REAL ESTATE DEVELOPMENT AGREEMENTS, PART 1 & PART 2 First Run Broadcast: February 21 & 22, 2017 1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00a.m. P.T. (60 minutes each day) Real estate development agreements are not one agreement, but a series of complexly interrelated contacts acquisition agreements for the underlying land or property to be developed; sprawling agreements with municipal authorities to obtain regulatory approval; and construction agreements with contractors. Ultimately, execution of carefully laid development plans and realization of the financial benefits of the development depend on thoughtfully planned and carefully drafted agreements. This program will provide you with a guide to planning the process of generating and reviewing the several underlying contracts that form real estate development agreements. Day 1 February 21, 2017: Real estate development process and agreements Steps in the process, anticipating delays, and financial tradeoffs Acquisition of land or other property Finance and option letter issues related to development agreements Day 2 February 22, 2017: Municipal and land use considerations in the development process and agreements Framework most highly negotiated provisions in contractor agreements Developer covenants, scheduling issues, allocation of risk Leasing or sale of developed property Speakers: John Miller is the principal of John R. Miller, PLLC in the Charlotte, North Carolina and was for 39 years a partner with Robinson, Bradshaw & Hinson, P.A. His practice encompasses corporate and securities law, mergers and acquisitions, banking and finance, and construction law. He was selected by his peers for inclusion in "The Best Lawyers in America" and for inclusion in Business North Carolina Magazine's "Legal Elite" as one of the top business lawyers in North Carolina. He received his A.B. from Duke University and his J.D., with distinction, from Duke University School of Law. John S. Hollyfield is of counsel and a former partner in the Houston office Norton Rose Fulbright, LLP. He has more than 40 years experience in real estate law practice. He formerly served as chair of the ABA Real Property, Probate and Trust Law Section, president of the American College of Real Estate Lawyers, and chair of the Anglo-American Real Property Institute. He has been named a "Texas Super Lawyer" in Real Estate Law by Texas Monthly magazine and is listed in Who s Who in American Law. He is co-editor of Modern Banking and Lending Forms (4 th Edition), published by Warren, Gorham & Lamont. He received his B.B.A. from the University of Texas and his LL.B. from the University of Texas School of Law.
Richard R. Goldberg is a retired partner, resident in the Philadelphia office of Ballard Spahr, LLP, where he established an extensive real estate practice, including development, financing, leasing, and acquisition. Earlier in his career, he served as vice president and associate general counsel of The Rouse Company for 23 years. He is past president of the American College of Real Estate Lawyers, past chair of the Anglo-American Real Property Institute, and past chair of the International Council of Shopping Centers Law Conference. Mr. Goldberg is currently a Fellow of the American College of Mortgage Attorneys and is a member of the American Law Institute. Mr. Goldberg received his B.A. from Pennsylvania State University and his LL.B. from the University of Maryland School of Law.
VT Bar Association Continuing Legal Education Registration Form Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name Middle Initial Last Name Firm/Organization Address City State ZIP Code Phone # Fax # E-Mail Address Real Estate Development Agreements, Part 1 Teleseminar February 21, 2017 1:00PM 2:00PM 1.0 MCLE GENERAL CREDITS VBA Members $75 Non-VBA Members $115 NO REFUNDS AFTER February 14, 2017 PAYMENT METHOD: Check enclosed (made payable to Vermont Bar Association) Amount: Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # Exp. Date Cardholder:
VT Bar Association Continuing Legal Education Registration Form Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name Middle Initial Last Name Firm/Organization Address City State ZIP Code Phone # Fax # E-Mail Address Real Estate Development Agreements, Part 2 Teleseminar February 22, 2017 1:00PM 2:00PM 1.0 MCLE GENERAL CREDITS VBA Members $75 Non-VBA Members $115 NO REFUNDS AFTER February 15, 2017 PAYMENT METHOD: Check enclosed (made payable to Vermont Bar Association) Amount: Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # Exp. Date Cardholder:
Vermont Bar Association CERTIFICATE OF ATTENDANCE Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: February 21, 2017 Seminar Title: Real Estate Development Agreements, Part 1 Location: Credits: Program Minutes: Teleseminar - LIVE 1.0 MCLE General Credit 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.
Vermont Bar Association CERTIFICATE OF ATTENDANCE Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: February 22, 2017 Seminar Title: Real Estate Development Agreements, Part 2 Location: Credits: Program Minutes: Teleseminar - LIVE 1.0 MCLE General Credit 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.
