Did Your Developer Go Bankrupt And Leave your Association Holding The Bag? Your Remedy May Lie Within The Developer Agreement

Lydia Chartre | Husch Blackwell | August 7, 2019

Even the best and most established real estate developers can face hard times, especially in the aftermath of recession and economic downturn, as we experienced a few short years ago. Many condominium and subdivision developments found themselves half completed, both in terms of units and homes built, and common area improvements (like streets and curbs) left undone.  Where a new developer comes in to build upon the remaining lots, what responsibilities does he take on?  As related in a recent 2019 case, the answer may be found in the original development agreements with the municipality.

Facts

In a 2019 case, a development company went bankrupt halfway through developing a subdivision.  That developer did not complete the improvements promised to the City in the development agreement.  The development agreement specified that it applied to the successors and assigns of the developer, which by definition under the terms of the agreement, applied to purchasers of the lots from the developer for development purposes.  A new developer bought the remaining lots from the original developer out of its bankruptcy, for the purpose of completing construction of the homes in the planned subdivision.  The City expected the new developer to complete the roads within the subdivision per the development agreement, but when the new developer refused to take on that cost, the City sued.

Court Rulings

The court determined that the language within the agreement the original developer had with the City was clear in that it bound future developers to its terms.  When the new developers purchased the lots, they became bound by the developer agreement.  As a result, the new developer became obligated to complete the roads.

Lesson

If you are in a community association that has unfinished improvements within the common areas because your original developer dropped the ball, there may be remedies for you within the original developer agreements.  Taking a look is worth your time and money; otherwise, the Association could be left holding the bag.

United City of Yorkville v. Fidelity and Deposit Co. of Maryland, et al., 2019 IL App(2d) 180230

This Project Is Behind Schedule – What Is a Contractor to Do?

Michelle Litteken | PilieroMazza | August 6, 2019

Construction projects rarely, if ever, go precisely as planned. One of the most common issues government contractors face is falling behind schedule. A schedule is developed, and then the contractor is confronted with differing site conditions, changes, or a litany of other causes of delay. The contract completion date that seemed easily achievable when performance began may now appear to be impossible to meet. What should a government contractor do to ensure they are compensated and to avoid liquidated damages?

The first step in most situations is to notify the contracting officer in writing. There are several FAR provisions that require a contractor to provide notice (e.g., FAR 52.242-17 Government Delay of Work; FAR 52.243-1 Changes – Fixed-Price; and FAR 52.236-2 Differing Site Conditions), and providing notice helps to preserve one’s rights moving forward.

The next step is determining the type of delay that has occurred. There are three types of delay: inexcusable, excusable, and compensable. Determining the type of delay requires an analysis of responsibility, impact, and the existence of other delays during the same time period.

  1. An inexcusable delay is a delay that is solely caused by the contractor or their team. This includes rework or slower than expected production.
  2. An excusable delay is a delay that occurs because of unforeseeable events outside of a contractor’s control, and without the contractor’s fault or negligence. Common excusable delays include acts of God or unusually severe weather. To obtain an extension of time, the contractor must demonstrate that the event delayed the overall completion of the project (known as the critical path), and the delay did not coincide with another delay (a concurrent delay). An excusable delay extends the period of performance, but it does not include any monetary relief.
  3. compensable delay is a delay entirely caused by—and the responsibility of—the government. This includes differing site conditions, directed changes, and defective specifications. Like an excusable delay, to recover compensation, the contractor must show that the delay affected overall completion of the project, and it was not concurrent with any other delays. A compensable delay extends the period of performance and entitles a contractor to delay damages.

If the delays encountered are excusable or compensable, the next step may be submitting a request for equitable adjustment (REA) or a claim to modify the period of performance and seek delay damages if appropriate. Because an REA or claim is more likely to succeed if the contractor has regularly updated the project schedules and kept accurate and complete daily logs/reports, recordkeeping and documentation is extremely useful. For complex projects, a schedule analysis prepared by an outside consultant may be needed. A successful REA or claim can help a contractor avoid liquidated damages and potentially recover additional compensation. 

The Accidental Construction Owner: a Checklist of Considerations for HOAs Engaging in Construction

Jason T. Strickland | Ward & Smith | July 26, 2019

Homeowners associations (“HOAs”) do not typically act as construction owners.

