The California State Judicial Council amended California Rule of Court, Emergency Rule No. 9, on May 29, 2020, lifting its previously adopted indefinite tolling of the limitation period to bring civil lawsuits. The amended rule now provides that limitation periods of 180 days or less will be tolled only until Aug. 3, 2020, allowing project applicants to begin to plan and get financing so that development can proceed this year.
The Judicial Council issued emergency rules of court to address the COVID-19 pandemic on April 6, 2020, one of which – Emergency Rule No. 9 – tolled the statute of limitations for all civil actions from April 6, 2020, until 90 days after the date that California’s governor lifts the statewide COVID-19 state of emergency. Because the state of emergency declaration could remain in effect for a year or more, and since most developers cannot proceed to obtain financing until the period to bring litigation has lapsed, the effect of the rule was to indefinitely pause housing and other development – even while “shelter in place” orders are lifted and housing construction was declared an “essential activity” exempt from those orders.
Holland & Knight worked with a broad coalition of more than 50 trade groups, planning associations, affordable housing providers, business associations, charitable organizations, infill developers, advocacy groups and nonprofit organizations to urge the Judicial Council to amend Emergency Rule No. 9. The California Building Industry Association and the California Chamber of Commerce joined with leaders in the affordable housing nonprofit community and the “Yes In My Backyard” movement to stress the importance of allowing housing development to continue in light of the state’s unprecedented housing crisis.
In response to opponents who urged that tolling of litigation deadlines remain in effect indefinitely, the Judicial Council’s amendment keeps tolling in effect far longer than most housing advocates consider justified, but the rule does set a date when the tolling period will end. Statutes of limitations of 180 days or less – such as the 30-day to 35-day deadline for most California Environmental Quality Act (CEQA) challenges, and the 90-day limitations periods in the Planning and Zoning Law as well as the Subdivision Map Act – will be tolled only from April 6, 2020, until Aug. 3, 2020. Longer statutes of limitations remain tolled until Oct. 1, 2020.
Even after Aug. 3, project applicants and public agencies will still need to wait for the remaining number of days left in applicable statute of limitations to run. Additionally, project applicants and public agencies seeking to invoke the CEQA statute of limitations should be mindful of the need to keep CEQA notices posted for the full statutory period, as well as to consider the provisions of Executive Order N-54-20, which states that it suspends the filing requirements for CEQA notices until June 22. (See Holland & Knight’s Breaking Ground Blog, “California Executive Order Suspends Certain CEQA Noticing and Posting Requirements,” April 27, 2020.)
California environmental agencies recently issued a draft vapor intrusion guidance document that will significantly impact the investigation and remediation of environmentally impacted properties by owners, operators and potential buyers.
The guidance document will also impact real estate deals and development involving those properties.
The California State Water Resources Control Board, San Francisco Regional Water Quality Control Board and California Department of Toxic Substances Control released their “Draft Supplemental Guidance: Screening and Evaluating Vapor Intrusion” for public comment on Feb. 14.1
The draft guidance attempts to standardize and render consistent the approach that various California environmental agencies with overlapping jurisdiction take regarding vapor intrusion.
If promulgated in its current form, this guidance document could make regulatory compliance for these properties significantly more difficult, expensive and time-consuming.
Real estate and environmental lawyers, property owners and developers, and environmental consultants should accordingly familiarize themselves with the draft guidance. They may also wish to advise potentially affected clients of the likely implications and the June 1 public comment deadline.
BACKGROUND REGARDING VAPOR INTRUSION
Vapor intrusion occurs when certain volatile chemicals released to the ground or subsurface contaminate soil or groundwater. Gases formed from the volatilization (i.e., evaporation) of these chemicals can migrate up through soil and into buildings and homes via basements, crawl spaces, cracks in foundations, sewer lines, gaps around utility lines and other pathways.
Chemicals that can cause vapor intrusion include trichloroethylene, also referred to as TCE, and tetrachloroethylene, which is also known as PCE. These solvents are commonly used by dry cleaners and as industrial degreasers in manufacturing and metal degreasing processes.
arious agencies have identified them as carcinogenic or potentially carcinogenic and harmful to human health in other ways. Benzene, which is associated with releases of gasoline and diesel fuel, is also volatile. It has been deemed carcinogenic and can cause vapor intrusion.