REAL ESTATE DEVELOPMENT AGREEMENTS Construction Agreements By John R. Miller John R Miller, PLLC Charlotte, North Carolina (O) 704-900-6500 jmiller@johnrmillerpllc.com
I. Introduction Real estate development by definition involves construction, an increasingly complex and hectic process with a multitude of participants. The associated risks are allocated among the various participants in the construction process by a network of contracts connecting these parties in their respective roles, within a framework of laws, regulations and public policy. Construction counsel can contribute to the process by anticipating the risks and managing them through effective contract negotiation and drafting. II. Spotting Red Flags and Identifying Risks in Construction Contracts The following is a checklist of some of the more important provisions in construction contracts 1 that represent potential risk. 1. Consequential Damages Does the contract contain a waiver of consequential damages? Is the waiver mutual or is it a one-sided provision? From the Contractor s perspective, are the subcontracts in harmony with the provision in the general contract? 2. Indemnity To what extent is risk shifted from one party to another through the mechanism of indemnification? More importantly, to what extent does the provision cover the negligence of the indemnitees? 3. Notices Are the notice provisions reasonable or unreasonable, i.e., do they involve very short time periods or impractical content requirements? 4. Payment Are the payment terms reasonable? Are the conditions precedent to payment, such as producing affidavits from subcontractors and suppliers, workable? Is the Owner adequately protected from double payment or non-performance by the Contractor? 5. Design Liability Are there provisions requiring the Contractor to review plans and specifications and to assume responsibility for unreported defects? Are there provisions 1 This Paper generally focuses on the relationships under the General Contract between the Owner/Developer and the Construction Contractor. Most of the concepts and issues also apply to Subcontracts and, to a lesser extent, to the Contract between the Owner/Developer and the Design Professional. 2
shifting the risk of design errors to the Contractor or allowing the design professional to dictate the result when design documents conflict? 6. Subsurface/Concealed Conditions Does the contract provide equitable protections in case the Contractor encounters unexpected subsurface or concealed conditions, as is typical in industry-standard forms? Are there unreasonable site inspection provisions? 7. Warranties What is the period of duration of the construction warranty and when does it commence? Are the warranty provisions in the general construction contract in harmony with the warranty obligations of the subcontractors? In guaranteed maximum price contracts, does the contract allow the Contractor to use savings to cover corrective work? 8. Hazardous Materials Does the contract purport to shift responsibility for hazardous materials that are already on the site to the Contractor? Is the owner obligated to indemnify the Contractor against pre-existing conditions? 9. No Damage for Delay Is there a provision that purports to limit the Contractor s remedy for delay to an extension of time but no additional compensation? Are there liquidated damages in the event of delays caused by the Contractor? 10. Insurance Requirements Is the insurance coverage required by the contract documents obtainable? Is there a waiver of subrogation provision, and is it mutual? 3
III. Understanding the Complex Financial and Risk Relationships in Construction Contracts The financial stakes for all parties involved in the construction process are very high. Large commercial projects usually involve very large budgets, yet the work is frequently awarded to the contractor or subcontractor with the lowest bid and often before the design is even completed. This means that the successful bidders are under additional pressure to economize, but they run a huge financial risk if they take shortcuts and there is a failure or default of some sort. The results can be catastrophic and the damages can be enormous if there is a serious problem, such as a major structural defect, accident or other construction failure. It is the role of counsel to minimize the risk of liability undertaken by his or her client and to advise the client as to ways to manage such risks, for example, through insurance, indemnification arrangements and other techniques. The biggest mistake that clients often make is that they simply fail to read and follow their own contracts (i.e., they fail to appreciate some of the provisions of the complex construction contracts that are entered into). For example, in a typical construction contract a contractor would be required to give notice to the owner in the event the contractor encounters a delay. All too frequently, this contractual obligation is ignored by contractors, leaving them unnecessarily open to damages for failure to complete the work on time. Although courts have demonstrated some leniency in such situations, courts often state that they will not rewrite a contract for the parties and will enforce the contract as written. Because construction is such a complex process and the demands on all of the parties are frequently great, many parties do not take the time to follow the contract, keep contemporaneous records and send notices to other parties as required. These practices expose the party to unnecessary risk. This risk could be minimized or avoided by seeking and following the advice of competent construction counsel. Practice Pointer-- Do not ignore the obvious --read the Contract. Advise clients to abide by its requirements. Practice Pointer-- requirements. Keep contemporaneous job records and observe all notice 4
