Virginia Real Estate, Land Use & Construction Law : Virginia Construction Lawyers & Attorneys : Bean Kinney & Korman Law Firm : VA Real Estate, Land Use & Zoning

It has been widely reported that Northrop Grumman has chosen a building located in the Fairview Park area of Fairfax County to relocate approximately 300 employees from Los Angeles. Certainly this decision bodes well for the Northern Virginia region as a whole, as proximity to Washington, D.C., the Pentagon and the Northern Virginia technology centers offers many advantages. In recent years, other corporate giants such as Hilton, CSC, and Volkswagen of America have all relocated to Northern Virginia. After deciding on Virginia instead of Maryland, Northrop Grumman focused on sites in Arlington and Fairfax Counties before ultimately selecting the Fairview Park property. State and local government incentive programs were considerable.

One very interesting aspect of this transaction is that Northrop Grumman elected to purchase the building instead of entering into a lease as was widely expected. There are two main business issues at play. First, clearly they are taking advantage of current conditions in the commercial real estate sector to buy the property at a significantly lower price than what the property sold for less then three years ago. Published reports in The Wall Street Journal and elsewhere indicate that Northrop will purchase the building from ING Office Fund for approximately $78,000,000.  Note that the building was purchased in 2007 from Verizon Communications Inc. for $105,000,000. Second, under proposed financial reforms and accounting changes scheduled to take effect in 2013, companies are to report leases as a long-term liability instead of an annual operating expense. It has been widely reported that the accounting change was a factor in Northrop’s decision. 

The effect to the commercial real estate market if more companies elect to purchase instead of lease could be seismic. Lease terms could become shorter than what is now typical, and more purchase and sale transactions could be the norm. Expect this issue to be the focus of many in the months to come.

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Part I – Builders Review of Purchase Agreement

           Virginia has experienced several years now of a declining residential real estate market, marked by periods of low sales, high inventory and declining prices. Note that recently the prices and inventory have stabilized, but certainly activity has slowed again now that the federal tax credits for homebuyers has expired. Given the current state of the residential real estate market, many buyers experience remorse and attempt to terminate their purchase agreements and receive a full refund of their deposit from the seller.

            Unfortunately for home builders, many of their "form" purchase agreements were drafted before the current downturn — at a time when sellers held all of the negotiating advantages — and the resulting agreements were so one-sided in favor of the sellers that some Virginia courts have held them to be unenforceable.   While there are many steps you can take to protect yourself in the event existing purchasers are insisting on a return of their deposit, it also would be prudent to take preventive steps now to make sure your form contracts fully comply with Virginia law to protect you going forward.

            Briefly listed here are the most commonly cited reasons used by disgruntled purchasers in their attempts to terminate their executed agreements, with suggested contract provisions for each of these scenarios.   Part I of this post will address lack of mutuality and provisions relating to the deposit, and Part II will address the Interstate Land Sales Act and other minor issues. Please feel free to contact me for a more detailed discussion of these important issues.

Lack of mutuality

            Many dissatisfied buyers argue they have the right to terminate their agreements with a full refund of their deposit because the signed agreement lacks “mutuality.” Mutuality, in this context, simply means that a valid contract requires promises and obligations from both buyer

and seller.  

            A buyer's typical remedy upon a default by a seller is to either sue for damages or ask for specific performance. This way, when developers attempt to limit buyers' remedies they run the risk of making the contract unenforceable. Developers need to be careful that their form purchase agreements don't go too far in taking away the rights of buyers and limiting any obligations on behalf of sellers.

             In fact, a Virginia court recently held a purchase agreement to be unenforceable for lack of mutuality because the buyer had no right to sue for specific performance. The buyer's sole remedy was a refund of the deposit. It is interesting to note that in its decision, the court suggests that the contract would have likely been deemed enforceable if it had provided for interest to be earned on the deposit.

            Some suggest that your form purchase agreement should not expressly limit the buyer's remedies after default by the seller. In Virginia, if a real estate contract is silent regarding the buyer's remedies, then the buyer has all of the remedies allowed under law including the right to sue for specific performance.

            For preconstruction sales, however, you should provide for specific performance only when the property is constructed. Also, as mentioned above, as an alternative you may want to consider providing for interest to be earned on the deposit.