Historically, regulators were primarily concerned with subsurface chemical impacts to groundwater that might be used as drinking water or for other purposes. But some of that focus is now shifting to vapor intrusion as health impacts from subsurface chemical vapors, and their migration pathways into overlying buildings, are better understood and testing equipment can measure ever-smaller concentrations.
TCE in particular raises vapor intrusion concerns with regulatory agencies. The U.S. Environmental Protection Agency and the Department of Toxic Substances Control have issued guidance documents indicating that even very low levels of TCE in indoor air — as low as 2 micrograms per cubic meter for residential uses — may present an unacceptable risk to sensitive occupants such as children, pregnant women, sick people and the elderly.
These guidance documents state that these low levels can also damage developing fetal hearts when pregnant women breathe the impacted air.
For perspective, 1 microgram per cubic meter is roughly equivalent to a drop of liquid in five Olympic-sized swimming pools.
Vapor intrusion problems may also be widespread. Properties contaminated with chemicals that can volatilize into indoor air are located throughout California and across the nation.
Much of that contamination stems from historical business operations as varied as electronics manufacturing, metal barrel refurbishing and dry cleaning.
Some of these operations date back more than a century, when little was known about the potentially harmful health effects of exposure to very low levels of these chemicals.
In those early periods, it was common and often legal to dispose of these chemicals and associated wastes by discharging them into unlined ponds or even simply discharging them onto the ground.
Nevertheless, those companies may remain responsible under environmental laws and sometimes lease provisions to address their historical impacts to human health and the environment. In many cases, the properties that are now posing vapor intrusion risks were thought to be cleaned up.
In fact, some of them have received a clean bill of health from regulators. These historical impacts affect real estate transactions when they are discovered by buyers during the due diligence period.
Addressing potential vapor intrusion issues at potentially impacted properties can be complicated and expensive. It generally begins with assessment work. This can entail testing soil, soil gas and groundwater under and near buildings, and indoor and ambient outdoor air to assess indoor air chemical concentrations and to compare those concentrations with outdoor air to rule out external sources.
Contaminants in soil and groundwater that exceed regulatory levels may need to be mitigated through measures such as installation of vapor barriers on foundations, optimization of heating, ventilation and air conditioning systems, or construction of subslab depressurization systems to vent vapors to the outdoor air.
Contaminants may also need to be remediated through elimination of the chemicals in the subsurface to reduce or eliminate vapor intrusion problems.
DRAFT GUIDANCE PROVISIONS
The draft guidance includes four primary recommendations for assessing possible vapor intrusion into buildings in California.
First, it recommends using attenuation factors the EPA promulgated in 2015.
Attenuation factors are multipliers used to extrapolate chemical concentrations detected in subsurface soil gas or groundwater to indoor air concentrations. A consultant essentially takes the subsurface concentration and multiplies it by the attenuation factor. This calculation yields the predicted indoor air concentration.
For example, the draft guidance specifies a multiplier of 1 for crawl space chemical concentrations. This means the guidance assumes 100% of the chemicals in the crawl space intrude into indoor air — an assumption that some find unrealistic.
Similarly, the multiplier for groundwater is 0.001, meaning it is assumed that 0.1% of the chemical in groundwater will enter into indoor air.
Some practitioners criticize this attenuation factor approach as overly simplistic. Existing modeling can, in some cases, use factors such as properties of the chemical at issue, soil type and porosity, building age and size, and other factors to develop a more nuanced, site-specific assessment of indoor air. The draft guidance effectively rules out this kind of modeling analysis.
Second, the draft guidance recommends a four-step evaluation process to determine whether a building located near a known or suspected source of vapor-forming chemicals may be affected by vapor intrusion.
These steps are described on the following flowchart and summarized below.
