But I already paid for that! So you have a mechanic's lien; now what? (Part 2)
Four Practical Points for Avoiding and Responding to Construction Liens
Step 1: Who’s healthy in 2010?
Within the bounds of the Fair Credit and Reporting Act and any state obligations, it is imperative for both owners and general contractors to understand the financial fortitude of the parties doing the work. If you don’t obtain the bonds to protect the project, you need to be aware of what you can do to protect your rights. While you cannot request a complete financial audit, good due diligence will save you time, energy, money, and headaches in the future. Keep an eye out and an ear to the ground for any questionable items or rumblings related to the trades. Has anyone complained of “slow-pay” issues? Are there any “marks” against the contractor on any registration or licensing entity with the state? How timely is the contractor in meeting and agreeing to the terms you proposed (discussed below) that have active and proactive involvement for ensuring that the project remains clear of liens? Where is the contractor’s facility? Will it be condemned because it’s so rundown or has that “almost vacant” look, or is everything shiny and “new,” which in this economy could reflect an overleveraged or overextended trade contractor just waiting to fold if that next job doesn’t come through? While these items alone cannot “tell” you the contractor’s financial status, do not race past any yellow flags – the red ones are just behind it waving in the wind. These precautions are as true for the owner, who can get sideswiped by the general contractor or any of the lower-tier trades or suppliers.
Step 2: Is it time to update your contracts and specifically your right of inspection, payment, and mechanic’s lien provisions?
Do you know what your contract allows you to do at the beginning of the contract term or during the project to avoid liens? Do you have a list of the trades and suppliers (at least the major ones if not everyone) in the contract or within 30 days of its execution? Is your state a “preliminary notice” state such as California or Nevada, or a “surprise” state such as Idaho? Is your contract an “open-book” agreement? Can you communicate with lower-tier trades at any time? Do you have payment provisions relating to timing of payment for lower-tier trades or suppliers in your prime agreement? Do you require a sworn statement for the work performed for prior payment applications and a listing of the trades? Do you have joint pay or direct pay provisions if you have any concern whether those trades might be paid? Can you require waiver and lien releases with each payment (as permitted by law, of course)? Are you allowed to offset payments if you do discover there are some financial or payment concerns?
Step 3: Do you check in on the status of the work?
It is important to both monitor the work to keep up on the status and to communicate with the trades and suppliers on a regular basis to make sure they are being paid. While a few trades may promptly bring a slow pay or non-pay to the owner ’s or general contractor’s attention, many others in this economy will not until the very last minute out of pressure from the nonpaying party or fears of “not playing along” and not getting future work. The key is to allow the owner or general contractor to discover any issue early in the process – early enough so that any money can get to the right party and not the party that disappears with the dollars.
Step 4: Someone’s filing a claim; what do I do?!
There are times when something may slip past you despite the best-laid plans. Do you have a checklist action plan? Does everyone know what to do and what information and documents are required? Many times these claims arise at the most inopportune times and create a “fire drill” atmosphere. Avoid the confusion and rush, and know what you need to get done in your state to avoid a lien on the property or obtain the prompt removal of the lien if one has already been filed. The more information you have in advance, the better decisions you will make during the process and the less money it will cost you to address the issue.
But I already paid for that! So you have a mechanic's lien; now what? (Part 1)
Your project is coming along fine, despite the economy. You’ve weathered the squalls of bids, design changes, agency approval, and credit (mercifully), and now even construction completion is looking good. You can see the finish line through the haze on the horizon, and you’re fairly pleased with how you have pulled everything together with what has been a long haul through the system. You’re in the home stretch. You’re closing down the last items and payment obligations to ensure everything will get done. You didn’t even have to spend much money on legal fees in drafting the contract or during construction (that alone is reason to cheer for your department’s budget). You may just go on a “road show” to tout your expertise about how projects should be run. And then....
You receive a call from your project manager letting you know that a subcontractor says it wasn’t paid and will file a mechanic’s lien in five days if it doesn’t get a check. Well, how could that be? You have a record of payments to the general contractor, but you cannot find a release for those payments. You get two more calls from unpaid trades.... Yet, you feel somewhat confident; after all, the contract says the general contractor “is responsible” and you have that record showing you did pay him. It’s his responsibility to pay all the people he contracted with, right? Well, yes and no (of course!) is the legal answer your construction lawyer will likely give you.
Unfortunately, this scenario is becoming all too common in this lingering depressed construction environment. Tight bids, job or trade failures, and an ailing economy have trapped many owners and general contractors, causing them to potentially pay twice for work they thought was already “clear” and paid for.