HOAs are set up as entities to maintain and manage planned unit communities. The most important and common role of the HOA is to maintain the common elements of the community. However, in that capacity, HOAs will typically be compelled to undertake a construction project. In these circumstances, the HOA plays the role of a commercial construction owner but is doing so without the experience that a commercial construction owner has in managing a construction project. The following is a list of considerations for the HOA that is engaging as a construction owner:

Written Contract

The HOA will typically hire a contractor to perform the construction work. Sometimes the HOA will also hire a designer to develop a design for the work and to inspect construction of the work. In each instance, there should be a written contract put in place between the owner and the contractor (and between the owner and designer, if the latter is involved). The contract should have express terms and be clear and understandable.

Payment

Payment for the work should be set out in the written contract. The two most common types of payment are cost-plus or lump sum. In a cost-plus situation, the contractor will be paid for the materials and labor it provides to the project, plus a markup which is intended to compensate the contractor for its overhead and profit. In a cost-plus situation, the HOA should strongly consider requiring a guaranteed-maximum-price or GMP. A GMP caps the total costs and fees for which the HOA will be responsible — there is a maximum cap above which the HOA does not have to pay.

The second arrangement is a lump sum whereby a fixed price is paid by the HOA to the contractor for the work. This price is negotiated at the outset of the project and set forth in the contract. Unless unforeseen conditions are encountered, or the scope of work is changed for some reason, the owner is required to pay the lump sum, no more or less, to the contractor for completion of the work, regardless of the actual costs. This arrangement is generally more favorable to an HOA but is generally disfavored by contractors.

The HOA should also have the written contract set forth a process for the timing of payments (i.e., when and how payments are made) and the paperwork that must be submitted in order for the contractor to establish its entitlement to payment.

Scope of Work

Written contracts should set forth the scope of work to be performed. There should also be some provision that determines how the work will be accepted, including whether there will be inspections by the owner and/or the designer, and what happens if work is rejected.

Time

The contract should set forth the time in which the contractor is required to complete the work and the remedies available to the HOA if the work is not completed in the time required. Remedies for late completion are typically in the form of liquidated damages, which are a daily rate fixed at the beginning of the project. For each day late that the contractor finishes the project, the contractor will pay to the owner an amount equal to the daily rate. It is important in the contract to not turn the liquidated damages into a penalty. The liquidated damages should be a reasonable approximation or estimate of the actual damages that the HOA will suffer if the project is not completed in the time required.

Liens

In the event of a dispute with a contractor, there likely will be liens asserted against the project. These liens can be asserted not only against the common elements, but also the individual units in the planned unit community. Thus, the HOA’s members, the unit owners in the community, are subjected to being defendants alongside the HOA. This can create problems between the HOA and its members. The HOA should keep its members informed of the construction project. In the event of a dispute or if a dispute looks likely, the HOA should try to get ahead of the problem by informing its unit owners of the problem. Although the assertion of a lien by a contractor or subcontractor cannot be wholly prevented, certain key provisions, if present in the contract, can reduce the likelihood that liens can be successfully asserted against the common elements or the individual units.

Insurance

A written contract between the owner and the contractor (or between the owner and the designer) should set out insurance requirements for the contractor or designer, including specific dollar minimums and types of insurance the contractor is required to maintain.

Sequence

All of the above considerations must be considered in light of the sequence in which negotiations with the contractor are conducted. If the HOA gets too far into negotiations with a specific contractor and becomes wedded to using that contractor, then the HOA has little leverage to negotiate contract terms with the contractor and likely will be forced into a situation where it must sign the contract presented by the contractor as a fait accompli. Therefore, an HOA proceeding as an owner on a construction project should make sure the issues listed above are put forward, considered, addressed, and made part of negotiations at the earliest stage so as to prevent a loss of leverage and avoid being forced into a contract with inappropriate, unfair, or harmful terms.

Conclusion

The HOA should consult with its attorneys, and if necessary, have its attorneys refer them to a competent construction attorney to advise them at the very earliest stages of the construction project. Doing so will allow the HOA to avoid or at least mitigate the risks and losses associated with acting as a commercial owner when the HOA lacks experience doing so.

Mixed Reality for Construction: Applicability and Reality

A. Vincent Vasquez | Construction Executive | May 14, 2019

One technology available to the digital contractor for mapping what’s happening in the physical world with the 3D models is mixed reality. Mixed reality often includes both augmented reality and virtual reality.

Figure 1: Trimble DAQRI Smart Helmet
PRECONSTRUCTION PHASE

During the preconstruction design phase, mixed reality can be used for a number of tasks, such as:

  • conducting design iterations;
  • communicating designs to owners;
  • visualizing the impact of design changes;
  • discovering design and coordination clashes; and
  • mocking up virtual interior designs.
MARKETING

Mixed reality can also be used to create marketing material, such as a virtual showroom. Imagine being able to show a potential client what the building will look like. For example, the client, wearing mixed-reality glasses, can see the physical neighborhood with the building or can take a virtual “walk” through of an apartment before it it is even completed.

