When “Art” Strikes Development

A 2018 legal case in New York arose over the disposition of a collection of run-down warehouses in Long Island City, Queens, New York, which graffiti artists began to use as a canvas for their work after the buildings went undeveloped by the owner for many years. When the owner announced that he would demolish the buildings to make way for luxury condominiums, 21 of the graffitists sued for an injunction to prevent the destruction of the buildings and their artwork. The owner whitewashed the walls, destroying most of the graffiti, and after a trial, the Court found the owner liable of violating the Visual Artists Rights Act of 1990 in obliterating the graffiti and awarded the maximum statutory damages, $150,000 per work, for a total of $6.75MM. In my latest article for the Daily Journal of Commerce, co-authored with Stoel Rives law clerk Antonia Krizanec, I discuss a few steps an owner-developer might take in the face of a similar situation. Read the full article here.

Originally published as “A case of New York City graffiti becoming art” on November 16, 2018, by the Daily Journal of Commerce.

Reminder of January 1, 2019 Mandatory New Notice Requirement by CA Residential Solar Contractors

In 2017, the California Legislature passed a bill that resulted in Business and Professions Code (BPC) section 7169, which ultimately would require Home Improvement Contractors, which include contractors that install solar systems on residences, to issue specific disclosures to any residential consumers who may want to purchase, finance or lease, and install a solar system on their property. Recently in August, the California Public Utilities Commission “endorse[d] the solar energy systems disclosure document as being compliant with [BPC section 7169]….” The Disclosure terms include:

  • The total cost for the solar system, including financing and energy/power costs (if applicable);
  • The statutory License Board Disclosure statement for contractors and / or the home improvement salesperson who sold the system information regarding with whom to file if there are complaints; and
  • The statutory Three-Day Right to Cancel Disclosure if the contract is not negotiated at the contractor’s place of business.

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New Fall Protection Regulations Being Studied

The Washington Department of Labor & Industries, Division of Occupational Safety and Health, is considering changes to Washington’s fall protection regulations. These are rules intended to protect construction workers from injury caused by falls on a jobsite.  The Division has been interested in this topic since 2013, when the federal Occupational Safety and Health Administration expressed concerns about our state regulations, particularly as they apply to residential construction.  The Division has held meetings around the state and has found widespread support for a uniform set of regulations that would apply throughout the state.  It also learned that some industry participants were not aware of the current regulations.

Further meetings have been scheduled (December 11 in Spokane and December 18 in Tukwila) at which attendees can learn more about the current regulations. For more information about these meetings or the regulatory process leading towards amendment of the regulations, consult this state website.

Injuries from falls can be very serious and many can be prevented. The Division’s website is a good source of information about construction injury risks and prevention strategies.  Keeping up to date on these and other safety rules is not only important for success in the construction business, it’s the law.

Condemnation Awards on Leasehold Interests

A recent Utah case, adopting a “termination clause rule,” may have tenants in Utah reconsidering condemnation provisions in leases. In UDOT v. Kmart, 2018 UT 54, the Utah Supreme Court denied a condemnation award to a tenant because the lease automatically terminated upon condemnation.  The Court found the tenant had no interest for which it should be compensated based on a terminated lease.  Accordingly, a lease provision ensuring that a tenant is not liable under a lease following condemnation also has the negative effect of foreclosing any award a tenant may be entitled to for the value of its leasehold interest.

In the Kmart case, while the Court acknowledged the general rule that a tenant is entitled to a condemnation award if the value of the leasehold interest is diminished or terminated by “a governmental exercise of the eminent domain power,” it held such right could be “altered, waived, or terminated” by the lease.  Specifically, the Court adopted a “termination clause rule” whereby a tenant is not entitled to a condemnation award when the lease terminates on its own provisions because “any continuing interest in the leased property . . . has been extinguished under the lease agreement’s terms.”

The Court acknowledged that a tenant has a protectable property interest in a lease, so, for example, if a lease has five remaining years on the term when the leased property is condemned, the condemning authority must compensate the tenant for the value of those five years. However, where a lease contains a clause terminating the lease upon condemnation, the tenant’s rights are for the stated “lease term or until the property is condemned.”  The tenant therefore has no protectable (and compensable) property interest after condemnation.

However, the Court included one caveat to the termination clause rule, stating that if a lease has a termination clause, the tenant’s right to compensation in a condemnation award is extinguished “unless otherwise reserved by contract.” In support of this caveat the Court cited Metropolitan Airports Commission v. Noble, 763 N.W.2d 639 (Minn. 2009), which allowed the parties to the lease to allocate the award, even where the lease (and therefore the tenant’s interest) was automatically terminated.

Based on Utah’s adoption of the termination clause rule, but with the implication that it will honor allocation clauses, tenants will need to carefully evaluate lease provisions providing for automatic termination on condemnation. Tenants may want to limit the termination only to certain obligations and not to the lease as a whole, or focus on an affirmative allocation of the award to the tenant based on what would have been the remaining lease term but for the condemnation.