Construction is a very complex process, and most construction contracts contain a provision authorizing the owner to make changes in the work. Disputes regarding changes are commonplace, and frequently there is an issue as to whether or not a change was ordered by the owner and whether the person who changed the scope of the work was authorized to order changes. Most construction contracts contain a provision stating that a written change order is required in order for the contractor to be entitled to additional compensation for a change, but frequently this requirement is ignored and a dispute ensues. Many parties are surprised to learn that in some jurisdictions (North Carolina is an example), the provisions of a written contract can be modified or waived by a subsequent parol agreement or by conduct which naturally and justly leads the other party to believe the provisions of the contract have been modified or waived. This principle applies even if the contract explicitly requires all amendments or waivers to be in writing. It offers an avenue for a contractor who did not obtain a change order to argue that the change was orally approved or approved by conduct of the parties. Practice Pointer -- Since a party s oral agreements or conduct might be regarded as effecting a change to the Contract, care should be taken at all times not to lead the other party to believe that the provisions of the Contract have been waived or changed. Another significant trap for the unwary is the lack of appreciation of the significance of the applicable General Contractor Licensing Law. In North Carolina and Florida, for example, the General Contractor Licensing requirement has broad application and has engendered more litigation than any other area of construction law. 2 The reason for this is that the courts have determined that when an unlicensed contractor in disregard of the licensing statute intended to protect the public enters into a contract with an owner to perform construction work costing more than the minimum sum specified in the licensing statute, the contractor may not recover for the owner s breach of that contract. The result can be quite harsh because an unlicensed contractor can be barred from recovering from the owner for non-payment, even if the amount owed is substantial and undisputed. Likewise, in California and Florida, an unlicensed contractor cannot enforce the contract; more significantly, the Contractor may be subject to the 2 See generally J. Miller and J. Taylor, North Carolina Construction Law, Chapter 1 (Prof. Educ. Syst., 14 th ed. 2007). 5
remedy of disgorgement in those States i.e., the Contractor may have to repay all sums collected even if the Work is satisfactory. The courts have held that the importance of deterring unlicensed persons from engaging in the construction business outweighs any harshness in these results. In some States, the courts have also held that the licensing requirement cannot be waived by the parties. 3 Any party, including any out-of-state builder, should take special note of the applicable licensing laws because the consequences for violation of the statutes can be severe. Moreover, some statutes and courts have frowned on loaning of general contractor s licenses, and this can also lead to very harsh results for out-of-state contractors. Practice Pointer -- Pay attention to the contractor licensing provisions in the state where the project is located before the contract is signed. After execution of the contract, any deficiency may not be curable. IV. Negotiating and Drafting the Most Important Construction Contract Provisions A. Role of major form agreements, including AIA Contacts, in negotiations The construction process is complex and involves multiple parties and an extensive assortment of uncertainties. Accordingly, a well crafted construction contract should be comprehensive and should include a variety of provisions dealing with the various problems that might be encountered during the course of construction and thereafter. For this reason, most drafters of construction contracts start with an industry form that contains sufficient detail. The American Institute of Architects (AIA) has developed a series of forms that pertain to all of the various relationships in the construction process and cover a range of different approaches to construction including a variety of fee arrangements. The AIA forms are comprehensive and time-tested and represent a reasonably fair balancing of the relative risks, although some 3 Even a settlement agreement will not be deemed to be enforceable if it was made in contravention of the North Carolina licensing statute. 6
observers maintain that the architect receives more favorable treatment under the AIA forms because they were developed by their own profession. 4 In addition, the Engineers Joint Contract Documents Committee (EJCDC), Association of General Contractors and other groups have developed and promulgated similar forms. In 2007, Consensus DOCS issued a set of forms in response to some of the criticisms of the AIA forms. 5 These industry forms, when used as a starting point, often represent the default position, and counsel for the parties must negotiate and draft any changes to conform to the agreement of the parties on a specific project. Because of their widespread use, the AIA forms are often viewed as representing what is market. Over the years, the AIA has made changes that have adjusted the AIA forms to changes in the marketplace. B. Anticipating Disputes Between Property Owners and Builders and Risk Mitigation Techniques The construction contract is the vehicle for allocating risks between the property owner and the builder. The construction contract documents should be drafted in a way that anticipates disputes between the owner and the contractor and establishes how this risk will be managed. Risks can be managed or mitigated by (i) shifting responsibility from one party to another or to a third party, (ii) procuring insurance, bonds or another form of protection from a third party or (iii) excluding or limiting responsibility for specific risks between the parties. The following are more important contractual mechanisms for allocating such risks. 