CONSTRUCTION PHASE
Figure 2: Mixed-reality glasses used in facilities management

During the construction phase, mixed reality has a number of potential uses, such as:

  • Quality control and clash detection to Identify early on if something is installed improperly.
  • Scheduling and collaboration. A wearer can project the 4D model in space and see if a team is behind schedule because something that is supposed to be there, isn’t.
  • Subcontractor material layout. Instead of subcontractors marking where their stuff goes, they use mixed-reality glasses that tells them where their stuff goes. HITT Contracting anticipates this could save them 25% of schedule time.
  • Build what the worker sees through the AR glasses. In this case, the specific directions of what to build are presented on the AR glasses. The implication is training changes as the glasses can guide teams through the sequences required to do the job.
FACILITIES MANAGEMENT

Mixed reality can also be used in facilities management. It’s well known that the cost of constructing a building is a fraction of the total cost of maintaining a building over its lifetime.

Figure 3: Augmented reality used on a tablet

If the contractor has kept the BIM model updated throughout the construction process, this model can be provided to the owner at the completion of the project. Then if redesigns are requested, the owner can use the mixed-reality glasses, for instance, to see through walls and ceilings to know where structural elements are located.

Mixed reality can also connect to IoT devices in the building, such as networked water towers and boilers. The wearer of the mixed-reality glasses can look into a room and the different connected machines can show their current state. This allows issues to be recognized simply by looking at the machine.

AUGMENTED REALITY ON TABLETS

Actually, mixed-reality glasses are not required to visually see the 3D design overlaid with the physical world. Although still in early development, there are a number of apps available now that use the mobile device’s camera to overlay an interactive BIM model. Using a mobile device might also work better when outdoors, as today’s mixed-reality glasses don’t do as well in bright light.


Changes to Minnesota Laws Affecting Construction

Nicholas Loyal | Stinson | July 23, 2019

In the 2019 session, the Minnesota Legislature introduced a number of sweeping changes to statutes affecting individuals in the construction industry. On August 1, 2019, a number of those changes will go into effect. These changes are important to understand, as some of them contain civil and criminal penalties.

RETAINAGE (MINN. STAT. §§ 15.72 AND 337.10- EFFECTIVE 8/1/2019)

In 2019, the legislature incorporated changes to retainage requirements for both public and private projects in Minnesota. For all projects, the owner/public entity must now release retainage to downstream contractors/suppliers within 60 calendar days after the date of project substantial completion and contractors/suppliers in turn must pay their downstream subcontractors/suppliers retainage within 10 calendar days of receiving retainage payment from the owner/public entity. Note, however, that nothing in the statute requires payment for a portion of a contract that is not complete or for an invoice that has not been submitted.

After substantial completion, owners/public entities can hold back funds for punch list work during the 60 day period, but that holdback can be no more than 250 percent of the cost to complete/correct work. This holdback must be accompanied by a written statement detailing the amount and basis for withholding. Retainage cannot be withheld strictly for warranty work.

Additionally, note that owners and public entities are also entitled to hold back 1 percent of the total contract value or $500, whichever is greater, to encourage downstream contractors/suppliers to complete “final paperwork,” which is defined by the statute as any document necessary to fulfill a contractual obligation (such as payroll documents or withholding exemption certificates). Once final paperwork is submitted, this amount must be paid to downstream entities within 60 days.

The 2016 5 percent cap on retainage remains the law in Minnesota. However, the new law makes it clear that if there is a dispute between the owner/developer and a downstream party (that justifies withholding retainage from that party), the owner/developer must pay retainage to any other downstream parties whose work is not involved in the dispute and must provide a written explanation to the affected party regarding the dispute and the basis for withholding retainage.

WAGE THEFT (MINN. STAT §§ 16C.285 AND 175 ET. SEQ.- PENALTY PROVISIONS EFFECTIVE 8/1/2019)

Minnesota’s Legislature passed a wage theft law in 2019 that was designed to be the “strongest in the country.” The legislature has established new rules that require employers to provide employees with notice of expected wages, keep specific records of employee wages, comply with Department of Labor and Industry (DLI) investigations and to provide employees with documentation of wages actually earned.