Although each state’s laws on mechanic’s liens govern each party’s obligations and rights, in my next post I will provide you with some simple, general guidelines that owners and general contractors should keep in mind at the beginning of each project to help protect against the possibility of such a double payment.
You Are a Project Owner or Developer Who Wants to Build a Green Project? So, What Do You Actually Put in Your Contracts?
Despite the explosion of articles, seminars and webinars on green building and development during the last year or so, there is a dearth of information in the development world regarding what project owners and developers who do want to build a green project should actually put in their design and construction contracts.
Here is what I think is important regarding this subject:
General Green Building Certification Goal. The project owner first must decide in general what green building goal it wants to achieve. LEED certification (from the US Green Building Council), at a particular certification level (general, silver, gold, platinum), is an obvious option. But there are other general green building certifications, too, such as Green Globes (Green Building Initiative) and SBTool07 (International Initiative For a Sustainable Built Environment), as examples. The owner should make this basic decision early on, based on good information and analysis and the advice and recommendations of design and green building consultants, as applicable.
Industry-Specific Green Building Certification Goal. Deciding on an overall green building goal such as a LEED certification is not the only certification goal a project owner should consider, however. There also is a growing number of industry-specific certifications that the owner should evaluate, depending on the nature of the project and the owner’s business. For example, there are certifications available for health facilities (Practice Greenhealth), restaurants (Green Restaurant Association) and hotels (Hotel Pure Green). How important an industry-specific certification of this type is to an owner is a question to be addressed at the start of the design process.
Tax and Other Governmental Incentives Goal. Another element of green building goals to be considered is tax and other governmental incentives relating to green building. Particularly in Oregon and under new federal stimulus legislation, there may be tax credits, grants and other public sector incentives for green, sustainable and energy efficient construction that can be of substantial benefit to a project. However, these incentives must be identified as project goals early in a project’s design in order to ensure that the owner is able to take advantage of them.
Making Green Building Goals Explicit. Once an owner has sorted through its optional goals for LEED or other general certification, for industry-specific certification and for tax and other governmental incentives, these goals should be expressly set out in the owner’s design and construction contracts. Otherwise, the owner’s architect and contractor will not have any contractual obligations to achieve the owner’s green building goals. Typical form contracts, including 2007 American Institute of Architects (“AIA”) forms of contract, include minimal references to these kinds of obligations and do not include language in which to make the goals explicit.
Care in Phrasing Architect’s Green Building Obligation. Particular care should be taken in describing the green building goals in the owner’s contract with its architect, however. The reason is that if achievement of the goals is stated as absolute obligation on the part of the architect, such an obligation would be viewed as a “warranty”—and under the typical professional liability insurance policy, there likely would be no insurance coverage should the architect fail to achieve the goal. From this perspective, the better approach is to include contract language that obligates the architect to “endeavor to achieve” the owner’s green building goals “consistent with the applicable standard of care”. Using these phrases, the architect’s failure to achieve the goals could be viewed as a result of negligence—the resulting damages likely being covered under the typical professional liability insurance policy.
Green Building Decision-Making Process. The owner’s contracts with its architect and contractor should include language, either in the contract or by means of a free-standing exhibit or other document incorporated into the contracts, setting out an agreed process whereby design (and even construction means) decisions are made to achieve the owner’s green building goals. A key to any such process is for the owner to be involved directly, early and on a continuing basis. Otherwise, basic decisions regarding the design of the building—such as its orientation, layout, materials and other design elements—may be driven by the need to achieve the owner’s green building goals yet the owner may not be meaningfully involved in the decision-making process. Although an uninvolved owner may have the right to change such preliminary design decisions later in the process, such changes could involve redesign costs and projects delays. There is an AIA form, AIA Document B214 – 2007 Standard Form of Architect’s Services: LEED Certification, which sets out this kind of process. (The B214 form does not anticipate inclusion of an explicit statement of the owner’s green building goals, however.)
Effects of Limitation of Liability Provisions. Given the damages that an owner might incur should its green building goals not be met, it is important for a project owner to be careful about generic contract terms that might deny or minimize its recovery of such damages. The waiver of consequential damages provision in unamended AIA design and construction contract forms, for example, can result in denying an owner the ability to recover lost sales, rents, goodwill, and tax and other incentives occurring if an owner’s green building goals are not met, or are met late. A limitation of liability provision, not uncommon in design professional contracts, can place a severely limiting cap on the amount of damages of all types that an owner is able to recover should its green building goals not be achieved.
These are some examples of the kinds of contract drafting issues that should be addressed for any project owner wanting to build a green or sustainable project. By carefully addressing these kinds of contract issues at the front end of the contracting process, disputes and inadequate owner remedies can be avoided later.