1. Indemnity. Indemnification is the obligation of one party ( indemnitor ) to reimburse another party ( indemnitee ) for losses the indemnitee incurs or the damages for which it may be held liable. Indemnification clauses are a method of shifting certain risks from one party to the other, and these provisions have been used in the AIA forms for more 4 Indeed, one federal judge made the following insightful remark about the AIA forms: No project of this scope with the attendant pressures on everyone concerned could possibly be completed in accordance with the literal scheme envisioned by an architect-drawn agreement. In truth, even the AIA standard contract would require a battery of Philadelphia lawyers on the firing line each day. Under it, everybody is liable save the architects. J. A. Jones Construction Co. v. Greenbriar Shopping Center, 332 F. Supp. 1336 (N.D.Ga. 1971) 5 ConsensusDOCS were a collaborative product of all participants in the construction process. 7
than half a century. There are many dimensions to contractual indemnity and multiple ways to allocate risks by use of an indemnification clause. For example, the risk of liability can be shifted from one party to the other regardless of the party at fault or it can be allocated on the basis of a comparative fault. The indemnity may include a duty to defend, reimbursement of attorney s fees and other costs. The indemnity provision may be accompanied by procedural requirements such as notice provisions and the right to participate in the proceeding and in any settlement decisions. Many states have enacted statutes that limit contractual indemnity or render such provisions unenforceable as against public policy. These state statutes are by no means identical. Some statutes merely prohibit indemnification clauses for the sole negligence of the promisee while others prohibit indemnification to the extent caused by the negligence of the promisee in whole or in part. Florida has a unique statue that prohibits indemnification of both types unless the contract contains a monetary limitation that bears a reasonable relationship to the contract, which cap must not be less than $1,000,000 per occurrence when indemnity is provided to the owner of real property. 6 Some statutes do not allow indemnification for certain types of conduct, such as gross negligence of the indemnitee or its agent. Counsel negotiating the construction contract must take into account the applicable law regarding the limitation of contractual indemnification. For a survey of such laws, see Anti-Indemnity Statutes in All States, http://www.mwl-law.com/wp-content/uploads/2013/03/anti-indemnity-statutes-in-all-50- States-00131938.pdf published by Matthiesen, Wickert & Lehrer, S.C., of Hartford, WI. A properly drafted indemnification clause should take into account potential defenses that might render the indemnification obligation unenforceable. One technique is to include savings language in the indemnification provision (e.g., to the fullest extent permitted by law. ). The AIA indemnification provision contains a savings clause, which courts have used as a basis to enforce the indemnification provision to the extent allowed by applicable law. In addition, the construction contract should contain a severability clause that would permit a court to sever the language in the contract that would render the 6 Fla. Stat. 725.06. 8
provision unenforceable. Courts are reluctant to make a new contract for the parties but will sever an unenforceable provision if the contract so provides. Practice Pointer-- Counsel drafting an indemnification provision should pay close attention to the applicable anti-indemnification statute. The clause should contain savings language, and the contract should include a severability clause. 2. Exclusion of Specific Remedies or Types of Damages. Another method for allocating risk in a construction contract is a provision limiting liability of one or both parties for certain types of damages, typically the exclusion of consequential damages. Although it is difficult to articulate a universal definition of consequential damages, it is basically any damage or loss that does not result in the ordinary course of events from the breach as determined in any manner that is reasonable, i.e., damages that are not direct damages. Most notably, lost profits and loss of use are frequently seen as consequential damages. There is no accepted definition of either type of damage nor is it possible to define them precisely because the application of the relevant principles depends heavily on the facts and circumstances. The 1997 edition of the AIA General Conditions included a mutual waiver of consequential damages provision. The AIA stated that the purpose of this new clause was to provide predictability and to remove some of the uncertainties and risks inherent in construction contracts. The 2007 edition of the General Conditions retained this provision, which was relocated to section 15.1.6. This provision reads as follows: 15.1.6 CLAIMS FOR CONSEQUENTIAL DAMAGES The Contractor and Owner waive claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes.1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and.2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work. 9