Deposit as damages

            Your purchase agreement should make expressly clear that in the event of a default by a purchaser, the seller's right to retain the deposit is in the form of liquidated damages and not as any form of penalty. Damages considered to be a penalty will likely not be held to be enforceable.  We can offer suggested language for the provision dealing with seller's remedies after a default by purchaser. 

         We will continue this discussion in Part II next week.

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Today we tip our toe, quite gingerly we might add, into the ugly place where preliminary statistics and politics meet. In the last week, print news and the internet have been awash with reports on stimulus spending today and estimates of the impact that spending has had a jobs created or saved. In particular, Chris Thorman and Don Fornes of Construction Software Advice have culled through the quarterly reports which are publicly available at www.recovery.gov and provided a detailed state-by-state breakdown of construction stimulus spending amounts awarded, amounts "received", jobs created and the cost per job (this article was also posted to ENR's blog and both have separate comments).

In general, the "cost per job" analysis of stimulus funding has triggered political ugliness reaching internet meme proportions. The "Usual Suspects" have regularly weighed in to the debate. In January, Rep. John Boehner (R-OH) ripped into the stimulus spending arguing that "the plan would spend a whopping $275,000 in taxpayer dollars for every new job it aims to create". In reply, economist Paul Krugman called Boehner's approach a "bogus talking point" that "involves taking the cost of a plan that will extend over several years, creating millions of jobs each year, and dividing it by the jobs created in just one of those years." With the latest quarterly numbers, the political machines for both sides have cranked up and marched out the latest updated versions of the talking points. We will leave it to our individual readers to decide whether the "Usual Suspects" refers to the motley line-up crew from Casablanca or Keyser Soze.

On a regional level, the data from Construction Software Advice provides some real points of interest. First, comparing amounts awarded to amounts received, there is a huge divergence amongst Maryland, Virginia and the District of Columbia in the flow of money. Maryland has "received" close to half the awarded funding. Virginia has received only 34%. The District has only received 5.5% of the $1,900,000,000 awarded (the most regionally). This tells us that in terms of the DC region, a huge amount of the money has not even been "received" yet and we can expect continuing economic impact, particularly from the DC projects. The underlying data may also face significant adjustment over time as corrections and changes are made, a reality that even the Recovery.gov site recognizes on-going data correction impacts the analysis. The precise measurement of jobs "created or saved", especially indirect jobs, appears to very difficult if not impossible.

It strikes us that at some point, a post mortem on cost per job will be appropriate and necessary, but at this stage it is difficult if not impossible for that exercise to be meaningful. Construction jobs in particular involve significant ramp up and as such stimulus funding that may have initiated the project will likely not see full employment fruition of jobs created or saved for some time. The Construction Software Advice report expressly recognizes these limitations stating, "With 76,214 jobs created/saved during this reporting period, the number will undoubtedly go up in future months as more projects begin and as more projects enter more labor-intensive phases." What we take from this information is that there are a lot of stimulus dollars, in particular construction stimulus dollars, in particular in this region, that have yet to be spent.  (Hat tip to our friend Rob Geedra from Geedra.com for passing along this link).

Image by Ereneta

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Cash flow and payment related issues continue to be of critical importance on construction projects. We recently posted on Basics of Mechanics Liens in Virginia, Maryland and the District of Columbia. We now turn to basic terms relating to notifications and required actions for payment bond claims in Virginia, Maryland and the District of Columbia. This discussion relates to public projects which are governed by statutory requirements for issuance of payment bonds and claims under those bonds. Private projects sometime have bonds as well; however, the terms of the bonds themselves would generally govern on bond claims on commercial projects. As with the mechanic's lien article, thanks go to Juanita Ferguson, a construction litigator at the firm whose upcoming newsletter article on liens and bonds forms the backbone of this post.

One important point to emphasize is that contractors and subcontractors have the right to file mechanic’s liens if they are not paid on projects involving privately owned property. This is not true on public projects. Instead, the federal government passed the Miller Act requiring payment protection on public contracts as payment security. The various states followed suit by passing their own “Little Miller Act” statutes which we cover here.

Virginia

How much is the bond? For all public projects in excess of $100,000.00, the amount of the main contract.

