Financial Contingencies, "Pay if Paid" Clauses and Takings, Oh My!: The Fallout from the Granby Towers Litigation
In 2004, 515 Granby, LLC proposed a $180.5 million condo development. With 34 stories and 327 units, Granby Towers would be the tallest building in Norfolk and would revitalize the northern part of the city. The following year, the federal government threatened to condemn the property, causing just enough of a delay for the ebbing economic tide to overtake the Granby Tower project and thwart 515 Granby’s ability to secure financing.
Fortunately for 515 Granby, the prime contract with Turner Construction Company had the following language:
This Agreement and any liability and obligations of the Owner…shall be subject to and expressly conditioned upon the closing by the Owner, and the initial funding by its lender, of the construction loan… and Owner shall have no obligation or liability to Construction Manager for any costs for the Construction Phase under this Agreement unless such construction loan closing is completed.
Turner and its subcontractors, who were owed over $13 million for construction on the project, challenged this language in a two-day evidentiary hearing in the Circuit Court for the City of Norfolk. In a letter opinion issued by Judge Martin, Judge Martin rejected this challenge, finding that 515 Granby “made great efforts to secure financing for the project,” but was unable to do so due to the current conditions of the credit market. Judge Martin concluded that 515 Granby would have had to pay Turner only if and when it had received initial funding of the construction loan. For an in-depth look at the court's reasoning, and what you can do if you face such a contractual provision, go to Yes, Virginia, Contract Terms Do Matter: Financing Term Offers Owner an Escape Hatch, by my colleague, Tim Hughes, guest blogging on Construction Law Musings.
Fortunately for Turner, its subcontracts contained the following language:
The obligation of Turner to make a payment under this Agreement, whether a progress or final payment, or for extras or change orders or delays to the Work, is subject to the express condition precedent of payment therefor by the Owner.
One of the subcontractors, Suburban Grading & Utilities, claimed this language was unenforceable. In a second letter opinion, Judge Martin upheld this provision as well, noting that the Supreme Court of Virginia finds “pay if paid” clauses enforceable “where the language of the contract in question is clear on its face.” This language was an unambiguous “pay if paid” clause that Judge Martin had no choice but to uphold, leaving Suburban to eat the costs of $575,928 for labor and materials and another $245,662 for dewatering. For a great and very timely discussion of this opinion and advice about "pay if paid" clauses, I urge you to read Chris Hill's Construction Law Musings post, Pay if Paid, Pay Attention Subs.
Don’t go away thinking there will be no winners in this debacle! The federal government has since conveniently renewed its desire to condemn the property in order to expand the federal courthouse next door. It offered a paltry $6.1 million to seize the Granby Tower property, an offer that no one is jumping at yet. If you’re interested in reading more on this very likely end to the Granby Towers saga, take a look at Harry Minium and Tim McGlone’s recent article in The Virginian-Pilot.
Image by: Hyunsoo Leo Kim/The Virginian-Pilot
Heidi,
Great discussion of a terrible situation. And thanks for the links back to Musings! Tim's post was great.
Always our pleasure to loop back around to Musings. I was glad to tie your and Tim's discussions of the individual opinions into this post. Take care and have a fantastic holiday season, and here's to a great 2010!
Thanks for visiting and commenting Chris, I really enjoyed the guest post opportunity and your recent update on the pay if paid clause.
The really sad part of all of this is that the Granby Tower project was truly conceived as the crown jewel of downtown, the plans look magnificent and success would have remade the downtown skyline. Instead, there is just a hole in the ground and a bunch of crushed subs.
The final thing that struck me was reading the article Heidi linked to with the Pilot ... the owners describe the federal delays as causing them to "lose their financing". They never had the financing to begin with, there was no closing, there was no settlement, there was no funding. They just started the project and then left everyone high and dry.
Does anyone know what a city block of raw land downtown in Norfolk really is worth? This all seems posturing to increase the condemnation valuation to me and the condemnation seems to potentially get the owner paid and leave all the other players high and dry, but maybe I am being unfair and cynical ...
Actually Tim, I prefer the term "realistic." This situation is terrible and most likely all of the downstream players that depended on the owner will get the shaft.
You are too kind!
In all seriousness, all the construction players are getting hammered here ... but Turner is a major player, and if they elected to move forward without evidence of financing, at least there is an element of big boys take the risks, they take their lumps. It is the subcontractors on this project that I really feel badly for.
Yep. Turner should have known better, or at least investigated more thoroughly
Virginia is tougher on subcontractors than many other jurisdictions. In California, for example, pay when paid clauses are not enforceable against subcontractors.Yamanishi v. Bleily & Collishaw, Inc.29 Cal App 3d 457(1972). For other jurisdictions, see Seal Tite Corp. v. Erhert, 569 F Supp. 701 (D.N.J 1984), Trinity Universal Ins. Co.v. Smithwick, 222 F 2d 16(8th Cir.),Byles v. Great Am. Ins.Co., 395 F 2d 273(10th Cir.1968). Maybe the facts and the specific contract language are reasons for the more sub friendly approach in the other jurisdictions.
Thanks for the perspective outside of the Commonwealth, Ron! Virginia tends to be tougher not just on subs, but in a lot of different arenas. Makes you appreciate thinking through language in a contract before you sign the dotted line!
My view on VA is that you are in control of your fate. If you get into a contract, then you are stuck with it. On the other hand, the Court's will enforce the deal as written so most parties know what they are getting into. It makes for a more predictable situation.
I would second Chris' take in response to Ron. The deal generally controls and Virginia traditionally in very pro-contract. Other states have a more elastic view and permit public policy or judge reaction to re-write the deal a little more aggressively.
I would say that even in Virginia, I am starting to get some whiffs of the conservative ice of contract control melting a bit depending on jurisdiction and specific judge. Nevertheless, the weight is pro-contract and I for one believe that predictability in legal results is a really great thing.