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Construction in Brief: 2016 Volume 3

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What’s New

By Kerstin Isaacs

Brief Note:

Greetings from the Editorial Team at Construction In Brief! We hope you had an enjoyable summer. We are gearing up for an exciting Fall with the opening of our new office in New York. Contractors working on residential projects in New Jersey should not miss the article, “New Jersey Courts Extend the Life of Liability for Condo Contractors”, and “Not So Fast! My Oil and Gas Lease Does What?” is a cautionary must-read for landowners involved in oil and gas leases.

We hope you will find some useful information in Volume 3 of Construction in Brief. Please let us know if there is any way we can assist you.

  Ashling Jennifer Allie
    Co-Editor-in-Chief    Co-Editor-in-Chief   Associate Editor

 

 

New Faces
Please join us in welcoming Scott Jeffreys, who joins the Firm as Controller. With over thirty years of experience in financial management, analysis and reporting, planning, and budgeting, Scott is responsible for the management and direction of the Firm’s accounting team. Prior to joining Cohen Seglias, he worked as a business and operations consultant.

Please also welcome Joshua A. Brand, who joins the Firm as an Associate in the Labor & Employment Group in Philadelphia. A former Assistant City Solicitor in the Labor and Employment Unit of the City of Philadelphia Law Department, Joshua brings substantial employment litigation and labor experience. He represents clients before administrative agencies, including the Equal Employment Opportunity Commission, Department of Labor, and Pennsylvania Human Relations Commission. He also provides counseling to businesses on employment-related issues, including employee leave, discipline, and other personnel policies. Joshua is a graduate of Temple University Beasley School of Law.

New Office in New York!
Our new address in New York is: 55 Broadway Suite 901 New York, NY 10006

Awards
We are proud to announce that five Cohen Seglias attorneys have been included in the 2017 edition of The Best Lawyers In America® in a variety of practice areas:

Ed Seglias - Construction Law/ Litigation Construction
George E. Pallas - Construction Law/ Litigation Construction
John A. Greenhall - Construction Law
Marc Furman - Employment Law Management & Labor Law Management
Judge Gene Cohen (Ret.) - Arbitration

Judge Cohen (Ret.) appointed to the Court of Common Pleas!
Congratulations to Judge Gene D. Cohen for being appointed by the Pennsylvania Supreme Court as a Senior Judge. He recently returned to the bench to assume his new position. We are grateful for the contributions the Judge has made to our clients and attorneys over the past three years and wish him the best!

Kerstin is the Firm’s Marketing Director. She can be reached at (215) 564-1700 or kisaacs@cohenseglias.com.


 

Explaining Key Amendments to the Pennsylvania Mechanics’ Lien Law

By Jason A. Copley and Daniel E. Fierstein

While use of the term “groundbreaking” in a construction law article may want for originality, it is an accurate description for recent amendments to the Pennsylvania Mechanics’ Lien Law. The amendments—signed into law on Oct. 14, 2014—will change the way liens are obtained. The law is set to go into effect in 2017, provided a state-operated website is operational by the end of this year.

Lien Law 101
As most members of the construction industry know, the lien statute permits contractors, subcontractors, and suppliers to secure payment for labor and materials they have supplied to a construction project with a lien on the property they improved. Because subcontractors and suppliers do not contract directly with the property owner and the owner is often not aware of all those performing work on the property, the current lien statute contains many strict filing requirements that serve to protect owners’ rights.

One such requirement is that subcontractors and suppliers must provide the owner with written notice of their intention to file a lien claim at least 30 days before a court filing. Parties who fail to comply with this requirement forfeit their lien rights.

When the amendments to the lien statute take effect, subcontractors and suppliers that work on projects registered with the state directory (described below) will be subject to a new pre-filing requirement that will require them to take action to preserve their lien rights at the beginning of the project.

What Are the Amendments?
The amendments require the state’s Department of General Services (DGS) to create an internet website called the State Construction Notices Directory. The directory will serve as a standardized statewide system for filing notices for construction projects costing in excess of $1.5 million (searchable project). If an owner chooses to register a searchable project with the directory, notices will be searchable by owner, contractor, property address, and a unique identifying number.