(1) Prioritize buildings in proximity to the source contamination. First, determine whether there has been a known or suspected release of vapor-forming chemicals. If so, determine whether the release is associated with one or more underground storage tanks, in which case the property falls within the State Board’s Underground Storage Tank Low-Threat Closure Policy and not under the draft guidance.2 If not, the responsible party should evaluate whether acute or short-term hazards are present based on the type or concentrations of hazardous substances at issue. Such hazards may require immediate mitigation or remediation measures.
According to the draft guidance, buildings within 100 feet of the most contaminated areas or connected to a contaminated area by a preferential pathway such as sewer lines, which are discussed below, should be evaluated for vapor intrusion.
The draft guidance also recommends skipping subsurface sampling and proceeding directly to indoor air testing for buildings that meet those criteria plus one of the following: the release area is directly below the building; a contaminated groundwater plume is near or less than 5 feet below the building; or the building is connected to conduits (such as sewer lines) that intersect significant subsurface contamination.
If the latter criteria are not met, then the guidance recommends evaluating vapor intrusion using soil gas sampling instead of indoor air testing, which is more consistent with the current regulatory approach and is described in Step 2 below.
(1) Collect exterior subsurface soil gas samples to determine whether a building may experience vapor intrusion. If, based on Step 1 above, it is appropriate under the draft guidance to evaluate possible indoor vapor intrusion using soil gas data instead of indoor air testing, the next step is to test subsurface soil vapor chemical concentrations. The guidance indicates the responsible party should conduct this testing both near the building in question and laterally from the suspected source area to determine the nature and extent of the contaminant impact. The responsible party should also sample at two or more depths, one depth above the known or suspected source area and one or more shallower depths to determine whether additional contamination exists.
Next, the responsible party should calculate human health risk using the 0.03 attenuation factor discussed above applied to the maximum subsurface soil gas concentration.
If the calculated cancer risk is greater than one in a million or the hazard index, which is a measure of non-cancer health effects, is greater than 1.0, then the responsible party should conduct indoor air testing.
If the calculated risk does not exceed either number, then the draft guidance recommends repeating the soil gas testing in a different season to account for seasonal variations in subsurface chemical vapor concentrations.
If the calculated risk remains below these numbers in a different season, then the responsible party can consider it a low vapor-intrusion priority building and regulatory closure may be available.
(1) Collect indoor air, subslab gas and outdoor air samples if a building has vapor intrusion risk. If indoor air testing is recommended based on Steps 1 or 2, then the responsible party should survey the building. This includes locating and removing indoor air sources of vapor-forming chemicals, which can be more common than one may think, screening for vapor entry points into the building, and observing the surrounding area for possible outdoor sources of vapor-forming chemicals.
Under the draft guidance, the responsible party should select at least three indoor air sampling locations and three co-located subslab sampling points, which will require drilling through the floor and building foundation.
These locations should be in primary live/work spaces, near slab or floor penetrations from which vapors may enter the building and near the suspected maximum subsurface contamination.
In addition, the draft guidance recommends selecting three outdoor locations upwind of the building to determine if any indoor vapor concentrations may emanate from outdoor sources rather than vapor intrusion.
The guidance indicates the responsible party should then estimate vapor intrusion risk using the maximum measured indoor air concentration and estimate future vapor intrusion risk using the maximum subslab gas concentration and an attenuation factor of 0.03, as discussed above.
The draft guidance also recommends conducting this testing two to three times to account for seasonal variability, similar to the repeated soil gas testing described in Step 2 above, and once with the HVAC system on and once off.
(1) Evaluate the need to manage current and future vapor intrusion risk based on indoor air concentrations and subsurface soil gas concentrations. If, based on Step 3, cancer risk is greater than one in a million but less than one in 10,000, and the calculated hazard index is less than 1.0, then additional investigation, monitoring, risk assessment, mitigation and remediation should be considered. If the cancer risk is greater than one in 10,000 or the hazard index is higher than 1.0, then mitigation and remediation should be implemented.
The third core element of the draft guidance is a recommendation for increased consideration of sewers as a potential vapor intrusion migration and exposure pathway.
The agencies indicate subsurface vapors can enter sewer lines that intersect contaminated soil vapor or groundwater and be transported beneath or directly into buildings.
