less living space than what was disclosed in the marketing materials.  Coldwell Banker claimed that because the seller’s agent exclusively represented the seller, there was no fiduciary duty to disclose information relating to the square footage to the buyer.  The California Supreme Court thought otherwise. Continue Reading

“Blurred Lines”: Important Caveats to Consider with Integrated Project Delivery

The shared risk/reward concept of an integrated project delivery (IPD) arrangement is an increasingly attractive collaborative approach to construction projects.  But IPD is still a relatively new concept with unique risks and challenges.  In my recent article for the Daily Journal of Commerce, I discuss some key points that should be considered before undertaking any IPD agreement.  Read the full article here.

 “‘Blurred Lines’: Important Caveats to Consider with Integrated Project Delivery” was originally published on January 20, 2017, by the Daily Journal of Commerce.

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Coverage for Crane Damage Proves Tricky

Following a presentation I made at a Seminar Group conference in Oregon on crane easements, one of my colleagues brought to my attention the recent NY case of Lend Lease (US) Construction LMB Inc. v. Zurich American Insurance Co.  The NY Court of Appeals found that damage caused to a tower crane when Superstorm Sandy hit land was not covered under Zurich’s builders’ risk policy.  While the policy contained a grant of coverage for “temporary works” (such as scaffolding, shoring, formwork and fences), the policy contained a “contractor’s tool exclusion,” which the Court found excluded coverage for the tower crane.  The opinion addressed only the damage to the crane as opposed to damage caused by the crane, the latter being likely covered under other provisions of the policy.  While not alone dispositive, the Court noted that the plaintiff contractor was unable to show that the value of the crane itself was disclosed as part of the “total project value” being insured under the policy.  Given the costs and risks associated with heavy equipment, a good insurance evaluation at project inception should always consider coverage for large tools, equipment and machinery. 

SNDAs – How to Handle from the Tenant’s Perspective

At some point, almost every tenant of a commercial lease is asked to sign a Subordination, Non-Disturbance and Attornment Agreement (an “SNDA”). Generally, the SNDA comes from the landlord’s lender sometime after the tenant’s lease has been signed and the term has commenced. It can be a complex document with onerous provisions for a tenant, and, without adequate counsel early in the process, a tenant may have little room to negotiate or revise an SNDA.

At its core, an SNDA contains three key provisions. First, the tenant agrees that, notwithstanding that the lease may pre-date the lender’s mortgage, the lease is subordinate and junior to the mortgage. Second, the lender agrees that, so long as the tenant performs its obligations under the lease prior to the expiration of applicable cure periods, the lender will not disturb the tenant’s occupancy or terminate the tenant’s lease in the event of foreclosure or other enforcement by the lender.  The third prong is attornment: the tenant’s agreement to accept the lender (or other purchaser at foreclosure or its successor or assign) as the landlord following foreclosure.  This exchange of promises gives the lender a senior right to its collateral and gives the tenant security in its lease.

But SNDAs are usually not limited to simple subordination, non-disturbance and attornment. Lenders will usually seek to limit their obligations to the tenant in the event they foreclose and step into the landlord’s shoes.  Lenders often seek a requirement to obtain lender consent for any lease modification, a lender’s right to notice from tenant of (and the right to cure) landlord defaults, and a tenant covenant to pay rent pursuant to an assignment of rents.  Lenders may also seek to limit the tenant’s rights to extend or terminate the lease.

When negotiating a new lease, tenants should determine whether there is a mortgage in place with priority over the proposed lease and carefully review any lease subordination provisions. Tenants should also consider requiring a reasonable SNDA with an existing lender of record as a condition to signing the lease. Landlord-prepared leases often contain provisions under which a tenant’s lease is made automatically subordinate to any existing or future mortgage or requiring the tenant to subordinate the lease to any future mortgage upon request.  Such automatic subordination provisions can make the tenant’s lease junior to the lender without the protections of a non-disturbance covenant.  Tenants should seek a provision in their leases conditioning such subordination on tenant’s receipt of a commercially reasonable SNDA from the lender.  This preserves some ability for the tenant to negotiate and protect itself against onerous terms.  Tenants should require the recordation of the SNDA to assure that the non-disturbance covenants are binding on the lender’s successors and assigns.