Notice to Employees

The new wage theft law requires an employer to give written notice, in English, to employees at the start of employment, which includes the following information:

1. Rate and manner (by hour/shift/day/salary/commission) of pay

2. Applicable allowances for meals/lodging

3. Paid vacation and sick time information, including accruals and terms of use

4. The employee’s employment status and whether the employee is exempt from minimum wage and overtime and on what basis

5. A list of deductions that may be made from an employee’s pay

6. The number of days in each pay period, the scheduled pay day, and the date of first payment

7. The legal and operating names of the employer

8. The physical address of the employer’s principal place of business (and mailing address, if different)

9. The telephone number of the employer .

If the employer intends to change any of the items/information, it must first give written notice, in English, to the employee before putting the change(s) into effect.

Further, an employer must keep a signed copy of the written notice provided to each employee. If an employee requests the notice in a different language, an employer must make the notice available to that employee in the requested language.

Earnings Statements

Under the new wage theft provisions, an employer must now also make sure that at the end of every pay period employee pay stubs/earnings statements include the following information:

1. Name of the employee

2. Rate and manner (by hour/shift/day/salary/commission) of pay

3. Applicable allowances for meals/lodging

4. Total number of hours worked (unless exempt)

5. Total amount of gross pay during period

6. List of deductions

7. Net pay after deductions

8. Date pay period ends

9. The legal and operating names of the employer

10. The physical address of the employer’s principal place of business (and mailing address, if different)

11. The telephone number of the employer

Frequency of Pay

The new Minnesota provisions also require an employer to pay wages, salary, earnings and gratuities to employees at least once every 31 calendar days and to pay all commissions earned at least once every three months. Failure to do so can result in the DLI issuing a demand on the employee’s behalf for those payments and imposing a penalty on the employer in the amount of the employee’s daily earnings at the applicable rate.

Required Recordkeeping

The 2019 provisions of the wage theft law change requirements regarding recordkeeping. Specifically, an employer must now keep the following records for each employee:

1. The name, address and occupation of each employee

2. The rate of pay, and the amount paid each pay period, to each employee

3. The hours worked each day and each workweek by the employee – including, for all employees paid at piece rate, the number of pieces completed at each piece rate

4. A list of the personnel policies provided to the employee, including the date the employer gave the policies to the employee and a brief description of the policies

5. A copy of the notice provided to each employee as required by section 181.032, paragraph (d), including any written changes to the notice under section 181.032, paragraph (f). See immediately below for more detail on this notice requirement.

Enforcement

The 2019 wage theft law authorizes the Office of the Minnesota Attorney General (in addition to the DLI) to investigate and enforce the terms of the statute. Specifically, failure to pay employees “all wages, salary, gratuities, earnings or commissions at the employee’s rate or rates of pay or at the rate or rates required by law. This includes any applicable statute, regulation, rule, ordinance, government resolution or policy, contract, or other legal authority, whichever rate of pay is greater” constitutes “wage theft.” Wage theft can lead to up to 5 to 20 years imprisonment for the responsible party and fines from $10,000 to $100,000 depending on the amount of wages included in the “theft.”

An employer can also be subject to a misdemeanor charge if it hinders or delays an investigation by the Office of the Attorney General and/or the DLI, refuses to allow access to the workplace, fails to keep or preserve records, or fails to post a summary of all applicable labor rules under Minnesota’s Fair Labor Standards Act (Minn. Stat §§ 177.21 to 177.44) as required by Minn. Stat. § 177.31.

Under the 2019 wage theft law, an employer is prohibited from retaliating in any way against an employee who seeks remedies or files complaints under this statute. Any employer who retaliates is subject to a fine of $700-$3,000 per violation.

Additionally, a contractor’s violation of the revised 2019 Minnesota wage theft law can lead to a loss of “responsible contractor” status for a contractor, which can prevent a contractor from being the “lowest responsible bidder” in a procurement process for a competitively bid project.

See a summary of these changes put together by DLI. Please let us know if you would like any assistance regarding new notice and record-keeping requirements. We can help with forms or other documents as needed.

HANDS-FREE CELL PHONES REQUIRED (MINN. STAT § 169.011, SUBD. 94 – EFFECTIVE 8/1/2019)

The 2019 Minnesota Legislature passed a ban on cell-phone use while driving. The ban covers all “wireless communication devices” and prohibits their use while a vehicle is “in motion or a part of traffic.” There is an exception for voice-activated or hands-free mode (and for emergency use), but not for use of GPS or directional applications while a vehicle is moving. A $275 fine is assessed for any citations issued under this section after a person’s first violation.