There are four types of notices defined in the amended lien statute: notice of commencement, notice of furnishing, notice of completion, and notice of nonpayment. None of these notices or associated filing requirements will take effect until the directory is operational. By statute, the directory must be operational by Dec. 31, unless the DGS provides sufficient reasons for a delay in the directory’s implementation.

Notice of Commencement
This notice is optional and allows project owners or agents to require notice from subcontractors who want to preserve lien rights. The notice of commencement must be filed before work begins. A contractor may file the notice of commencement as an agent if it is authorized to do so by contract. The notice of commencement must contain certain information that includes, but is not limited to:

  • Name, address, and email address of the contractor;
  • Name, location, and county in which the searchable project is located;
  • Legal description of the property, including tax identification number;
  • Name, address, and email address of the searchable project owner; and
  • If a bonded project, name, address, and email address of a surety that has issued performance and payment bonds (and bond numbers).

The notice of commencement is the key to the amendments because if an owner elects to file one, the filing triggers an obligation for subcontractors and suppliers to file a notice of furnishing in order to preserve their rights.

Notice of Furnishing
If a notice of commencement is filed, a subcontractor or supplier performing work must file a notice of furnishing within 45 days of commencing work or first providing materials to the job site. The notice will provide information about a subcontractor’s scope of work and who hired them to perform the work.

The lien statute makes clear that a subcontractor who fails to comply substantially with the notice of furnishing requirement forfeits the right to file a mechanics’ lien claim. It also requires a contract for a searchable project to include written notice that a failure to file the notice of furnishing will result in the loss of lien rights.

This front-end notice requirement is interesting because it is in addition to the existing back-end notice requirement whereby subcontractors and suppliers must provide owners with a written notice of intention to file a claim at least 30 days before filing. The notice of furnishing must contain certain information that includes:

  • A general description of labor or materials furnished;
  • Name and address of the person providing the labor or materials;
  • Name and address of person who contracted for the labor or materials; and
  • A description of the searchable project based on the description in the notice of commencement.

The Amendments Aim to Protect Subcontractors and Suppliers from Abuse
To protect subcontractors and suppliers from attempts to discourage use of the directory for the notice of furnishing, the lien statute makes it a violation of the statute to suggest, request, encourage, or require a subcontractor not to file a notice of furnishing.

This type of violation is considered a second-degree misdemeanor and creates a civil cause of action against the violating entity. To that end, an aggrieved subcontractor may sue to recover actual damages caused by the violation, and the court may award reasonable attorney fees and court costs, which certainly gives the provision some teeth and may actually lead to more litigation because of the ability to recover these fees and costs.

If a subcontractor fails to comply with the notice of furnishing requirements, they may still file a mechanics’ lien claim if it proves that an owner, owner’s agent, or contractor committed this type of violation and that the violation directly caused the subcontractor’s noncompliance with the notice requirement.

Notices of Completion and Nonpayment
The owner of a searchable project may also file a notice of completion within 45 days of the actual completion of work, which is further defined in the lien statute. Owners are not required to file this notice, and the lien statute limits a court’s ability to use the notice of completion to determine whether a party has complied with certain timing requirements of the lien statute.

Subcontractors who have not been paid in full for their work on a searchable project may also (but are not required to) file a notice of nonpayment on the directory. This notice is considered informational only and cannot be used to affect or limit the subcontractor’s rights under the lien statute. The lien statute also makes clear that filing a notice of nonpayment does not satisfy other written notice requirements (e.g., notice of furnishing or a 30-day notice to the owner of intent to file a lien).

When filed, these notices may help owners and their agents to confirm the payment status of lower-tiered contractors and the risk of prospective liens, and may even help facilitate payment to those that have not been paid. The notices may also help lower-tiered contractors and suppliers to monitor the status of the project and its completion.

Likely Impact
While it is unclear exactly how the directory will affect industry behavior, it is reasonable to expect certain changes.