Although characterized as mutual, this provision has been criticized by owners as favoring the contractor because many observers believe that the owner is giving up more potential damages while the contractor retains the right to recover lost profits on the Contract itself. 3. Limitation of Liability Provisions. In addition to shifting contract risk through indemnification or excluding certain remedies, the parties may agree to limit monetary damages in their contract. In other words, the contract might place a cap on the amount of damages recoverable by one party from the other. Unlike the exclusion of consequential damages provision, caps on liability have not taken hold as a standard provision in the construction contract, although they are becoming more commonplace in design contracts. This is probably due to the fact that design professionals contend that their liability risks are disproportionally high in comparison to the compensation to be earned from their clients and their insurance costs may likewise be prohibitively expensive. 7 Caps on damages are also more common in other commercial contracts, such as supply contracts and international project equipment installation contracts. As is the case with drafting an indemnification clause, there are numerous variations for limitation of liability clauses, including various ceilings on liability such as the amount of the fee, the amount of available insurance, or a specific dollar amount, or some combination of these types of limitation. Sometimes damages resulting from certain conduct is carved out from the cap, such as gross negligence or willful misconduct. Although limitation of liability clauses will generally be strictly construed, the courts have typically determined that the parties to a commercial contract are generally free to negotiate such terms for the allocation of risk or the limitation of remedies as they may mutually agree, provided such provision is not in violation of an important public policy or is unconscionable. Some courts have determined that a state s anti-indemnification 7 See Beltzer and Orien, Are Courts Limiting Design Professionals Ability to Limit Liability? 30 The Construction Lawyer No. 2 at 7 (2010). 10
statute should likewise constitute a public policy against a limitation of liability and that such clauses might be unenforceable on that basis. 8 4. Insurance Issues. Shifting construction risk to a third-party insurer is another very common mechanism for allocating risk in a construction contract. A well-drafted construction contract will describe in detail the insurance requirements imposed upon the project owner and the builder, often including the requirement that the contractor name the owner as an additional insured on its comprehensive and general liability policy. Moreover, the contract will often provide that the parties shall enter into a mutual waiver of subrogation in order to maintain the agreed allocation of risk. Subrogation is the assignment to an insurer, after payment of a loss, of the rights of the insured to recover the amount of the loss from a party legally liable for it. The insurer s right of subrogation can arise by the terms of an insurance policy or operation of general legal principles. Waiver of subrogation is the insurer s relinquishment of its right to assume the insured s place, after payment of loss to the insured, to recover the amount of the loss from a party legally liable for it. The mutual waiver of subrogation is especially important where a number of parties have a commercial relationship and where the parties are collectively looking to the insurance provided by one or more of the parties to cover particular losses. The most common example is in the case of builder s risk or property insurance where one party provides the builder s risk insurance, and the various parties involved in the project all look to the insurance to cover the loss, regardless of fault. Often the loss is caused by the actions of one or more of the parties, and the mutual waiver of subrogation precludes an unfair allocation of risk among the parties. For example, if there is a loss such as a fire, and the insurance carrier providing the builder s risk insurance covers the loss, under insurance law the insurance carrier would ordinarily then be subrogated to the rights of the insured under the policy and could proceed against any party who is legally responsible (in whole or in part) for the loss (standing in the shoes of the insured who suffered the loss). Yet if the parties and the insurance companies have agreed to a mutual waiver of subrogation, the insurance companies have 8 See, e.g., City of Dillingham v. CH2M Hill Northwest, Inc., 873 p.2d 1271 (Alaska 1994). See generally Bruner and O Connor on Const. Law 19:52.71 (Supp. 2009). 11
waived their rights to proceed against any party responsible for the loss. If the waiver of subrogation is not mutual, then the party who does not have the benefit of the waiver of subrogation would be exposed to the subrogation claim but the other parties would not be liable. Thus, one party, who may only be partially responsible for the loss, would absorb the entire loss even though the parties had intended to look to the builder s risk insurance as the exclusive means to cover the loss. The concept of the mutual waiver of subrogation is that the insurance is for the mutual benefit of all of the parties regardless of which party provides the insurance. Practice Pointer-- Where the contract documents call for a mutual waiver of subrogation, it is imperative that the parties confirm that the insurance carrier has acknowledged this waiver by appropriate endorsement to the policy prior to commencement of the Work. V. Performance Standards and Payments One of the Owner s principal objectives is, of course, for the Contractor to complete the Work according to the terms and conditions of the Contract. The Contractor, on the other hand, is mainly concerned about getting paid for the work. Because construction projects are generally quite complicated and are performed over a period of months or years, it is commonplace for the Contract to provide that the Contractor will be paid as the work progresses. In order to protect the parties respective interests, the Contract usually contains one or more of the following features: 1. Progress Payments and Retainage. The Contract usually provides that the Contractor is required to submit applications for payment, which are verified by the Owner s representative (usually the Architect) in order to ascertain the status of the work. The Owner retains an agreed portion from the progress payment as security for the continued performance of the Contractor. In addition, the Contract often contains provisions permitting the Owner to withhold additional amounts for specific problems. 12