When is notice required? Anyone who has a contract with the general contractor does not need to transmit notice. Anyone who has a contract with a subcontractor must give notice to the general contractor within 180 days of the last date that work was performed or materials were provided for which payment is claimed.  

Is my project covered? If the project is $100,000.00 or less, the project is not covered unless required by the Commonwealth, county, or city responsible for the project.

When do I file a lawsuit? Suit must be filed more than 90 days after the last day that labor is performed or materials are provided but within one year after the date on which the claimant last performed labor or provided materials.

Maryland

How much is the bond? 50% of the total amount due under the main contract.

When is notice required? Anyone who has a contract with the general contractor does not need to provide notice. Any person having a contract with the subcontractor or a sub-subcontractor must provide written notice to the general contractor within 90 days of the last date of providing labor or materials.

Is my project covered? With the exception of highway projects, contracts for less than $100,000.00 are excluded.

When do I file a lawsuit? Suit must be filed more than 90 days after the last day that labor is performed or materials are provided but within one year after the state or municipality accepts the work performed under the primary contract.

District of Columbia

How much is the bond? One half of the total amount due under the terms of the main contract.

When is notice required? Any person who has a contract with the general contractor does not need to provide notice. Any person having a contract with the subcontractor must provide written notice to the general contractor within 90 days of the last date of providing labor or materials.

Is my project covered? If the project is less than $100,000.00 the bond may be waived.

When do I file a lawsuit? Suit must be filed more than 90 days after the last day that labor is performed or materials are provided but within one year from the last date that labor is performed or materials are provided.
 

A comparison of the jurisdictions reveals that the statutes are thus similar, but not identical, on timing requirements in particular.  As we move forward, we will delve into some of the nuances related to mechanics liens and payment bond claims in more detail.

Image by Ian Britton courtesy of FreeFoto.com

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We have recently discussed the need for construction industry players to know the basics of liens and bonds. We have also examined one case example of what can go wrong in mechanic’s lien matters by examining the failed Granby Tower project in Norfolk. Expanding on this thread, we will now turn to laying out some of the basics in our local jurisdictions for filing mechanic's liens. Thanks in particular to Juanita Ferguson, another construction litigator in our firm, whose upcoming newsletter article on liens and bonds formed the framework of this post.

Virginia:

1. Who can file? All persons performing labor or providing materials for a construction project
2. What is filed? A Memorandum of Mechanic’s Lien must be recorded in the land records where the property is located. With the exception of parties in privity with the owner, claimants need to transmit a notice to the owner and file that notice as well. Finally, the claimant must subsequently file a “Bill to Enforce” which is a lawsuit enforcing the mechanic’s lien
3. When is it filed? No later than 90 days after the last day of the month that work was last performed or materials were provided, and in no event no later than 90 days after completion of work on the project. The Bill to Enforce must be filed within six months of recordation of the Memorandum of Lien.

Maryland

1. Who can file? All persons performing labor or materials for a construction project
2. What is filed? Subcontractors must file a Notice of Intent to Lien in the Clerk’s office of the Circuit Court where the property is located. The first notice required for a general contractor is the Petition to Establish Mechanic’s Lien. Subcontractors are also required to file a Petition in order to enforce the lien.
3. When is it filed? A general contractor must file a Petition within 180 days of completion of the work or delivery of materials. A subcontractor must file a Notice within 120 days after performing work or providing materials.

District of Columbia

1. Who can file? Any person having a contract with the owner or the general contractor (note the difference here compared to Maryland and Virginia)
2. What is filed? A Notice of Mechanic’s Lien is filed at the office of the Recorder of Deeds in Washington, DC. In addition to filing, subcontractors must serve the Notice on the owner of the property. In order for any contractor to enforce the lien, a Complaint must be filed.
3. When is it filed? The Notice must be filed within 90 days after the project is completed or terminated, whichever is earlier.
    

Needless to say, while this is a handy guide on deadlines, there are plenty of issues, questions and nuances embedded in these several declarative sentences.  Mechanic's lien practice is highly technical and an area of law fraught with danger.  I would suggest this is definitely a subject matter where clients are well advised to stay away from at home remedies unless they are willing to risk their entire claims.

Image:  From the Luna Commons, part of the David Rumsey Map Collection

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