Establishing a Legal Nonconforming Use

The key to a legal nonconforming use is establishing that the use was previously permitted. The Utah Court of Appeals recently reiterated this statutory requirement in LJ Mascaro v. Herriman City, 2018 UT App 127, where it stated a land owner must “provide substantial evidence to support a prior legal use,” in order to gain protected legal nonconforming use status.  In Mascaro, the court held that the land owner had failed to provide evidence that its use was ever legally permitted and therefore upheld a denial of nonconforming use status.

To establish a legal nonconforming use, the use must have “legally existed before its current land use designation,” must be “maintained continuously” following a change in the applicable land use regulations, and now fails to comply with those regulations. Utah Code Ann. § 10-9a-103(37).  In Mascaro the court easily found the use had continuously existed and was now not permitted, but it did not find sufficient evidence that such use was ever legally permitted.

The factual nuances in Mascaro stem from an attempted annexation of the land owner’s property from Salt Lake County into Riverton City in 1978, which was found null and void in 1981, and then a successful 2009 annexation into, and zoning by, Herriman City.  In 2013 the land owner requested that the use of topsoil manufacturing and screening be considered a legal nonconforming use by Herriman City, rather than require a conditional use permit pursuant to the new zoning.  The Herriman City Planning Commission considered the evidence but found that it did not support the establishment of a legal nonconforming use by Salt Lake County prior to the annexation and found the lack of zoning for the short period the property was subject to the Riverton City annexation inapplicable, and therefore it denied the request for nonconforming use status.

The Mascaro court agreed with the city’s conclusion, stating that the land owner had not provided evidence of land use approvals, business licenses, or other permits from Salt Lake County establishing the use as legal.  The court also found that the land owner had not provided evidence that the use existed prior to Salt Lake County adopting zoning ordinances prohibiting the use.  The court did not address whether the annexation into Riverton City and lack of applicable zoning until the annexation was voided could have established the use as permitted, because the court found the land owner had failed to preserve the issue for appeal.  The court therefore held that the denial of nonconforming use status was not illegal or arbitrary and capricious.

California Court Finds Coverage When “Property Damage” Doesn’t Require Physical Injury By Definition

Although it may seem strange at first, the recent ruling by the California Fourth Appellate District Court in Thee Sombrero, Inc. v. Scottsdale Co., (2018 EL 5292072), holding that an insurer must pay for a claim where there was no actual physical property damage, is not as odd as it may seem to non-insurance coverage lawyers.  The reason?  It all depends on the policy language and the definition of “Property Damage” where there is an “occurrence.”

The underlying facts are noteworthy in that there was no dispute that the plaintiff-claimant, Thee Sombrero, Inc. (Sombrero), lost revenue and the value of its real estate (diminished value) when the security company it hired to provide security guards failed to keep guns out of Sombrero’s nightclub.  A fatal shooting due to that alleged negligence (“an occurrence”) resulted in a lost ability by Sombrero to operate its property as a nightclub.  That specific loss of use totaled almost a million dollars in diminished value of the Sombrero property.  Sombrero sued the security company for the lost value, and the security company defaulted.  Sombrero then pursued the security company’s insurer, Scottsdale, under California Insurance Code section 11580, which allows a prevailing claimant to file a direct action against the insurer for coverage under the applicable insurance policy.

Scottsdale filed a motion for summary judgment not long after the section 11580 action was filed against it, arguing that the loss of the “use permit” for a nightclub was not lost use of tangible property, but merely the loss of an intangible right to use property in a certain way, and really economic loss that is not covered as property damage under the policy. The trial court agreed.  Sombrero appealed and argued in essence that “[t]he loss of the ability to use the property as a nightclub is, by definition, a ‘loss of use’ of ‘tangible property.’” To which the appellate court commented, “It defies common sense to argue otherwise.”  At the same time, however, the appellate court identified contrary authority involving Scottsdale (albeit in Washington State) that was “strikingly similar” to the present case, yet distinguished the prior Scottsdale decision on three grounds:  1) the focus should be on the loss of use of the tangible property that results from the loss of the entitlement, not just the entitlement, 2) the loss is not defined in the policy as requiring a “total loss” and therefore under normal interpretation standards “any significant use” lost would be within the reasonable expectation of the insured for coverage, and 3) acknowledging that a leasehold of a specific type of property is an actual property right, and the loss of such use of a property right is therefore a loss of use of tangible property.   In stating the “correct principal,” the appellate court held that “losses that are exclusively economic, without any accompanying physical damage or loss of use of tangible property, do not constitute property damage.”  Here, because the Scottsdale policy “expressly defined property damage as including” ‘[l]oss of use of tangible property that is not physically injured,” the appellate court disregarded the distinguishable California cases with differing policy language under consideration.

