California Contractors State License Board (CSLB) Issues FAST FACTS for Contractor Referral Businesses

There is no doubt that our national economy relies heavily on e-commerce.  This is true with regard to contractors in California as well. As individuals and businesses look for quality builders, trades and services in the construction field, they look for sources of on-line information to evaluate whom to hire.  Would you think that an on-line referral service is a “contractor” under California law?  According to the CSLB, the answer may surprise you with a “maybe.”  Again, the same rules that have always applied in evaluating the question of who is a “contractor” – even if the person never lifts the proverbial hammer – still apply to those representing that they can find the best contractor resource for you.  Bottom line, if you are in the referral business (or use the services of a referral business), don’t cross that line.

It’s important to remember that a referral service cannot solicit or negotiate contracts on behalf of a contractor, or offer to undertake to, or purport to have the capacity to undertake itself or through others a construction project (BPC § 7026).

A referral service may serve as a repository for licensed contractors and provide contractor contact information to prospective customers. However, to avoid allegations of unlicensed activity, the prospective customer should enter into a contract directly with the licensed contractor and make payments directly to that licensed contractor.

For the full bulletin, see the link.

Condominium Comeback? Bullish-Developers Must Consider the Liabilities Associated with the Resurgence of Condominium Developments

The condominium embodies a missing price point in Seattle’s real estate market. As a result, we have noticed an uptick in the number of developers seeking legal advice regarding the potential risks associated with condominiums. In my first article for the Daily Journal of Commerce, I provide an update on Washington’s condominium laws, a summary of the potential liabilities arising from the Washington Condominium Act, and a review of the risk management tools that can be implemented to mitigate them. Read the full article here.

Originally published as “OP-ED: Bullish developers must consider liabilities tied to condos” on June 14, 2018, by the Daily Journal of Commerce.

Crumbling for Coverage?: Recent Ninth Circuit Opinion Relies on Washington Supreme Court’s Definition of “Collapse” in Declaratory Coverage Action

On May 9, 2018, in an unpublished opinion, the Ninth Circuit held that the proverbial London Bridge should be near collapse for an insured owner to successfully obtain insurance coverage for same.  In American Economy Insurance Co. v. CHL LLC, No. 16-35606, an owner appealed the district court’s decision in a declaratory coverage action regarding whether the owner’s building indeed collapsed pursuant to the definition of “collapse” in the relevant insurance policies.  The Ninth Circuit relied on the Washington Supreme Court’s definition of collapse from its recent opinion, Queen Anne Park Homeowners Ass’n v. State Farm Fire & Casualty Co., 183 Wn.2d 485, 352 P.3d 790 (2015).  Nationally, courts have struggled to conform to a single definition of collapse in the context of insurance coverage.  This article briefly reviews the three main definitions of collapse, and what the Queen Anne opinion means for property owners in Washington.

In the Queen Anne dissent, Justice Fairhurst identifies the three main definitions of collapse that have been adopted by courts across the United States.  The first definition is actual collapse.  For example, in Century Mutual Insurance Co. v. Royal, 113 So. 2d 680, 683 (Ala. 1959), the court found there was no collapse coverage because there was actually no collapse or rubble on the site.  Second, the slightly more relaxed definition is imminent collapse.  In Doheny West Homeowners’ Ass’n v. American Guarantee & Liability Insurance Co., 70 Cal. Rptr. 2d 260 (Ct. App. 1997), the court opined that its slightly more lenient definition of collapse is consistent with the insureds’ reasonable expectation that they should not have to wait for their building to collapse to obtain coverage.  The third major definition, as adopted by Washington, is substantial impairment of structural integrity.  In Queen Anne, the court defined this standard for collapse as the “substantial impairment of the structural integrity of a building or part of a building that renders such building or part of a building unfit for its function or unsafe ….”  183 Wn.2d at 487.  However, the court limited this generous coverage grant by stating that collapse must be something more than “mere settling, cracking, shrinkage, bulging, or expansion.” Id.  In addition, the court emphasized that “‘substantial impairment’ of ‘structural integrity’ means an impairment so severe as to materially impair a building’s ability to remain upright.”  Id. at 492.  The courts’ adoption of these definitions has major coverage implications for property owners, because what may constitute a covered claim in one state may not be covered in the next.

Despite the Washington Supreme Court’s adoption of a more liberal collapse standard, and Washington’s reputation for being a pro-insured state, property owners are forced to speculate as to what types of property damage actually constitute collapse under the “substantial impairment of structural integrity” standard.  Under Queen Anne, we know that the damage to a building must be more than cracking, shrinkage, bulging, or expansion.  Likewise, the damage must be severe enough to materially impair the building’s ability to stay upright.  On the other hand, the building does not have to actually crumble into a pile of rubble for collapse to occur.  These guidelines are unclear and leave insured owners with damaged buildings in a precarious position regarding coverage.  Under the current legal authority, it would appear that owners do not have to wait until their buildings collapse, but they do have to wait until the structural integrity of their building is seriously in question.  So, to obtain “collapse” coverage, an informed owner should engage legal counsel and a structural engineer to determine whether the condition of the building in question satisfies the “collapse” standard.