Given this risk, the agencies recommend sampling indoor air in a building that meets these criteria even if soil gas and subslab sampling indicate no significant vapor intrusion risk because they may ignore the sewer pathway risk.
This could result in more complicated and expensive vapor intrusion assessments because many buildings have sewer lines beneath or connected to them that may intersect contaminated soil or groundwater.
All such buildings may be compelled under the draft guidance to conduct indoor air sampling that would not be required under existing guidance.
Finally, the draft guidance lays the groundwork for development of a California-specific vapor-intrusion database of information such as vapor intrusion sampling and building data. The purpose of this database is to understand how human-caused and natural factors influence vapor intrusion.
The information will be collected via the State Board’s existing GeoTracker database. A working group within the California EPA will eventually use the database to determine whether California-specific attenuation factors are appropriate in place of, or in addition to, those discussed above.
IMPLICATIONS OF THE DRAFT GUIDANCE
The increased vapor intrusion sampling, mitigation and remediation requirements set forth in the draft guidance could increase the cost of vapor intrusion assessments by as much as 30% to 60%, according to one environmental consultant.3
One reason is the increased emphasis on multiple lines of evidence, such as soil gas, subslab, groundwater, and indoor and outdoor air sampling. In addition, multiple sampling events over a long period of time to evaluate seasonal variations will increase the time and cost of assessment and regulatory closure.
These time frames will be completely unrealistic in many real estate due diligence contexts, which may result in creative approaches like environmental escrows, expanded environmental indemnities and increased use of prophylactic mitigation measures that may not ultimately be necessary.
Collecting samples from multiple subsurface depths during each sampling event will also increase complexity and costs.
Finally, the required use of specified attenuation factors in place of site-specific vapor-intrusion modeling will increase the number of properties that exceed calculate cancer and non-cancer risk thresholds.
Due to the coronavirus pandemic, on March 25, the agencies extended the public comment period until June 1 at noon.
Comments can be submitted to DWQ-vaporintrusion@ waterboards.ca.gov. The agencies have indefinitely postponed the public meetings previously scheduled for April regarding the draft guidance.
Property owners and developers, environmental and real estate lawyers, environmental consultants and other stakeholders in California should carefully evaluate the draft guidance and submit public comments if they desire.
1 DTSC and California Water Resources Control Boards, Public Draft, Supplemental Guidance: Screening and Evaluating Vapor Intrusion (February 2020), available at https://bit.ly/34U6DLi (last visited May 4, 2020).
2 State Board, Underground Storage Tank Program, Low-Threat Underground Storage Tank Closure Policy (last updated Sept. 3, 2019), available at https://bit.ly/2Kpq3OW (last visited May 4, 2020).
3 Roux Associates, Inc., CA Vapor Intrusion Supplemental Guidance: Notable Changes and Implications for Developers, Property Owners, and Responsible Parties (Mar. 5, 2020), available at https://bit.ly/2Vojmml (last visited May 4, 2020).
While it has been more than twenty years since the California Supreme Court determined, in Wm. R. Clarke Corp. v. Safeco Ins. Co., that “pay-if-paid” provisions in subcontracts were unenforceable, following a recent decision from the Court of Appeal, Fourth Appellate District, general contractors, or any other contractors that contract directly with owners, should review their subcontracts to confirm that they do not contain potentially unenforceable “pay-when-paid” provisions.
Following the California Supreme Court’s Wm. R. Clarke decision, many direct contractors (defined by California Civil Code § 8018 as a contractor with a direct contractual relationship with an owner) revised the payment provisions in their subcontracts from “pay-if-paid” (where payment by the owner is a condition precedent for payments to the subcontractor) to “pay-when-paid” (requiring the contractor to pay the subcontractors within a defined period after payment by the owner). In the recent Crosno Construction Inc. v. Travelers Casualty and Surety Company of America decision, the Fourth District Court of Appeal determined that such “pay-when-paid” provisions may be unenforceable if they run afoul of California’s statutory waiver and release statutes (California Civil Code § 8120 et seq.).
