Monthly Archives: January 2021

Mechanic’s Liens For Design Professionals: A Powerful Payment Collection Tool

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Christian Dewhurst and Timothy Fandrey | Gray Reed

In these unprecedented times, every bit of revenue is critical to the continued operation of nearly every business operating within the construction industry. Fortunately, there are a myriad of remedies to aide collection efforts. Perhaps the most commonly discussed remedy is the mechanic’s lien provided by Chapter 53 of the Texas Property Code Chapter.

Mechanic’s liens are most frequently used by contractors and suppliers to obtain payment security for the valuable labor and materials that they furnish to a construction project. In Texas, unlike many other states, design professionals are also given the right to lien for certain professional services that they perform for the project. In today’s uncertain climate where collection of money for valuable design services performed is a concern, the lien provides the design professional the opportunity to secure payment.

Like their contractor counterparts, design professionals must satisfy certain requirements to maintain and perfect a mechanic’s lien in Texas.

  1. The lien for professional services is limited to architects, engineers and surveyors.
  2. The types of professional services for which the property can be liened are limited to the preparation of a plan or plat in the case of architects and engineers, and the conducting of a survey in the case of a surveyor.
  3. The design professionals must be in privity of contract with the owner or the owner’s agent.

Thus, it appears that sub-consultants are unable to lien. Given the requirement of direct privity requirement, lien perfection is relatively straight-forward. The lien affidavit must simply be filed by the 15th day of the fourth month after the design contract is completed, terminated or abandoned.

Under many standard construction industry forms, including the American Institute of Architects and the Engineers Joint Contract Documents Committee, architects and engineers are required to perform construction administrative services, including review of submittals and change orders, and periodic inspections of the project site. These are no doubt valuable services, but cannot be liened unless there is a change to the plan or plat. Architects and engineers may, however, lien for construction supervision services because such services are considered “labor” and thus can be liened.

Despite the existence of this powerful, albeit somewhat limited, right to lien, engineers and architects do not file liens with the frequency of contractors and suppliers. One reason is that the cost of design services relative to the cost of construction is typically small. Accordingly, design professionals may not often find it necessary to secure payment through a lien. Relatedly, design professionals generally perform the bulk of their lienable services at the beginning of the project during a period before large amounts of project funds have been spent on other items, including construction and payment is therefore less frequently an issue. Further, design professionals that are able to lien have contractual privity with the project owner and merely use a lien as payment security. By contrast, subcontractors and suppliers typically do not have contracts with the project owner and can also be subject to a contingent payment clause in their contracts with the general contractor. A lien provides the subcontractor not only payment security, but also functions as a powerful method of extracting payment from the owner that has not made payment to the general contractor.

Given the changing payment landscape in the midst of the COVID-19 pandemic, architects, engineers and surveyors should consider giving their lien rights a first or second look. It is a powerful tool that can give the design professional security to perform work on credit to a project owner.

Federal District Court Declines Invitation to Set Scope of Appraisal

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James M. Eastham | Traub Lieberman

In Mt. Hawley Ins. Co. v. Harrods Eastbelt, Ltd., No. CV H-20-2405, 2020 WL 7632250 (S.D. Tex. Dec. 22, 2020), the United States District Court for the Southern District of Texas addressed a request to set the scope of an appraisal by requiring the appraisers to use a specific format for the appraisal. At issue was a claim for damages to three insured buildings allegedly damaged during Tropical Storm Imelda. The insurer had denied coverage based on the asserted lack of wind-created openings as required for coverage under the policy. Rather, the insurer took the position that the interior leaks were caused by a number of excluded causes including long-term weathering, wear and tear, age-related deterioration, ponding, and long-term leaks.

In response to the denial of coverage, the insured invoked the appraisal provision of the policy which provided, among other things, that the “appraisers will state separately the value of the property and amount of loss.” Despite the language of the appraisal provision, the Insurer sought an order requiring the appraisers to state the amount of loss separately for each portion of the property in dispute and for each major building component including separate amounts of loss for roofs, exterior walls, windows, and interior water damage.