In some States, subcontractors may have payment rights that are superior to the prime contractor. This is because some State legislatures have enacted statutes to the effect that when a subcontractor has performed, it is entitled to payment by the prime contractor even if the prime contractor has not been paid by the Owner. See, e.g., N.C.G.S. 22C-1 through N.C.G.S. 22C-6. Clauses in the subcontracts that provide that a subcontractor will be entitled to payment only if the Contractor is paid by the Owner ( pay-if-paid clause) or only when the Contractor is paid by the Owner ( pay-when-paid clause) may not be enforceable under the laws of a particular jurisdiction. For a survey of such laws, see 50 State Survey Pay-if-Paid / Pay-When Paid, and No Damage for Delay, published by Woods & Aitken LLP http://www.woodsaitken.com/wpcontent/uploads/2011/12/payifpaid_paywhenpaid_ndfd-provisions.pdf 2. Surety Bonds. The Contractor usually has the right before commencing work to some assurance that the Owner has the requisite funds to finance the job. In addition, there may be a surety bond to insure payment in the event of default, thus shifting the financial risk to a third party surety. Bonds are usually required on public jobs. In international projects, bank guarantees or letters of credit are often used to manage credit risk instead of surety bonds. 3. Mechanics or Construction Liens. In the event of non-payment, the contractor and its subcontractors usually have the right to file a lien against the Owner s property or against funds that may become due under the Contract as a means of securing payment. 9 The theory underlying the establishment of the statutory remedy of a construction lien by state legislatures is to provide the lien claimant with a form of security for the collection of an indebtedness owed to the builder. A construction lien claimant has a security interest that general creditors do not have. Each State has its own system for filing liens, and counsel for the lien claimant must be familiar with the requirements of the applicable jurisdiction. 4. Payment by Joint Check. The most recent version of the AIA forms give the Owner the right to make payments to the Contractor and a subcontractor or supplier if the Architect 9 Usually there are no lien rights on public property, which is why payment and performance bonds are mandatory on public jobs. 13
has withheld certification for payment because of the failure of the Contractor to make payments properly to subcontractors or suppliers. 10 The Owner should exercise caution in making joint checks because the Owner does not have a contract with the subcontractors and suppliers and might be viewed as asserting direct control over these entities. VI. Conclusion As the foregoing discussion demonstrates, the effective drafting and negotiation of construction contract documents can certainly be challenging. There are a multitude of significant contract issues and numerous mechanisms for managing and adjusting these risks. Although parties to a commercial contract typically have the freedom to allocate risk by mutual agreement, construction counsel must also consider the effect of the law of the applicable jurisdiction that may impose limitations or restrictions, as a matter of public policy, on the parties ability to apportion risk by negotiation and agreement. 10 AIA Document A201 (2007 Edition), Section 9.5.3. 14
NEGOTIATING DEVELOPMENT AGREEMENTS HOT ISSUES Richard Goldberg Ballard Spahr, LLP - Philadelphia (o) (215) 864-8730 goldbergr@ballardspahr.com 1. Drafting and negotiating the acquisition and development agreement. a. The initial issue is the time periods for satisfying contingencies. The typical contingencies (title, other due diligence) are usually easily satisfied within relatively short time periods. However, the critical time period deals with the entitlement process. The purchaser must understand the local process and allow enough time to complete the process. The seller may condition return of the deposit on prompt and expeditious application for entitlements and set time limits for each stage of the entitlement proceeding. b. The return of deposits pursuant to the acquisition agreement can also be staged. Each step along the way can provide the buyer with the opportunity to retain deposits to compensate for the time the property is off the market. c. The development process requires consultation between the seller and buyer. The worst scenario occurs when the property becomes entitled either in whole or in part to accommodate the dream of the buyer and the development process is short circuited by failure to complete the entitlement process or worse when the process is complete and the deal dies because of financing or other events extraneous to the seller. 2. Acquisition and development agreements concerning different property types. a. The more complex the development, the more difficult to effectively negotiate the terms of the development process between the buyer and seller.