First, we expect many owners and contractors on searchable projects to file notices of commencement. While doing so will provide subcontractors and suppliers with easy access to important information that will help them protect their payment rights (e.g., payment bond numbers and a property’s legal description), it will also help owners and contractors identify all subcontractors and suppliers working on a searchable project, control the flow of money, and trigger a front-end notice requirement with which subcontractors and suppliers must comply to preserve their lien rights.

To further control the flow of money, owners and agents may increase their use of joint check payments at the end of projects to obtain proof of payment and what they can then expect to be a project insulated from all liens.

Second, we foresee changes to construction contracts, some of which the lien statute now mandates. For example, contracts for searchable projects must include written notice that failure to file a notice of furnishing will result in the loss of lien rights. Despite the required contract provision, subcontractors and suppliers who are unfamiliar with the amendments are at risk of missing notice of furnishing filing deadlines (thereby forfeiting their lien rights).

Third, bond claim activity may increase. Because owners must include payment bond information in the notice of commencement for bonded projects, that information will then be more accessible to subcontractors and suppliers at the beginning of a project who may be more inclined to pursue a bond claim.

Regardless of the net impact, it is critically important for members of the Pennsylvania construction industry to familiarize themselves with the new changes to the lien statute and modify their business practices accordingly. Until the directory is rolled out, all eyes are on the DGS and the approaching Dec. 31 deadline to roll out the directory. Many in the industry will be watching closely as the year gets set to come to a conclusion. 

Reprinted with permission from the August 16th edition of the Legal Intelligencer.
© 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com. 

Jason is Managing Partner and Dan is an Associate, both practicing in the Firm’s Construction Group. They can be reached at (215) 564-1700, jcopley@cohenseglias.com and dfierstein@cohenseglias.com.


 

New Jersey Courts Extend the Life of Liability for Condo Contractors

By Edward Seglias and Matthew R. Skaroff

In New Jersey, the time period within which a project owner may bring claims for design or construction defects, called the statute of limitations, generally begins upon substantial completion of a project. This means that a contractor or designer can only be sued within six years after substantial completion. However, there are exceptions to this rule, such as when a party cannot reasonably discover the damage, for example mold inside a wall. This exception is known as the discovery rule. New Jersey courts recently identified another exception that will surely extend the time in which a contractor or designer can be sued on certain construction projects.

In Palisades at Fort Lee Condominium Association, Inc. v. 100 Old Palisade, LLC, the Superior Court of New Jersey, Law Division, ruled that a condominium association could bring suit against contractors more than six years after the date of substantial completion. It determined that the six-year timeframe for such lawsuits should not start at substantial completion, but instead when unit owners take control of the association. 

In deciding this case, the Court explained that condominiums have a particular formation process and governance structure under New Jersey law. A sponsor, usually the developer, establishes a condominium by filing a master deed and public offering statement. Upon filing, the sponsor becomes the owner of every individual unit and the corresponding percentage of the property’s common elements. The master deed also provides for the creation of a condominium association to be governed by a board of directors. Once a certain percentage of the units are sold, control transfers from the sponsor to the condominium association. Once this transfer occurs, the condominium association has exclusive authority to bring claims regarding the common elements in the building. 

Palisades involved a project with numerous undiscovered construction defects. The project consisted of multi-story additions to a residential tower and other facilities. Construction was substantially completed in 2002. Ordinarily the six-year statute of limitations for defects would have started to run in 2002. However, the owner operated the building as a rental property for two years and then in 2004, sold the building to another entity, which converted it into a condominium and created an association. Control did not transfer to the condominium association until 2006. A year later, the association commissioned an engineering report, which uncovered the underlying construction defects. In 2009 — seven years after substantial completion, and one year after the statute of limitations generally would have expired — the association brought a claim against the contractors on the project. 