Referencing the Texas Supreme Court’s prior stated emphasis on the propriety of avoiding judicial involvement pre-appraisal, the Court declined the Insurer’s invitation to set the scope of the appraisal and held that the request was beyond the policy requirement that the appraisers “state separately the value of the property and amount of loss.” While the Court did not forbid the appraisers from using any form which enabled them to “state separately the value of the property and the amount of loss”, the Court refused to require any particular approach.

A Consequential Ruling: Florida Supreme Court Rejects Recovery of Consequential Damages in First-Party Breach of Contract Actions

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John David Dickenson, Chad A. Pasternack and Alexandra Schultz | Property Insurance Law Observer

In first-party breach of insurance contract actions, the parties oftentimes dispute whether the policyholder may seek damages that are not explicitly provided for in the policy, with the policyholder arguing such indirect damages flow from the alleged breach of contract. By doing so, policyholders blur the lines between breach of contract actions and bad faith actions. The Florida Supreme Court recently considered this issue in Citizens Property Insurance Corp. v. Manor House, LLC,[1]  and held that “extra-contractual, consequential damages are not available in a first-party breach of insurance contract action because the contractual amount due to the insured is the amount owed pursuant to the express terms and conditions of the insurance policy.”

Manor House arose from a Hurricane Frances insurance claim filed by an owner of apartment buildings. Citizens issued payments totaling approximately $1.9 million. Approximately nineteen months after the loss, Manor House’s public adjuster asked Citizens to reopen the claim. After reopening the claim, Citizens made additional payments and continued its adjustment. Several months after reopening the claim, Citizens’ field adjuster informally estimated the actual cash value of the loss at approximately $5.5 million and the replacement cost value at $6.4 million.

At around the same time, there was a change in ownership at Manor House. The new owner demanded Citizens pay the “undisputed” amount of $6.4 million and demanded appraisal. Citizens sought documentation regarding the new owner’s authority to act on behalf of Manor House, as well as other documentation such as invoices and contracts for work in progress. Manor House then filed suit seeking, amongst other things, extra-contractual damages related to rental income that it allegedly lost due to delay in repairing the apartment complex based on Citizens’ “procrastination in adjusting and paying the Manor House claims.”[2]

The trial court granted Citizens’ motion for partial summary judgment regarding the lost rental income. On appeal, the Fifth District reversed, concluding that “the trial court’s ruling ignores the more general proposition that ‘the injured party in a breach of contract action is entitled to recover monetary damaged that will put it in the same position it would have been had the other party not breached the contract.”[3] The Fifth District concluded that consequential damages are available in breach of insurance contract actions, provided that the damages “were in contemplation of the parties at the inception of the contract” and can be proven “with reasonable certainty.”[4]

The Florida Supreme Court reversed the Fifth District’s decision, agreeing with the trial court that the parties must rely on the express terms and conditions of the insurance policy, which, in this case, did not provide for lost rental income coverage. The Court reiterated that under Florida law, courts are to give effect to the intent of the parties as expressed by the policy language, rather than the “reasonable expectations” of the insured. Accordingly, “extra-contractual consequential damages are not available in a first-party breach of insurance contract action because the contractual amount due to the insured is the amount owed pursuant to the express terms and conditions of the policy.”[5] For a policyholder to obtain extra-contractual consequential damages, it must pursue and prove bad faith under Florida Statutes § 624.155.

Manor House affirms a simple principle: the terms and conditions of the insurance policy govern disputes over coverage.  In a first-party property breach of contract case, the only remedies “contemplated” by the parties are those set forth in the policy’s express terms.

[1] Citizens Prop. Ins. Corp. v. Manor House, LLC, No. SC19-1394, 2021 WL 208455 (Fla. Jan. 21, 2021).

[2] Id. at *2.

[3] Manor House, LLC v. Citizens Prop. Ins. Corp., 277 So. 3d 658, 661 (Fla. 5th DCA 2019).

[4] Id.

