Mechanic’s Liens and Leases Don’t Often Mix Well

Christopher G. Hill | Construction Law Musings

As those who read my “musings” here at this construction law blog are well aware, the topic of Virginia mechanic’s liens is one that is much discussed.  From the basic statutory requirements to the more technical aspects of these tricky beasts.  One aspect of mechanic’s liens that I have yet to discuss in detail it how these liens attach in the situation where the contractor does work for a lessee and not for the owner of the underlying fee interest in the property.

A recent case out of the Western District of Virginia federal court, McCarthy Building Companies Inc. v. TPE Virginia Land Holdings LLC,  discusses the interaction of Va. Code 43-20, work on a leasehold, and parties necessary to any litigation relating to a lien for the work on that leasehold. The basic facts, outlined more thoroughly in the linked opinion, are these.  MBC provided certain work to TPE Kentuck Solar, LLC on property leased from TPE Virginia Land Holdings, LLC.  The lease was for a fixed term and for a fixed amount regardless of the work performed at the property.  MBC was unpaid by the Kentuck entity and then recorded a lien on the property and then sued to enforce that lien and for unjust enrichment against TPE Land Holdings.  TPE Land Holding filed a motion to dismiss the mechanic’s lien and unjust enrichment counts.

The Court heard oral argument and then went into an analysis of the above-referenced statute and whether TPE Land Holdings was a necessary party that had any interest in the “property” subject to the lien.  The Court put the question as follows:

The question, therefore, is not who has an interest in the land generally; rather, the court must ask who has an interest in the “part” of the land that Kentuck possesses. Specifically: Who has an interest in Kentuck’s leasehold interest?

Upon review of the lease and the relationships among the parties, the Court determined that the only party with an interest in the leasehold was Kentuck and that no action on the lien could diminish the property interest in the underlying property owned by TPE Land Holdings.  In short, TPE Land Holdings gave up its interest in the leasehold when it leased the land to Kentuck.  Even in the event that the lien suit lead to foreclosure, the worst that could happen is a new tenant would take over the lease and TPE Land Holdings would have potentially worse luck enforcing the lease.  Even in this scenario title to the underlying land would not be affected by the lien or its enforcement.  Therefore, the Court stated, TPE Land Holdings is not a necessary party or even a proper party to the lien counts and must be dismissed.

The Court dismissed the unjust enrichment count as well.  The Court stated that due to the fixed nature of the lease payments along with the fact that MBC failed to plead the requisite elements of an unjust enrichment claim, key among them that TPE Land Holdings was aware it may have to pay for the work performed under the contract with Kentuck.  Aside from MBC’s failure to plead all of the elements of such a claim, the Court stated that nothing MBC did affected the value of the leasehold from the perspective of TPE Land Holdings given the way the lease was drafted such that the work at the property would not affect the lease payments or other lease aspects that were set long before the work was performed.

My take?  Aside from the usual advice to read the opinion in full and to consult an experienced Virginia construction attorney, this case is a good primer on the interaction of leases and Virginia mechanic’s liens.  I recommend it to your reading.

Environmental Justice: A Changing Landscape for Virginia Developers

William Shewmake | Woods Rogers PLC

A company in the formative stages of locating, permitting, and constructing any substantial industrial or commercial project needs to be keenly aware that the legal and regulatory landscape related to environmental justice is changing in Virginia. We anticipate that change will accelerate in the coming year.

The Virginia Department of Environmental Quality (DEQ) commissioned an environmental justice study by SKEO Solutions, Inc. which issued a report in October 2020 (PDF). The report contains numerous recommendations the DEQ is likely to adopt. One of the first is to begin the process of hiring a Director for Environmental Justice, which is underway.In the General Assembly session just ended, the House and Senate approved competing bills to create a permanent environmental justice advisory group that would include representatives from state agencies across the spectrum. This group would establish policies and recommend statutory and regulatory changes to promote the goals of environmental justice. While the Senate and House could not reconcile their respective bills during this past legislative session, new environmental justice legislation is likely to emerge and pass in the General Assembly session next year.

Moreover, the Governor’s current environmental justice advisory group has recently issued a report with recommendations, and Governor Northam ordered that the advisory group remain in place.

What is environmental justice?