While this case did not arise out of a construction defect dispute, the points of insurance coverage may be applicable in a future construction defect context where there has been an “occurrence” but no physical injury to the property, only a valuable loss of use of that property.  Of course, it will always depend on the specific language of the insurance policy, which is why it is so important to understand the insurance policies and potential for coverage in any dispute.

Dispute Resolution for Developers

The nearly 60 cranes towering over Seattle’s skyline may be a sign of the building boom in the city, but they also could portend a flood of construction claims arising from the projects they help build. Despite the frequency of construction claims, many developers are not familiar with the dispute resolution methods available to them and the impact they have on the outcomes of their construction claims, projects, and businesses. In my latest article for the Seattle Daily Journal of Commerce, I look at the most popular dispute resolution methods and provide developers with a guide to selecting the best dispute resolution method(s) for their construction contracts so they have a blueprint for how to handle construction claims when they arise. Read the full article here.

Originally published as “Dispute resolution tips for developers to use in handling construction claims” on November 1, 2018, by the Seattle Daily Journal of Commerce.

Cross-Laminated Timber Projects: The Pacific Northwest’s Next Big Timber Development

Cross-laminated timber (“CLT”) is a leading building technology that has been employed by European developers for decades, but the product’s use in the United States only recently took hold after its adoption by the 2015 International Building Code. A type of structural timber product composed of dimensional timber layers bonded together with structural adhesives, CLT can have the structural integrity of steel, and its use can reduce construction schedules by as much as half. In my latest article for the Seattle Daily Journal of Commerce, I look at several steps the owner of a project should consider before starting any project utilizing innovative and developing technologies like CLT.   Read the full article here.

Originally published as “Thinking of building with CLT? Here are some things to consider before starting” on October 4, 2018, by the Seattle Daily Journal of Commerce.

“Is Mike M. Johnson Here to Stay?”—Recent Washington Supreme Court Case Upholds Contractual Waiver of Claims Provision

In Nova Contracting, Inc. v. City of Olympia, No. 94711-2 (Wash. Sept. 29, 2018), the Washington Supreme Court, sitting en banc, ruled in favor of a municipality on the issue of whether the general contractor complied with a contract’s notice of claim provision.  Relying on Mike M. Johnson, Inc. v. Spokane County, 150 Wn.2d 375, 78 P.3d 161 (2003), the court in Nova Contracting held that a broad notice of claim provision (waiving “any claims” for noncompliance) (a) mandates written, rather than actual, notice of claims and (b) applies not only to claims for cost of work performed, but also to claims for (i) expectancy and consequential damages and (ii) breach of the covenant of good faith and fair dealing.  Slip op. at 2-3, 15.

The case arose from certain disputes between the City of Olympia (the “City”) and a contractor (“NOVA”) in connection with a public works contract in which the contractor agreed to replace an aging cement culvert. The contract contained a “notice of protest” provision from the Washington State Department of Transportation’s standard specifications.  This provision required the contractor to “‘give a signed written notice of protest’ ‘[i]mmediately’ if it ‘disagree[d] with anything required in a change order, another written order, or an oral order from the [City] Engineer, including any direction, instruction, interpretation, or determination by the Engineer.’” Id. at 1-2. Continue Reading

California Labor Commissioner Issues $1.9 Million Citation to Contractor for Wage Theft

Continuing its aggressive enforcement of California wage and hour laws, the Labor Commission issued wage theft citations of $1.9 million to Fullerton Pacific Interiors, Inc. for failing to pay minimum wage and overtime and failing to provide rest periods to 472 workers on 26 construction projects throughout Southern California.

Fullerton Pacific Interiors provided drywall work at commercial projects throughout southern California.  The company paid its taping and drywall installation crew a flat daily rate.  Thus, regardless of the number of hours actually worked, employees received the same daily pay.  Workers were permitted the legally required 30-minute meal period, but did not receive mandated rest breaks. On July 9, 2018, the Labor Commissioner also determined that the company failed to provide employees accurate itemized wage statements as required by law. The $1,964,679 citation includes $1,892,279 payable to the workers for owed wages, liquidated damages and waiting time penalties, as well as $72,400 in civil penalties.

Since being appointed Labor Commissioner by Governor Brown in 2011, Julie A. Sue has been very public about her intention to dramatically increase enforcement of California’s Wage Theft Protection Act that went into effect in January 2012.  “Wage theft” is defined as any instance when an employer fails to provide an employee full pay for all hours worked, including paying less than minimum wage, failing to provide overtime pay, requiring workers to perform off-the-clock work, and failing to provide meal and rest breaks. The Act and subsequent legislation have given the Labor Commissioner more legal tools and financial resources to enforce California’s myriad wage and hour laws. Under Su’s leadership, the California Division of Labor Standards Enforcement has focused its enforcement efforts on low wage workers, particularly those in the construction industry.

Takeaway for Employers:

This citation should be a wake-up call for California employers that failing to comply with California wage and hour laws can be extremely costly.   These laws are notoriously complex and counter-intuitive.  To ensure compliance, an employer may wish to conduct a self-audit under the direction of legal counsel.