[5] Manor House, 2021 WL 208455, at *2 (Fla. Jan. 21, 2021).

Render Unto Caesar: Considerations for Returning Withheld Sums

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William E. Underwood | Jones Walker

Withholding sums during a dispute can be an effective and perfectly legitimate means to protect against the harms caused by another party’s breach.  However, withholding too much money during a dispute can turn a position of strength into one of weakness.  

“Why should I fund the other side’s litigation war chest?” and “Isn’t this just a display of weakness?”  are common questions raised by contractors when this issue is discussed. Often, the contractor is well within its contractual or legal rights to withhold money from a breaching subcontractor (another topic for another day).  But it may not always be in a contractor’s best interest to withhold every single penny available. 

This article addresses some of the long-term implications for failing to return withheld sums, including the potential to recover attorneys’ fees, possible bad faith, accruing interest, and overall litigation costs.  Admittedly, it can be hard to give money back in the middle of a dispute.  But sometimes it can positively impact the overall outcome of the case.

Withholding Too Much Money Can Impact Attorneys’ Fees – Yours and Theirs

 Attorneys’ fees are a huge consideration when entering formal litigation.  But they can also matter during “just” an informal dispute, as these fights still cost money and a party can later seek these fees if a lawsuit or arbitration is filed.  And withholding too much money can impact a contractor’s ability to later recover attorneys’ fees.  Depending on your contract and/or applicable state law, the “prevailing party” may be entitled to recover attorneys’ fees at the conclusion of litigation.  But how do you determine if you are the prevailing party?  Is winning $1.00 enough?  Or do you have to do more? 

Although it differs state-to-state, the general rule is that the prevailing party is the one who prevails on its “substantive claims.”  This general finding is still not particularly informative, and it is obviously important to understand the laws and rules governing your specific dispute, but usually a contractor must recover more than a few dollars to claim victory and recover attorneys’ fees. 

With that in mind, withholding too much money going into litigation can impact a contractor’s ability to “prevail.”  Although there may be a defensible basis to withhold all of that money, the withholding contractor may ultimately still have to return some of the money to the subcontractor depending on the final outcome of the litigation.  If that is the case, then the subcontractor can argue that it prevailed—and is therefore owed its attorneys’ fees; not the other way around—because it was able to recover a portion of money that it (correctly) alleged was wrongfully withheld.  Or at the very least, an argument can be made that the withholding contractor did not “prevail” on its substantive claims because it had to give some of the money back. 

Regardless, having to return a portion of withheld funds at the conclusion of litigation can impact a contractor’s ability to recover attorneys’ fees.  And in some instances it can even lead to paying the other sides fees.  This payment of fees can have a significant impact on the overall financial outcome of a case.  So returning a portion of withheld money—if appropriate—can positively impact the overall financial result of the case. 

Withholding Too Much Money Can Lead to Counterclaims for Bad Faith

Withholding sums that are plainly not in dispute can quickly lead to a counterclaim for bad faith—which is generally defined as violation of basic standards of honesty and fairness in contractual dealings.  And in many states, a successful bad faith claim can offer the claimant an avenue to recover attorneys’ fees (in addition, or as an alternative, to any of the “prevailing party” considerations discussed above). 

Most states recognize some form or another of bad faith within the context of contractual dealings (but again, it is always important to understand the laws governing your dispute).  Construction contracts are no different.  And clearly withholding more money than reasonable or defensible often provides solid grounds for the other party to claim bad faith.  Although the bar to prove bad faith is usually high, it should not be taken lightly.  Not only can a bad faith claim serve as a defense to a breach of contract, but it can also serve as an affirmative claim and a basis for attorneys’ fees. So although a contractor may have good claims and a solid basis to withhold some money, objectively withholding too much can jeopardize the chances for success by opening the door to accusations of bad faith by the other side.

So again, a contractor can quickly ruin a good claim by withholding too much money.

Interest Can Accrue on Improperly Withheld Sums.