The contractors challenged the timing of the suit, but the Court found that the limitations period for the association did not commence at substantial completion. Instead, the Court found it unreasonable to insist that the condominium association bring a lawsuit when the condominium was still controlled by the sponsor. The Court ruled that the time for bringing a lawsuit only began when control transferred to the condominium association. The Court further held that the discovery rule tolled the statute of limitations until 2007, when the association received the engineering report providing all of the facts necessary to support actionable claims.

Palisades significantly expands the life of liability for defects in new condominiums as it starts the clock on claims when the condominium association takes control, rather than at substantial completion. This transfer may not occur for years after substantial completion. The Palisades ruling, however, does not render project participants “forever liable” in New Jersey. Rather, in New Jersey, defendants are protected by a statute of repose, which generally bars any plaintiff — condominium association or not — from bringing a lawsuit for construction defects more than ten years from the date of substantial completion. If you are faced with what appears to be an untimely suit, please reach out to us to discuss possible defenses. 

Ed is a Partner and Matt is an Associate, both practicing in the Firm’s Construction Group. They can be reached at (215) 564-1700, eseglias@cohenseglias.com and mskaroff@cohenseglias.com


 

Can Construction Managers File a Mechanics’ Lien in the District of Columbia?

By Edward Seglias and Jackson S. Nichols

In recent years, a mechanics’ lien claimant who held a contract with an owner on projects in the District of Columbia may have received an unwelcome surprise when attempting to file its mechanics’ lien. If the claimant did not include physical labor in its description of work performed in the notice of intent to lien, there is a good chance the lien filing was rejected. This is surprising because the DC mechanics’ lien statute does not contain an express physical labor requirement. Nevertheless, the Recorder of Deeds, the District of Columbia office charged with recording lien and other land record filings, has refused to accept and record liens on this ground. The approach taken by the Recorder of Deeds has wide-ranging implications for contractors working in the District of Columbia. 

Construction Managers vs. General Contractors
A “construction manager” that is “at risk” typically refers to a contractor that does not self-perform any work, but instead subcontracts and manages all of the work performed by the subcontractors. The term is frequently used in a negotiated procurement such as a cost-plus arrangement, perhaps with a guaranteed maximum price. Traditionally, a “general contractor” self-performed a portion of the work and subcontracted the remainder, usually in a competitive bid process. In recent years, these lines have become blurred because contractors have tended to subcontract and manage all the work. As a result, a physical work requirement, as applied by the DC Recorder of Deeds, could affect the ability of construction managers and general contractors to file a mechanics’ lien in DC. 

DC’s Mechanics’ Lien Statute
Like most U.S. jurisdictions, the District of Columbia has created statutes regarding the ability of contractors to obtain a mechanics’ lien against a property. While DC’s statute is generally favorable to a contractor, the Recorder of Deeds has rejected the filing of mechanics’ lien claims where the contractor’s description of its work only included labor that was managerial, supervisory, and administrative in nature, not physical labor, and which did not otherwise involve supplying materials. 

It is important to note that this physical labor requirement applied by the Recorder of Deeds does not appear in the statute. While D.C. Code § 40-301.01 generally provides a right to obtain a mechanics’ lien for a “contractor who contracted with the owner,” it does not define the term “contractor” to preclude work that is not physical labor. Section 40-301.02 sets forth the required contents of the notice of intent to lien, but does not specify or otherwise suggest a requirement that the labor be physical in nature and not supervisory. In fact, in requiring a description of services performed, this section uses the term “work done” instead of “labor.” The definition of “Project” in Section 40-301.03 includes “any work or materials provided,” which suggests that labor was not intended to be limited to physical labor. Moreover, the statute does not state that work that is managerial, supervisory, and administrative in nature is ineligible for a lien.