While it is unclear what precise definition of environmental justice Virginia will ultimately adopt, the concept of environmental justice generally involves concentrating intensive, disruptive projects in majority-minority and less affluent communities. According to the U.S. Environmental Protection Agency (EPA):

Environmental justice is the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies. EPA has this goal for all communities and persons across this Nation. It will be achieved when everyone enjoys the same degree of protection from environmental and health hazards and equal access to the decision-making process to have a healthy environment in which to live, learn, and work.

Historically, major projects, such as heavy industry and substantial infrastructure projects like roadways, have disproportionately burdened poor communities and communities of color with pollution and physical dislocation. The people who live in these communities had little say in the process because of the lack of resources needed to affect the outcome.

Why is there a need for environmental justice?

For years, several factors contributed to the pattern of concentrating intensive uses in historically underrepresented communities.

  • Discrimination and implicit bias
  • Cheaper land and lower development costs
  • Poorer and minority communities represented a path of least resistance. As an experienced zoning attorney can attest, no matter how meritorious the project and appropriate the site selection, obtaining zoning for a large intensive use near an affluent community can be an arduous and uncertain venture.

How can developers respond to environmental justice concerns?

In the wake of Friends of Buckingham v. Virginia State Air Pollution Control Board (January 2020) and the administration and General Assembly’s recent focus on environmental justice issues, developers should assume that simply complying with environmental laws and regulations may be insufficient when addressing environmental justice issues. Failure to proactively address these issues could delay a project.

While we cannot predict the details of environmental justice policies and regulations that will be adopted in the future, companies should consider the following when approaching a potential project:

  • Identifying potential nearby environmental justice communities early is a key step.
  • Mitigation of a project’s impact on these communities will become more demanding.
  • Greater engagement with any potential environmental justice community will be ultimately beneficial.
  • The universe of projects that implicates an environmental justice analysis will substantially expand. The analysis will no longer be confined to substantial infrastructure projects and heavy industry, but will likely include larger commercial projects such as distribution and data centers.

Thus, for any larger commercial or industrial project, we strongly recommend you consider performing a demographic study near the outset of the project. The study should determine if communities, including micro-communities, exist in the area of the project that might qualify for environmental justice consideration. The results of that study may influence your site selection when deciding among competing sites as well as how you approach the project as you go forward. Your being in a position to persuasively argue that your project does not impact a community that invokes environmental justice consideration could expedite your permitting process, reduce your development and operational costs, and lessen potential mitigation measures.

If the site you select might involve environmental justice considerations, you should be prepared to explain why alternative sites are not preferable and the steps you are taking to mitigate any negative effects of your project. We predict that DEQ will be requiring a more detailed alternative site analysis and an explanation of what steps the applicant is taking to mitigate impacts on minority and less affluent communities.

You also should adopt a process that demonstrates your forethought and commitment to engaging possibly affected majority-minority and poorer communities. We recognize that this can involve a delicate consideration of how and when to open a dialogue because you want to establish a good faith line of communication while not simply providing fodder to those who will oppose your project no matter the merits and no matter the steps you are willing to take to address very legitimate concerns. A first step is to identify and establish a dialogue with community leaders while recognizing that large projects often require confidentiality in the formative stages. One-on-one conversations with community leaders and community partners often set a better tone than surprising community members in a public hearing at the beginning of the formal permitting process. When you have those meetings, you also need to be able to explain the benefits your project will provide to those most affected.

This type of environmental justice approach also may provide you with some protection from unfair and unfounded accusations of economic injustice. As anyone experienced in the zoning and permitting processes can tell you, many times opponents of a project will not let facts get in the way of an argument. They typically adopt a “kitchen-sink” approach when opposing a project. Because the accusation of racial or economic insensitivity can taint a project, no matter how unfounded the claim may be, you must be prepared for opponents who will try to manufacture any conceivable environmental justice argument.

Preparing for unfounded claims does not downplay the very legitimate environmental justice concerns that exist or the historic pattern of imposing intensive projects disproportionately on poorer and majority-minority communities. However, baseless claims involving environmental justice will become more prevalent, so you need to prepare and not find yourself in a reactionary and defensive posture if they occur.