b. The entitlement process for multi-family is has far less complexity than office, which is far less complex than retail which in turn is less complex than hospitality. c. The buyer of course must understand the entitlement process for the contemplated development. It is of equal importance that the seller fully understands the process as well. Without a complete understanding, the seller will find that they have negotiated an incomplete agreement which will contain ambiguities and uncertain timing provisions. The leverage when matters are not accomplished within normal time frames will shift from the Seller to the Buyer and money will be left on the table. d. The contract should contemplate the hot issues and the methodology for resolving them. Quite aside from use, parking, setbacks, side yard requirements and other bulk and density issues should be addressed so that the buyer cannot decide to use the issue as a wedge to seek concessions from the seller. e. Each development has an expected time frame in a jurisdiction depending on the nature of the use. It is vital for both parties to be realistic about the time frames to negotiate the agreement. 3. Entitlement issues for the buyer and seller. a. Obviously a well thought out entitlement plan is necessary to accomplish the proposed development. b. The burden is on the buyer/developer. However, the seller has a critical role. The agreement first must provide for cooperation. The degree of cooperation has to be specified. The seller is usually the home team and frequently possessed the contacts which are not available to the buyer. The degree of involvement should become an element of the contract negotiation. c. A vital consideration in the entitlement process and in the agreement process must deal with the completed or partially completed entitlement when the deal collapses because of incomplete land use approvals or other considerations. The seller can be left with a newly zoned and entitled property for which the seller has no use. More
important the new use may seriously hamper the future marketability of the real estate. In some jurisdictions, it is possible to make the entitlements conditioned upon completion of the development. However, that is not often the case. The seller can negotiate for compensation for the cost of restoring the original land use conditions or for the cost of entitlements which are more marketable. Without these provisions, the seller will have failed to consider the most difficult problem found in negotiating development agreements. 4. Option and financing issues in connection with acquisition and development agreements. a. In some jurisdictions, acquisition and development agreements are treated as pure options. These means that the consideration issues have to be addressed in a different manner than the typical bilateral agreement. Real consideration must pass and the option price should not be refundable. b. It is also important to note that in most jurisdictions equitable title does not pass until all material conditions to a sale agreement have been satisfied. The risk of loss can remain with the seller until the conditions are satisfied and the ability to obtain remedies may be seriously compromised. c. With regard to buyer financing, both the seller and buyer should be cognizant to lender requirements contained in a commitment. The buyer of course must satisfy the requirement. The seller should be concerned that the commitment contain realistic development and entitlement conditions in order to insure that transaction can close. It is not customary for the seller to participate in the negotiation of the financing conditions directly. However, to the extent that there is a development financing contingency, the conditions for satisfaction of the contingency are in the control of the seller who can insure that the contingency is satisfied despite the existence of unreasonable lender conditions. While this may not effectuate a closing, it does affect the retention of deposits and earnest money. In no event should the seller
participate in the financing or permit the lender to obtain a premature security interest in the seller s real estate until after the closing.
PROFESSIONAL EDUCATION BROADCAST NETWORK Speaker Contact Information REAL ESTATE DEVELOPMENT AGREEMENTS, PART 1 & PART 2 Richard Goldberg Ballard Spahr, LLP - Philadelphia (o) (215) 864-8730 (m) (215) 837-8401 goldbergr@ballardspahr.com John S. Hollyfield Norton Rose Fulbright, LLP - Houston (o) (713) 651-3717 john.hollyfield@nortonrosefulbright.com John R Miller John R. Miller, PLLC Charlotte, North Carolina (o) (704) 900-6500 jmiller@johnrmillerpllc.com