In Crosno, the subcontract required the direct contractor to pay its subcontractor in monthly progress payments with the following “pay-when-paid” provision should the owner’s payment be delayed:
If Owner or other responsible party delays in making any payment to Contractor from which payment to Subcontractor is to be made, Contractor and its sureties shall have a reasonable time to make payment to Subcontractor. ‘Reasonable time’ shall be determined according to the relevant circumstances, but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics’ lien remedies.
While the Crosno court did not appear to question the enforceability of most of this provision, the Court of Appeal determined that the portion of the provision which allowed the direct contractor to delay payment until the conclusion of its mechanics’ lien remedies was unenforceable. The Crosno court’s rationale was that this portion of the “pay-when-paid” provision postponed the direct contractor’s obligation to pay for an indefinite period of time and was, therefore, violative of California Civil Code § 8122’s bar against contractual provisions which “waive, affect or impair” a claimant’s waiver and release rights.
As pointed out by the Crosno court, California law lays out a comprehensive statutory scheme to resolve payment disputes in construction projects (California Civil Code § 8160 et seq. for private projects and California Civil Code § 9000 et seq. for public projects). This statutory scheme is intended to carefully protect against unfair or imprudent waiver of right to payment and a claimant may only waive its statutory remedies by signing one of the four types of statutorily required written waiver and releases (California Civil Code §§ 8132 – 8138). In fact, California Civil Code § 8122 makes any contractual provision purporting to modify the statutory waiver and release scheme unenforceable.
The Crosno court determined that the “but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics’ lien remedies” portion of the “pay-when-paid” provision in the subcontract violated California Civil Code § 8122 and, thereby, made the provision, as a whole, unenforceable as a matter of law.
Like Wm. R. Clarke, the Crosno case involved a subcontractor’s claims against the direct contractor’s payment bond. Likely, the offending language in the contract (“but in no event shall be less than the time Contractor and Subcontractor require to pursue to conclusion their legal remedies against Owner or other responsible party to obtain payment, including (but not limited to) mechanics’ lien remedies”) was intended to limit claims against the direct contractor’s payment bond. Unfortunately for the direct contractor and its surety, the payment bond obligated the surety, upon default by the direct contractor, to pay amounts due for “work and labor under the contract” between the direct contractor and owner. Seizing on the broad nature of the surety’s obligation and the unenforceability of the “pay-when-paid” provision, the Crosno court, like the Wm R. Clarke court before it, determined that the surety was obligated to pay the subcontractor’s claim regardless of the status of the direct contractor’s mechanic’s lien action against the owner.
The lesson to be learned from Crosno is that, while “pay-when-paid” provisions, in and of themselves, remain enforceable, they must be written in such a way that they neither run afoul of California’s statutory waiver and release scheme nor include patently unreasonable language. As such, we recommend that direct contractors review the payment provision(s) in their subcontractors to confirm that they remain enforceable.
The Contractors’ State License Board (“CSLB”) represents the interests of the public in California construction matters. In the field of California construction, the CSLB is all powerful. The agency has the right to suspend the license of any contractor or subcontractor who does not pay on a construction related judgment against it. If you are successful in obtaining a court judgment against a contractor or a subcontractor in a construction-related case, you can utilize the services of the CSLB to suspend the contractors’ license of that contractor or subcontractor until the judgment has been paid. Once the license is suspended, the contractor or subcontractor has no legal right to work as a contractor or subcontractor and can even be arrested for doing so. Details on using the CSLB to suspend the license of a contractor or subcontractor who has a construction-related judgment against it can be accessed at this particular CSLB link: CSLB – Judgment .
On receipt of notice of the construction-related judgment, the CSLB will either suspend the contractors’ license of any contractor or subcontractor who does not pay on the judgment or who does not appeal the judgment to the Court of Appeals or file bankruptcy within 90 days. There also exists an opportunity for the licensed debtor to file a bond with the CSLB. The bond will either have to be renewed annually or the judgment paid, whichever comes first.
The ability of a creditor to suspend the license of a contractor or subcontractor due to a construction-related judgment is invaluable. Any contractor or subcontractor who performs any work at all on a construction project while its license is suspended is subject to the very heavy penalty of “disgorgement” (for more info on disgorgement, see this article: California – Disgorgement).