In conclusion, if any possibility exists that a nearby community may qualify as an environmental justice community, identify that community early in the process. Then develop a strategy of how and when to engage the community and establish an open line of communication while keeping in mind the need for confidentiality during the project’s formative stages because discussing your project publically too early when you do not have answers to important questions can be just as damaging as waiting too long to establish a dialogue. Remember, winning friends near the beginning of the process is easier than converting adversaries later. Taking these steps may pay dividends as the project unfolds.

Even Where Fraud and Contract Mix, Be Careful With Timing

Christopher G. Hill | Construction Law Musings

I have often discussed the limited circumstances under which a construction contract claim and a fraud claim can coexist.  A recent case from the Western District of Virginia federal court demonstrates that care is necessary even in those limited circumstances.

In Fluor Fed. Sols., LLC v. Bae Sys. Ordinance Sys., the Court examined the question of a fraud statute of limitations under Virginia law.  The basic facts found in the Complaint are these:

In 2011, the United States Army awarded BAE Systems Ordinance Systems Inc. a basic ordering agreement under which BAE was responsible for modernization projects at the Radford Army Ammunition Plant. This action stems from a subcontract between Fluor Federal Solutions LLC and BAE, under which Fluor agreed to design and construct a new natural gas boiler at the plant. Fluor has completed work on the project, and BAE has accepted that work. Nonetheless, Fluor claims that BAE has refused or failed to pay for the balance of the project costs. Fluor alleges that BAE received several changes to its prime contract from the Army but did not pass those changes along to Fluor until after BAE solicited a bid from Fluor and entered a contract with Fluor to build a temporary facility. Instead, BAE continued to misrepresent the scope of the project. Fluor alleges that the change in plans increased costs substantially, but that BAE withheld information about those changes so that it could solicit lower bids. Fluor alleges that it requested a copy of BAE’s prime contract on numerous occasions, but BAE failed to provide a copy of it. Instead, Fluor submitted a request under the Freedom of Information Act. It received a copy of BAE’s prime contract on Oct. 3, 2018.

Based upon the above set of facts, Fluor then filed its complaint alleging fraud by BAE in this court on Oct. 17, 2019 claiming that BAE fraudulently induced Fluor to bid on a temporary facility that was significantly less costly than what was ultimately constructed and that BAE continued to misrepresent the scope of the project throughout construction.  BAE filed a Motion to Dismiss the Complaint based upon Virginia’s 2-year statute of limitations on fraud actions.  The relevant statute of limitations provides that a fraud complaint must be filed within 2 years of when the fraud was discovered or should have been discovered through reasonable due diligence. BAE argued, and the Court agreed, that the statute of limitations accrued when Fluor and BAE entered into a contract modification in November of 2016 that eliminated the requirement of a temporary facility and therefore Fluor should have known of the misrepresentation as of that date, a date more than 2 years prior to the filing of the Complaint.

The Court went further to address a tolling argument by Fluor.  The Court rejected that argument, stating:

Fluor had knowledge of all the facts necessary for its cause of action to accrue under Virginia law. Therefore, BAE’s alleged failure to disclose the terms of its prime contract did not prevent Fluor from discovering its cause of action. Moreover, Fluor asserts only that BAE did not provide a copy of its prime contract. Fluor does not suggest that BAE ever affirmatively misrepresented or concealed its fraud. BAE’s silence, without more, is insufficient to toll the statute of limitations.

In short, just because BAE’s passive failure to provide information was not enough to stop Fluor’s reasonable discovery of the facts necessary to know of the misrepresentation.  BAE would have had to affirmatively hide facts and misdirect Fluor for the fraud statute of limitations to be tolled.

As this and prior cases discussed here at Construction Law Musings attest, fraud in construction can be fraught with pitfalls.  As I always recommend, be sure to discuss this case and the facts of your potential claim with an experienced Virginia construction attorney to be sure that you meet both the limited factual circumstances for such a claim and that you meet the relevant statute of limitations.

2021 Construction Related Bills to Keep an Eye On

Christopher G. Hill | Construction Law Musings

Each year here at Musings, I try and highlight some key construction industry-related bills that are winding their way through the Virginia General Assembly.  This year is no different, though this year does not have the action level that prior years have had.