Can a Contingent Payment Provision Affect a Construction Lien Claim in Washington?

During Seattle’s current construction boom, general contractors and subcontractors may be concentrating more on finalizing work on their projects than on worrying about the niceties of their construction contract documents. It is no less prudent now, however, for the parties to remain aware of their contractual rights and responsibilities—especially those tied to payment.  One payment term commonly contained in subcontract agreements is the contingent payment provision, which, depending on its terms, may pose an interesting challenge to construction lien rights.

Contingent payment provisions (e.g., “pay-if-paid” or “pay-when-paid” clauses) are frequently inserted in subcontract agreements. The hallmark of pay-if-paid clauses is usually “condition precedent” language, where the general contractor and subcontractor expressly agree that the general contractor’s receipt of payment from the owner is a condition precedent to payment by the general contractor to the subcontractor.  Under this clause, the subcontractor assumes the risk of non-payment by the owner.  On the other hand, pay-when-paid clauses have been interpreted to delay the subcontractor’s entitlement to payment until the owner pays, or for some reasonable time if the owner does not pay. Continue Reading

Oregon Court of Appeals Broadens “Four Corners” Rule in Construction Defect Insurance Coverage Cases

In a recent Oregon Court of Appeals decision, the court likely eased the burden for contractors seeking a defense under insurance policies in which they have been named as an additional insured. In my latest article for the Daily Journal of Commerce, I examine the decision, which expands upon a 2016 Oregon Supreme Court ruling that the duty to defend arises when the allegations contained within the four corners of a plaintiff’s complaint can be “reasonably interpreted” to fall within the coverage of the policy. Read the full article here.

Originally published as “OP-ED: Oregon Court of Appeals broadens ‘four corners’ rule” on April 19, 2018, by the Daily Journal of Commerce.

Remember the Statute of Limitations

Contract claims and negligence claims are subject to different statutes of limitations, and if you are a participant in a construction project and believe you have been injured by another, it is important to understand what claims you may have, what statute of limitations applies to those claims, and when the limitations period may run out, leaving you with no remedy. In my latest article for the Daily Journal of Commerce, I look at a recent Court of Appeals case in Washington that illustrates these points. Read the full article here.

“Remember the Statute of Limitations” was originally published by the Daily Journal of Commerce on March 15, 2018.

A Lawyer’s Checklist for Starting Strong

In the push to get a construction project started, important management tasks may be overlooked or subordinated by “higher priority” tasks, and the importance of completing many of those tasks may not become apparent unless there is a legal dispute. In my latest article for the Daily Journal of Commerce, I provide a brief checklist that will help you start your next project on the right foot and give you a decided advantage should a dispute arise. Read the full article here.

“A Lawyer’s Checklist for Starting Strong” was originally published by the Daily Journal of Commerce on February 15, 2018.

Avoiding Development Disasters: Land Inventory and 1031 Exchanges

The ability to defer taxes through a 1031 Exchange can make or break a real estate transaction.  But federal tax law does not treat all real estate owners equally. Under IRC Section 1031(a)(2), real property held “primarily for sale” in the ordinary course of a trade or business is excluded from Section 1031 and may be subject to ordinary income taxes in the event of a sale.

Generally, land held for investment purposes can be swapped for “like kind” property without triggering taxable gain. However, certain property is excluded from 1031 because, under IRC Section 1221(a)(1), it is not a capital asset, including:

(i)   Stock in trade of the taxpayer
(ii)  Inventory; or
(iii) Property held by the taxpayer primarily for sale to customers in the ordinary course of a trade or business.

Such property, including any real estate which qualifies as inventory, is excluded from 1031 treatment and, upon sale, is taxed at ordinary income rates. This means that active developers dealing in subdivided property for sale in the ordinary course of business may be excluded from capital gains tax treatment. Continue Reading

Solar PPA Provider That Only “Arranges” Installation of System It Owns Is Not a “Contractor” in California

In the recently issued but unpublished decision Reed v. SunRun, Inc. (Los Angeles County Super. Ct. No. BC498002, Feb. 2, 2018), the Second District Court of Appeal ruled that a solar power purchase agreement (“PPA”) provider that only sells solar energy to homeowners is not required to be a licensed California contractor under certain circumstances.  Specifically, the court held that where the PPA provider “arranges” installation by a licensed contractor of the solar energy system (“system”) installed on the homeowner’s house but the PPA provider retains ownership of the system and sells the electrical output from the system to the homeowner, the PPA provider does not need to be a licensed contractor.

This ruling is good news for PPA providers in the state, whether they are marketing PPAs for residential or commercial property owners. Further, the ruling does not harm homeowners or other property owners or otherwise run afoul of the regulatory purpose of the Business and Professions Code (“BPC”) where the actual physical installation of the system must still be performed by qualified licensed contractors. This decision, if published, would also benefit the state by the further refinement of several California decisions that otherwise seem to restrict “arrangers” unless they carefully craft their contracts and actual activities within a narrow aspect of non-construction services.