When tenants receive an SNDA form, it may be presented by the lender and landlord as non-negotiable. The terms of the lease will govern how compliant the tenant must be to the landlord’s demands for a specific form of SNDA. Reasonable modifications to protect tenants should be judiciously requested, but they are worth requesting and are frequently granted. Here are some SNDA tips for tenants to remember:

  • Understand whether the SNDA has the potential to permit the lender to cut off or limit important tenant rights in the event of foreclosure. Even if the tenant’s right to the leased property is not disturbed, a lender-friendly SNDA may not preserve options, rights of first refusal, renewal rights, or rights in the event of casualty or condemnation, or it may alter or limit rights to setoff, abatement and the security deposit. A tenant can expect to be required to relinquish the right to pursue the lender for breaches and defaults of the landlord predating the foreclosure. The SNDA should preserve (if possible) important tenant rights under the lease.
  •  Seek to provide in the SNDA that the lease terms will prevail in the event of any conflict between the loan documents and the lease. For example, loan documents may provide that casualty proceeds go to the lender. The tenant may desire to provide in the SNDA that insurance proceeds will be made available for repair of the building, if so required in the lease.
  • Make sure the landlord is a party to the SNDA to approve payment and other covenants of tenant performance to the lender and to seek the landlord’s confirmation that restrictions on the tenant’s rights vis-a-vis the lender do not modify the tenant’s rights against the landlord under the lease.
  • Consider (if the tenant has bargaining power) providing in the SNDA that pre-foreclosure landlord defaults that are ongoing after foreclosure (e.g., building repairs) are the lender’s obligation to correct when it takes possession.
  • Modify any requirement to provide the lender prompt notice of all landlord defaults, to require only concurrent copies of notices of default that the tenant sends to the landlord under the lease.
  • Provide that the lender will not unreasonably withhold consent to routine or non-material lease amendments.
  • SNDAs frequently contain estoppel provisions under which the tenant confirms certain facts about the lease, such as amount of rent, amount of security deposit and no landlord defaults. Estoppel certificates are common when a lender is financing a commercial property; however, the tenant should scrutinize each provision to ensure the tenant can make the statements truthfully as of the date of the document. If the estoppel provisions relate to performance by another party, such as a statement that the landlord has fulfilled all obligations under the lease, the tenant should certify such statements only “to the knowledge of tenant.” Make sure the lease and all amendments, side agreements, and addenda are correctly identified and that all existing breaches or defaults of the landlord are identified accurately.
  • After a tenant signs an SNDA, it should modify and annotate its records to assure that it is reminded to comply with the SNDA when giving notice, amending the lease, etc.

Teaming Agreements Set Out Construction Team Members’ Relationship and Responsibilities in Pursuing Award of a Contract

A written teaming agreement is useful in defining the roles and responsibilities of a team of designers and contractors seeking to win a contract for a construction project. In my recent article for the Daily Journal of Commerce, I detail several key aspects of a well-drafted teaming agreement. Read the full article here.

“Teaming Agreements: When the Best Team May Not Be Enough” was originally published by the Daily Journal of Commerce on February 17, 2017.

Under California’s Right to Repair Act, Ignore Deadlines at Your Own Peril

In a very recent decision, the Fourth District Court of Appeal in Blanchette v. Superior Court affirmed the plain language of the Home Builder’s Right to Repair Act, holding that even a facially insufficient notice of defect triggers the obligation of a builder to respond within 14 days.  The statute, Civil Code section 895 et. seq., was “expressly designed,” as the court pointed out, “to permit the parties to resolve claims without resort to litigation.”  Therefore, the court stated that allowing the builder to ignore the deadline and not raise objections within that early timeframe would not further the purpose of the statute.

The court also stated that by the very terms of the statute itself, courts are obligated to strictly construe its terms.  In this case, the court strictly construed the builder’s obligation to “acknowledge” notice – even a deficient notice – within the 14-day window after the builder’s receipt of the claim (which is typically no more than 19 calendar days under California law).  In Blanchette, the builder did not acknowledge the claim until 24 days later, well beyond 14 days from receipt.  When the builder failed to respond, the claimant filed a class action. The builder sought a stay of the lawsuit until the homeowner complied with the requirement to describe the defect in “reasonable detail.” While the trial court granted the builder’s request for a stay, following a writ to the Fourth District, the stay was ultimately lifted to allow the class action to proceed due to the builder’s failure to timely respond.

Takeaway for builders:  As I have reiterated before to my clients and in presentations, such as recently at the Forward Planning Seminar of the North State BIA, prepare at the beginning of a project to be sued so that (1) you know how to respond when you do receive such a notice or lawsuit, or (2) even if you never face a claim, you can rest easy that you won’t be caught off guard.

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