Without further ado, here are those that I spotted and which I will be “Tracking” as they move through the sausage-making process:

HB2288– Virginia Public Procurement Act; construction contracts; requirement to submit list of subcontractors. Requires bidders or offerors on contracts for construction of $250,000 or more to submit along with their bid or proposal a list of all subcontractors, regardless of tier, that the bidder or offeror intends at the time of submitting the bid or proposal to use on the contract to perform work valued at $50,000 or more, including labor and materials. The bill requires such list to include certain information about each contractor. This bill also includes a re-passage provision that requires that it be re-enacted in the 2022 session to become effective.  Finally, the Senate General Laws and Technology committee has continued this to the First Special Session.

SB1209– Liability of general contractor for wages of subcontractor’s employees. Provides that there is a valid defense to a claim of nonpayment of wages by a general contractor to a subcontractor’s employees if the general contractor obtains a written certification that (i) the subcontractor and each of his sub-subcontractors has paid all employees all wages due for the period during which the wages are claimed for the work performed on the project and (ii) to the subcontractor’s knowledge all sub-subcontractors have also paid their employees. The bill also provides that the terms “general contractor” and “subcontractor” shall not include persons solely furnishing materials for the purposes of the liability of a contractor for wages due to a subcontractor’s employees.

This bill passed the House and was continued to Special Session 1 by Senate committee.

SB1305– Virginia Public Procurement Act; construction contracts; subcontractor workforce requirements. Requires all public bodies in a locality with a population in excess of 25,000 and covered institutions, defined in the bill, to include in every construction contract of more than $500,000 certain provisions related to the outsourcing of subcontracted work, which a contractor shall agree to during the performance of such contract. Such provisions mandate that a contractor shall only utilize subcontractors that certify in writing to the contract that they will outsource no more than 10 percent of the cost of the work subcontracted for, excluding the provision of materials, with specified exceptions.

Bill passed the Senate and has been postponed to the first Special Session by the House.

SB1108–  General district courts; jurisdictional limits. Increases from $25,000 to $50,000 the maximum civil jurisdictional limit of general district courts for civil actions for personal injury and wrongful death. The bill contains an emergency clause.

This Bill has passed the Senate and the House Civil Courts subcommittee has recommended reporting it out of committee with amendments.

As always, I recommend that you read the full text of these bills and consult a Virginia construction lawyer with questions.  If there are other bills of note that I have missed, please let me know in your comments or by email.

Another Reminder that Contracts are Powerful in Virginia

Christopher G. Hill | Construction Law Musings

Regular readers of this construction law blog are likely tired of my refrain that the contract is king here in Virginia.  With few exceptions, some of which have been passed in the last few years, the contract can and does essentially set the “law” for the transaction.  A recent opinion from the 4th Circuit Court of Appeals confirms this principle.

In Bracey v. Lancaster Foods, LLC, the Court looked at the question as to whether parties can contractually limit the statute of limitations in which a plaintiff or arbitration claimant can file its claim for relief.  In Bracey, Michael Bracey, a truck driver, sued his former employer, Lancaster Foods, asserting various employment law claims. Lancaster moved to dismiss and compel arbitration based on the terms of an alternative dispute resolution agreement Bracey signed when he was hired, under which he consented to arbitration of any employment-related claim and waived all rights he may otherwise have had to a trial. Bracey challenged the arbitration clause, one that also included a 1-year limitation on the time in which Bracey was allowed to file any claim, as unconscionable.  A federal judge in Maryland agreed and granted the motion to dismiss.

After dispensing with some procedural formalities, the 4th Circuit agreed with the lower court stating:

[a]s a general rule, statutory limitations periods may be shortened by agreement, so long as the limitations period is not unreasonably short” and the statute at issue does not prohibit a shortened limitations period. In reaching this decision, we explained that “[c]ourts have frequently found contractual limitations periods of one year (or less) to be reasonable.

While Bracey argues that it would be difficult to exhaust his claims before the EEOC prior to making a demand for arbitration, it is not entirely clear that administrative exhaustion would even be required when the parties contractually agree to resolve employment disputes in arbitration.

In short, even in the instance where there could be other factors that would make the shortened limitations period a burden on a claimant, there is no categorical rule that states that a shorter limitations period is unconscionable when entered into by contract.

While this is not a construction case, it does highlight the need to carefully review your construction contracts with the help of an experienced Virginia construction attorney.  Absent a careful review and possible edit of the contract, you could be stuck with a limitations period shorter than that of the applicable statute.

As always, I recommend that you read the opinion in its entirety and draw your own conclusions.