 In many states, improperly withheld sums can (and will) accrue interest during the lifecycle of the dispute.  For example, many states have prompt payment statutes that provide for the recovery of high interest rates on withheld sums if those must be returned.  And no claim for bad faith or other improper behavior is needed to recover this interest.  For example, Georgia’s Prompt Payment Act (O.C.G.A. § 13-11-1 et seq.) provides for an interest rate of 12% per annum on unpaid sums owed to a contractor or subcontractor.  This interest can add up quickly, particularly because formal disputes can drag on for years.  And generally any portion of withheld money that must be returned is subject to the accrual of this interest (assuming the subcontractor met the statutory requirements). 

But even if a contractor does not meet the requirements to recovery interest under a prompt payment act, many states will allow contractors to recover what is known as prejudgment interest on withheld sums that are later returned.  For example, New York allows for a prejudgment interest rate of 9% per annum.  This interest is typically added to any withheld sums that must be returned at the conclusion of a dispute.  And it usually begins to accrue at the outset of the dispute. 

So withholding too much money, even if it is not in bad faith, can still lead to a reduced recovery once improperly withheld sums are returned with interest.

Returning A Portion of Withheld Sums Can Increase Your Chances of Winning And Possibly Lower Your Litigation Costs

Returning a portion of withheld funds (if appropriate) can also have practical benefits for the remainder of a dispute.  On a basic level, it can narrow the number of issues the parties are fighting over, which in turn can decreases costs and fees.  If there is less to fight about, then (in theory) there is less to spend money on. 

But returning a portion of withheld sums for weaker claims can also allow a party to focus on its strongest claims—thereby increasing its chances of “prevailing” and potentially recovering its attorneys’ fees (as discussed above).  Much like the raccoon that refuses to drop a shiny object, sometimes it is best to let go of claims that may have initially seemed appealing but ultimately prove worthless.  Doing so can allow a party to pursue the strongest claims while maximizing its overall chances for recovery.

Conclusion

Withholding too much money can have long-term negative impacts on otherwise good claims.  And although this article does not address every single negative consequence of withholding too much money, it does highlight some of the very real financial impacts that it can have on a claim.  So when entering a dispute, it is important to consider these impacts and to adjust your withholding strategy accordingly.

Who Is The Declarant? And Why Does It Matter?

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Samuel B. Franck | Ward and Smith

The concept and designation of the “Declarant” arise from the formation of a planned community or a condominium. 

When the developer declares land to restrictions described in a “Declaration” for a planned community or a condominium, that developer has the opportunity to reserve certain rights to itself as the “Declarant.”  Although there is no requirement that the developer reserve such declarant rights, it is common practice to do so and very unusual for a developer to form a planned community or condominium without reserving declarant rights.  Subsequently, any party who holds any of the reserved declarant rights is a Declarant.

Although people often associate the concept of “developer” with a specific natural person, the Declarant is often an entity, such as a corporation or a limited liability company.  While a natural person may very well be authorized to act on behalf of a corporate Declarant, that authority does not vest the declarant rights in the natural person.  Similarly, other entities owned by the same person or by the Declarant itself, for that matter, are not a Declarant unless they have received an assignment or other transfer of declarant rights.

Declarant Rights

Declarant rights are reserved in the recorded Declaration for a planned community or condominium and are part of the contract among the lot or unit owners, the owners association, and the Declarant.  The developer of real property is generally free to restrict that real property however it sees fit.  Therefore, subject to only a very few statutory limitations, a Declarant is free to establish and reserve whatever declarant rights it wants at the time that a planned community or condominium is formed.  Although the North Carolina Planned Community Act and the North Carolina Condominium Act clearly contemplate declarant rights, define them, and, in some limited circumstances restrict the extent of those rights, there are no declarant rights created by statute.  If a declarant right is not expressly reserved in the Declaration, it does not exist.