For details on the law which allows judgment creditors to use the services of the CSLB to suspend the license of the contractor who has a construction-related judgment against it, see California Business and Professions Code section 7071.17 (amended, January 1, 2020), quoted here in full:
(a) Notwithstanding any other provision of law, the board shall require, as a condition precedent to accepting an application for licensure, renewal, reinstatement, or to change officers or other personnel of record, that an applicant, previously found to have failed or refused to pay a contractor, subcontractor, consumer, materials supplier, or employee based on an unsatisfied final judgment, file or have on file with the board a bond sufficient to guarantee payment of an amount equal to the unsatisfied final judgment or judgments. The applicant shall have 90 days from the date of notification by the board to file the bond or the application shall become void and the applicant shall reapply for issuance, reinstatement, or reactivation of a license. The board may not issue, reinstate, or reactivate a license until the bond is filed with the board. The bond required by this section is in addition to the contractor’s bond. The bond shall be on file for a minimum of one year, after which the bond may be removed by submitting proof of satisfaction of all debts. The applicant may provide the board with a notarized copy of any accord, reached with any individual holding an unsatisfied final judgment, to satisfy a debt in lieu of filing the bond. The board shall include on the license application for issuance, reinstatement, or reactivation, a statement, to be made under penalty of perjury, as to whether there are any unsatisfied judgments against the applicant on behalf of contractors, subcontractors, consumers, materials suppliers, or the applicant’s employees. Notwithstanding any other provision of law, if it is found that the applicant falsified the statement then the license will be retroactively suspended to the date of issuance and the license will stay suspended until the bond, satisfaction of judgment, or notarized copy of any accord applicable under this section is filed.
(b) (1) Notwithstanding any other provision of law, all licensees shall notify the registrar in writing of any unsatisfied final judgment imposed on the licensee. If the licensee fails to notify the registrar in writing within 90 days, the license shall be automatically suspended on the date that the registrar is informed, or is made aware of the unsatisfied final judgment.
(2) The suspension shall not be removed until proof of satisfaction of the judgment, or in lieu thereof, a notarized copy of an accord is submitted to the registrar.
(3) If the licensee notifies the registrar in writing within 90 days of the imposition of any unsatisfied final judgment, the licensee shall, as a condition to the continual maintenance of the license, file or have on file with the board a bond sufficient to guarantee payment of an amount equal to all unsatisfied judgments applicable under this section.
(4) The licensee has 90 days from date of notification by the board to file the bond or at the end of the 90 days the license shall be automatically suspended. In lieu of filing the bond required by this section, the licensee may provide the board with a notarized copy of any accord reached with any individual holding an unsatisfied final judgment.
(c) By operation of law, failure to maintain the bond or failure to abide by the accord shall result in the automatic suspension of any license to which this section applies.
(d) A license that is suspended for failure to comply with the provisions of this section can only be reinstated when proof of satisfaction of all debts is made, or when a notarized copy of an accord has been filed as set forth under this section.
(e) This section applies only with respect to an unsatisfied final judgment that is substantially related to the construction activities of a licensee licensed under this chapter, or to the qualifications, functions, or duties of the license.
(f) Except as otherwise provided, this section shall not apply to an applicant or licensee when the financial obligation covered by this section has been discharged in a bankruptcy proceeding.
(g) Except as otherwise provided, the bond shall remain in full force in the amount posted until the entire debt is satisfied. If, at the time of renewal, the licensee submits proof of partial satisfaction of the financial obligations covered by this section, the board may authorize the bond to be reduced to the amount of the unsatisfied portion of the outstanding judgment. When the licensee submits proof of satisfaction of all debts, the bond requirement may be removed.
(h) The board shall take the actions required by this section upon notification by any party having knowledge of the outstanding judgment upon a showing of proof of the judgment.
(i) For the purposes of this section, the term “judgment” also includes any final arbitration award where the time to file a petition for a trial de novo or a petition to vacate or correct the arbitration award has expired, and no petition is pending.