The facts leading to the SunRun decision are familiar to lawyers involved with clients in both the energy sector and the heavily regulated licensing scheme under California law:  SunRun sought to facilitate the use of solar in California through a PPA structure that enables homeowners to purchase energy from SunRun-owned solar systems installed on the homeowners’ rooftops.  SunRun itself was not a licensed contractor prior to February 2012, but worked with a number of licensed contractors for the installation of the systems.  SunRun and a licensed contractor would 1) visit the home and evaluate what was optimally required for the system, 2) the contractor would present a design to the homeowner for approval, 3) the contractor would install the system (using SunRun’s “best practices” and SunRun’s modular parts), 4) SunRun would retain ownership of the system (including maintenance and insurance obligations), 5) the homeowner would agree to buy energy from SunRun for 20 years, with an option to buy the system during that time, and 6) if the homeowner breached the agreement, SunRun had reserved its right to remove the system (which would take about one day).  SunRun’s agreement with the homeowner provided that SunRun would “arrange for the design, permitting, construction, installation and testing of the” system, but specified that a separate contractor would “furnish all installation and construction services” and that separate contractor was to be “solely responsible” for all aspects of the installation related to construction.  Although SunRun could refuse to pay a contractor if the installation was not satisfactory, the approval was fairly superficial and cursory, taking “15 seconds to two minutes.”  SunRun did not oversee installation nor was it physically present at the installation sites.

In August 2011, Reed contracted to purchase power from SunRun pursuant to a PPA styled as a “Solar Power Service Agreement.” Reed made only four of the monthly payments under the PPA and then sold his home.  The new owner assumed the SunRun agreement.  Later in January 2013, Reed sued SunRun and sought to certify a class on the grounds that SunRun was an unlicensed contractor and engaged in unfair competition.  Although abandoning the “solar energy claims” and not pursuing the subclass he originally asserted, Reed still sought to pursue the contractor license violation allegations.  Motions for summary adjudication/judgment followed by SunRun in 2014 and 2016.  Relevant to the license analysis, in April 2016 after further discovery, the trial court ruled that SunRun was not a “contractor” under BPC 7026 because 1) it “did not direct or supervise its licensed installers’ work at any job site” and any approval was limited “exclusively to ensur[ing] the local designer and installer’s design matched the agreement,” and (2) even if SunRun were a contractor, it fell within the exception under BPC 7045 for a finished product that was not a fixed part of the home.  An appeal by Reed followed.

On appeal of that aspect of the ruling, the appellate court affirmed in full the trial court’s determination. Importantly for those navigating California’s licensing regulations was the court’s reiteration of the public policy undergirding the BPC, while yet noting that the penalties that Reed sought to enforce hinged on whether or not SunRun was a “contractor” under BPC 7026.  The court emphasized that a “contractor” historically had to 1) actually perform construction services, 2) supervise the performance of services, or 3) agree by contract to be “solely responsible” for construction services.  Citing The Fifth Day, LLC v. Bolotin (2009) 172 Cal.App.4th 939, 947-950, the court stated that “[h]owever, a license is not required if a person merely coordinates construction services performed by others.”  Rejecting Reed’s counter arguments outright, the court did not find it necessary to reach the alternative ground ruled upon by the trial court:  whether SunRun’s system was within the non-fixture exception to licensing under BPC 7045.

Another helpful element of this lengthy litigation, although not at issue on appeal, was the initial motion for summary adjudication by SunRun in February 2014 where the trial court ruled that the applicable statute of limitations under BPC 7031 was one year. As the trial court succinctly stated:

This statute imposes forfeitures. The contractor’s work can be perfect and the client delighted. Then there would be neither damages nor any equitable basis for compensation or a remedy. Yet the legislature put in this provision to get contractors’ attention: get your license, or else. It is the financial equivalent of flogging. That is simple and harsh by design, and it is to drive home a point. A simple and harsh punishment serves “the clear statutory policy of deterring unlicensed contract work.” (Hydrotech Systems, Ltd. v. Oasis Waterpark (1991) 52 Cal.3d 988, 992; see also id. 995, 996, 997, and 998.) SunRun’s analysis is correct.

While neither the statute of limitations analysis nor the licensing ruling is published, both still serve as very good guidance using common sense in their application under California law. Nevertheless, entities looking to walk that line should be very mindful of the underlying facts and the points highlighted by the appellate court in this case, and ensure that neither their contract language nor their actual activities move them across the line and therefore potentially under the California contractor regulatory scheme found in the BPC.

Advance Contractual Lien Releases in Washington – An Enforceable Shield or Unintended Liability?

As the construction boom continues in Washington (and especially in Seattle), owners and developers look for ways to mitigate risk on projects. Risk mitigation is often accomplished through negotiated terms and conditions of the parties’ contractual agreements. In my latest Daily Journal of Commerce article, I explore the validity of advance contractual lien releases and highlight issues for owners and developers to consider before implementing these releases on projects in Washington. Read the full article here.

Originally published as “OP-ED: Advance contractual lien releases in Washington” on January 18, 2018, by the Daily Journal of Commerce.

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