There Are No Secret Declarants

Declarant rights can be transferred, in whole or in part, to other entities or persons.  Successors often include home builders, successor developers, and lenders.  Therefore, the Declarant identified in the original Declaration for a planned community or condominium may no longer be the Declarant or may share the declarant rights with other parties.  The current identity of the Declarant or Declarants can almost always be determined because the law requires that transfers of declarant rights be evident on the public records.  Transfers are not effective until the date that document is recorded or filed.

Transfer of Declarant Rights

The standard way to transfer declarant rights is pursuant to an Assignment of Declarant Rights, executed by both the Declarant-transferor and the new Declarant-transferee and recorded in the office of the Register of Deeds in the county where the planned community or condominium is located.  Technically, any recorded instrument that:  (i) adequately describes the declarant rights transferred, (ii) is executed by both the transferor and the transferee, and (iii) is recorded in the office of the Register of Deeds may be sufficient to transfer the rights.

In North Carolina, declarant rights can also be transferred without the consent of the Declarant through foreclosure, bankruptcy sale, tax sale, judicial sale, or receivership proceedings pursuant to an explicit statutory mechanism.  Although these non-consensual transfers are not all recorded in the Register of Deeds’ office, the others will be filed in other public record locations – either the office of the county Clerk of Court or the office of the Clerk of the Bankruptcy Court in the applicable federal judicial district.

The common element of all of these mechanisms is that, with sufficient research, one can determine the holder or holders of the declarant rights by researching and analyzing the public records.  Therefore, provided that you are willing to do the research, or retain legal counsel to do that research for you, you can identify the Declarant or Declarants of a North Carolina planned community or condominium.

There May Be More Than One Declarant

Because declarant rights can be transferred in whole or in part, there may be more than one Declarant of a planned community or condominium at any given time.  The division of declarant rights works cleanly when the rights transferred relate to specific parcels of real property, either property already included in the planned community or condominium, or development property subject to a Declarant’s right to incorporate the property into the planned community or condominium at a later time.  It is more difficult to divide control-oriented declarant rights.  For example, it creates a practical problem to have more than one Declarant authorized to appoint members to the board of directors of the owners association.

Another area where there may be multiple Declarants is in master communities that include condominiums or other sub-communities.  In such projects, which may include residential, commercial, or mixed use arrangements, there are often different Declarants from the beginning, one for the master community and others for each of the sub-communities.  It is important to evaluate the status of the Declarant for each community and condominium regime that impacts the property in which you are interested.

Owners, buyers, owners associations, and lenders should carefully consider any scenarios that include, or may include, multiple Declarants, not only to identify the Declarants for a particular project and the extent of each of their rights, but also with an eye toward identifying any problems that may arise out of competing interests in similar declarant rights.

The Termination of Declarant Rights

A Declarant’s authority ends when all of the declarant rights for that particular Declarant expire or terminate.  There are some limited statutory provisions that require the expiration of certain specific declarant rights, but otherwise, the declarant rights will endure until they either expire by their own terms or are voluntarily terminated by the Declarant.  In a North Carolina condominium, the Declaration must describe a time period after which the declarant rights must terminate, but for most rights, there is no limit on the allowable length of that time period.  No such requirement is imposed on planned communities in North Carolina, and we often find declarant rights for planned communities that have no specific expiration date.

The survival of declarant rights after the time period that a Declarant is actually exercising those rights is a problem for all concerned.  Those rights carry potential liability for the Declarant, which makes them an undesirable asset after the Declarant no longer has a use for them.  It is also awkward for owners and owners associations to function and flourish when stale declarant rights remain.  Although a Declaration may provide that some or all of the declarant rights expire upon the Declarant’s sale of the last lot, they often do not.  Furthermore, the development activity for a planned community or condominium may well be completed long before the last Declarant sells its last unit or lot.

Conclusion

Determination of the identity of the Declarant or Declarants is an important aspect of any party’s evaluation of a planned community or condominium.  Whether evaluating the asset as a successor developer, a lender, an owners association or a homeowner in a planned community or condominium regime, it is important to know which party or parties hold the declarant rights.  The longer the developer period for a project, the more complex the inquiry, but the holders of declarant rights may always be determined with careful and thorough review of the public records.