(j) (1) If a judgment is entered against a licensee or any personnel of record of a licensee, then a qualifying person or personnel of record of the licensee at the time of the activities on which the judgment is based shall be automatically prohibited from serving as a qualifying individual or other personnel of record on any license until the judgment is satisfied.
(2) The prohibition described in paragraph (1) shall cause the license of any other existing renewable licensed entity with any of the same personnel of record as the judgment debtor licensee or with any of the same judgment debtor personnel to be suspended until the license of the judgment debtor is reinstated, the judgment is satisfied, or until those same personnel of record disassociate themselves from the renewable licensed entity.
(k) For purposes of this section, lawful money or cashier’s check deposited pursuant to paragraph (1) of subdivision (a) of Section 995.710 of the Code of Civil Procedure, may be submitted in lieu of the bond.
(l) Notwithstanding subdivision (f), the failure of a licensee to notify the registrar of an unsatisfied final judgment in accordance with this section is cause for disciplinary action.
(Amended by Stats. 2019, Ch. 378, Sec. 7. (SB 610) Effective January 1, 2020.)
The lesson for contractors and subcontractors is clear. If you have a construction-related judgment against you, be sure to resolve it as soon as is possible. If you do not, then you may find your license and your ability to earn a living in the construction industry suspended by a powerful government agency. The invitation to construction creditors is also clear. If you have a construction-related judgment against a contractor or subcontractor, you have a very powerful tool at your disposal. The CSLB is that tool. They can take steps which will either get you paid or put the contractor or subcontractor out of business.
In Hensel Phelps Constr. Co. v. Superior Court, 257 Cal. Rptr. 3d 746 (Cal. Ct. App. 2020), the Court of Appeals of California, Fourth Appellate District, addressed whether a party’s contractual definition of the phrase “substantial completion” controlled the trigger date for California’s construction-related statute of repose, Cal. Civ. Code § 941(a). The Fourth District held that the agreement between the condominium owner and developer for Smart Corner Condominiums and the general contractor, Hensel Phelps Construction Co. (Hensel Phelps) – which determined the date of “substantial completion” for the construction project – did not control when the statute of repose started to run.
As set forth by the court, Hensel Phelps signed a prime contract with the owner and developer of a project that included a residential condominium tower. The prime contract required several items before the parties could consider the project substantially complete. Among the requirements was that the project be at the stage where the work was sufficiently complete to allow lawful occupancy and the architect on the project issued a certificate of substantial completion. The architect signed the certificate of substantial completion on May 24, 2007. The City of San Diego, however, continued to issue certificates of occupancy after that date.
On July 6, 2017, Smart Corner Condominium Association (Smart Corner), who was not in privity with Hensel Phelps, gave notice to Hensel Phelps of its construction defect claim, alleging numerous defects. After Hensel Phelps declined to participate in the pre-litigation dispute resolution process set forth in California’s Right to Repair Act, Cal. Civ. Code § 895 et. seq., Smart Corner filed suit against Hensel Phelps. During the litigation, Hensel Phelps filed a motion for summary judgment arguing that, as set forth in the prime contract, the statute of repose began to run on May 24, 2007, when the architect issued its certificate of substantial completion. The trial court denied Hensel Phelps’ motion. Subsequently, Hensel Phelps filed a writ of mandate, asking the appellate court to order the trial court to vacate its order.
On appeal, the court rejected Hensel Phelps’ request that the court interpret the phrase “substantial completion” using a bright line rule, as determined by the parties in their private contract. As noted by the court, the date of substantial completion is an objective fact about the state of construction of an improvement and is a statutory standard, not a contractual one. Finding that private parties cannot confer on themselves the ability to determine when the limitations period begins to run, particularly with respect to another party’s claim, the appellate court denied Hensel Phelps writ.
The Hensel Phelps decision serves as a reminder that subrogation practitioners considering filing suit in an older construction litigation case need to carefully analyze when a construction statute of repose referencing “substantial completion” starts to run. As noted in Hensel Phelps, the answer does not necessarily depend with how the building contract determines the date of “substantial completion.”