Does Moore v. Axelrod Support the Physical Labor Requirement?
In Moore v. Axelrod, 443 A.2d 40 (1982), the DC Court of Appeals held that a person who acted as a real estate broker and property manager was entitled to a mechanics’ lien because that individual alleged that he “contributed labor and materials which enhanced the value of [the] property.” In reversing that court’s dismissal of the broker/property manager’s mechanics’ lien claim, the appeals court rejected the owner’s argument that a real estate broker/property manager for the owner was not a “contractor” under the statute and not entitled to assert a lien. The court clarified that the “status as a real estate broker or property manager does not of itself entitle one to assert a mechanics’ lien against an owner’s property.” The court instead focused on the allegations that he had “contributed labor and materials which enhanced the value of [the] property,” specifically that he supplied labor and materials to rehabilitate and improve all sixty apartment units. So, while one could argue that the court required a physical labor requirement for the broker/property manager to obtain a lien, the court did not specifically address the nature of the labor provided as physical or supervisory. Similarly, the court did not address whether a construction manager/general contractor has no right to a lien if physical labor is not part of the work performed.

The interpretation that physical labor is required for a lien is a minority view that most states have not adopted. Locally, neither Maryland nor Virginia imposes such a requirement. Both allow architects or engineers providing on-site supervisory labor to obtain mechanics’ liens.

Consequences of the Physical Labor Requirement
As long as the Recorder of Deeds continues to interpret its role in accepting lien filings as including confirmation of the description of physical labor, construction managers (and potentially, general contractors) may have difficulty filing their mechanics’ liens. Unfortunately for such contractors, if the Recorder of Deeds rejects their lien filing on this basis, there is no formal judicial review process in place. However, there are other avenues of potential relief that can be considered, depending on the value of the lien. As a result, until this policy changes, contractors should, to the extent they can, include in their description of work any physical labor they contributed or any materials they supplied. In addition, contractors should make sure not to wait until the last day before filing their lien claim. It may take several days of conversation before the Recorder of Deeds agrees to file your lien claim, the ultimate validity of which will be determined later. 

Ed is a Partner and Jackson is an Associate, both practicing in the Firm’s Construction Group. Ed can be reached at (215) 564-1700 and eseglias@cohenseglias.com. Jackson can be reached at (202) 466-4110 and jnichols@cohenseglias.com


 

Not So Fast! My Oil and Gas Lease Does What?

By Brian A. Lawton

Many property owners lose sight of the fact that an oil and gas lease is a two-way contract. There are many legal duties that the landowner owes to the operator. One duty that is typically overlooked is the title warranty, where the landowner guarantees to the operator that the landowner owns and can lease all of the oil and gas rights to the property. 

A recent case from the Pennsylvania Supreme Court, Shedden v. Anadarko E&P Co., L.P., demonstrates the pitfalls of a general title warranty. The Sheddens entered into an oil and gas lease with Anadarko for their property. Anadarko subsequently discovered that under an 1894 deed, prior owners retained one-half of the oil and gas rights on the property. The Sheddens brought a lawsuit to acquire the missing one-half interest of the oil and gas rights on the property. A court ordered that the Sheddens owned all of the oil and gas rights. Anadarko subsequently exercised an option to extend the term of the lease and paid the Sheddens the amount owed under the original lease. The Sheddens rejected the payment, contending that the lease covered only one-half of their interest in the tract, and that they were free to lease the other half.

The Pennsylvania Supreme Court ruled for Anadarko, concluding that the lease covered 100% of the oil and gas, including the half-interest obtained by the Sheddens through the litigation after the lease was signed. The lease contained a warranty clause that the Sheddens had “full title to the premises and to all the oil and gas therein at the time of granting this Lease, and forever warrants title to the leasehold estate hereby conveyed” to Anadarko. The Court explained that where a lease contains such a clause, the after-acquired property is subject to the lease. 

A title warranty is often considered to be meaningless boilerplate language that appears in almost all leases. This case demonstrates, however, that this clause has real consequences. Rarely does a landowner truly understand what interest he owns in the minerals under his property. It is common sense that you should not promise something that you cannot deliver. Too often, however, landowners do just that by signing an oil and gas lease with a general warranty. The title warranty is a provision that you can, and should, negotiate in your lease, limiting what title you guaranty.

Brian is a Partner in the Firm’s Energy & Utilities Group. He can be reached at (412) 434-5530 or blawton@cohenseglias.com.