Under Construction Winter 2023 – Lexology

Letter From the Editor

Welcome to our Under Construction newsletter’s winter edition. We hope your holidays brought you joy and that your 2023 is off to a wonderful start for you, your family, and your company.

This newsletter covers a range of subjects linked to recent legal developments and construction industry trends that may be important to you and your company. Real estate development basics, California 2023 construction law highlights, a new false claims act that poses dangers for government contractors in Colorado, verifying that your insurance policies provide adequate and required insurance coverage, subordination of mechanic’s lien rights of general contractors, a Utah seller beware case, and much more are covered in the articles we selected. The articles below cover a variety of topics and explain issues that we believe you should be aware of at this time.

These articles are meant to inform and enlighten you. If you would like us to address a certain construction-related subject in a future newsletter, kindly let us know. We wish you a successful, active, healthy, and secure 2023!

Real Estate Development Basics: Focus on Northern Nevada

Attention to land use and zoning matters should be considered early in the real estate development process. Projects may require relief in the form of a master plan amendment, rezoning, special or conditional use permit, tentative mapping, or any combination thereof. This article provides a guideline to the basics of land use entitlements in Northern Nevada.

Development approvals will generally be obtained from the local jurisdiction where the project is located. In Washoe County, projects may be approved through the County, the City of Reno, or the City of Sparks. These three local jurisdictions also participate in the Truckee Meadows Regional Planning Agency (TMRPA), which has established a regional master plan and has additional authority over matters which have regional significance.

Initial steps to consider: identify the project type and potential sites

The initial step in real estate development often begins with identifying the type of project sought for development. Will the project be solely residential, commercial, industrial, or a mix of uses? Identify the specific use or uses that will be provided – e.g., if residential, will the project consist of single family or multi-family dwellings; if commercial, will the use be retail sales, restaurants, offices, a carwash, etc.? Some uses may or may not be permitted by right. Determine the density (number of residential units per acre) or intensity (area in square footage) that you will provide.

Next, potential sites should be identified. Each jurisdiction in Northern Nevada (whether an incorporated city or a county) maintains a zoning map and its own set of zoning regulations (sometimes referred to as a development code) which sets forth the applicable standards for each zone.

Determine existing zoning and development standards

Every property in Northern Nevada is assigned an Assessor’s Parcel Number (APN) for identification and tax assessment purposes. Additionally, every property will have an existing master plan designation and a regulatory zone designation. Pursuant to NRS Chapter 278 (Planning & Zoning), most cities and counties in Northern Nevada have adopted a master plan that sets forth the general policy plans and goals for the region. Each master plan includes a comprehensive land use map detailing the master plan designation for every property within the jurisdiction. The regulatory zoning is required to correspond with the master plan. For example, a master plan designation of residential would typically not allow for industrial zoning districts.

For properties located anywhere in Washoe County, including in the Cities of Reno and Sparks, the Washoe GIS Mapping System can provide basic parcel information, and includes zoning information for properties not in Reno and Sparks. https://gis.washoecounty.us/wrms/

Zoning information for properties within the Cities of Reno and Sparks can be located at the following links:

The existing zoning district (or regulatory zone) corresponds to permitted uses and applicable development standards. Uses may be permitted by right, permitted with an entitlement (e.g. special use permit/conditional use permit), or prohibited in certain zones. The development standards will generally include maximum height, maximum or minimum density or intensity, setbacks, lot coverage, parking and loading standards, design requirements, and other requirements.

Master Plan amendments and rezoning

Once the existing zoning is known, you may want to determine whether the existing zoning is workable or if the property will need to be rezoned to achieve your desired use. If the existing zoning is incompatible with your proposed project, you will likely need to rezone the property, and possibly obtain an amendment to the master plan designation. In addition, even if the proposed use is allowed and the project is to be constructed consistent with the development standards, additional regulations may apply. Legal counsel can assist with determining compliance with all regulations.

If a master plan amendment or rezoning will be required, the process will typically require a non-binding recommendation from the planning commission, with a final decision rendered by the City Council or County Commission. In addition, all master plan amendments in Washoe County, Reno, and Sparks require further review and recommendation from the TMRPA regional planning commission (RPC). The RPC reviews the proposal for conformance with the regional master plan. Appeals of RPC decisions are made to the TMRPA Governing Board, which is comprised of elected officials from the Reno and Sparks City Councils and the Washoe County Board of County Commissioners.

Projects requiring subdivision

Projects which seek to subdivide land, including for condominiums, will need to comply with all state and local regulations for subdivision of land. Depending on the number of lots sought to be provided, an application for a “tentative map” or for a “parcel map” will generally be required. In Nevada, these requests typically need to be accompanied by a site plan and legal descriptions prepared by a Nevada licensed surveyor, a recent title report, application fees, and completed forms. Depending on the request, the jurisdiction may also require plans for utilities, grading, landscaping, lighting, and sewer. Most applications will require a written narrative describing how all required legal requirements may be met, which typically include general consistency with the applicable master plan, and compliance with zoning regulations.

In most instances, these types of subdivision applications are decided upon by a planning commission, parcel map review committee, or board of adjustment. Appeals of the decision may be made to the governing body (usually the City Council or County Commission).

Condominium projects are also required to comply with additional state regulations and to register with the Nevada Real Estate Division. Legal counsel can assist in compliance with all requirements.

Land use entitlements

Projects which cannot be constructed by right will require an “entitlement” – legal relief granted by the City or County in order for some aspect of the project to proceed. Common forms of entitlement relief include a conditional use permit or special use permit, site plan review, major or minor deviation, or a variance. Each jurisdiction has differing requirements, but typically these types of applications require submission of several materials, including an analysis of how all legal findings of approval can be met. In most instances, a planning commission or board of adjustment will have final decision authority, with appeals permitted to the governing body (City Council or County Commission). Legal counsel can help prepare all written analyses and work with the team to help ensure all materials are complete and timely submitted.

Projects of regional significance (Washoe County)

Some entitlements and subdivision requests rise to the level of a “project of regional significance.” Pursuant to NRS 278.026(5), projects of regional significance include, but are not limited to, projects which will increase (1) employment by not less than 938 employees; (2) housing by not less than 625 units; (3) hotel accommodations by not less than 625 rooms; (4) sewage by not less than 87,500 gallons per day; (5) water usage by not less than 625 acre feet per year; or (6) traffic by not less than an average of 6,250 trips daily. Additionally, a project of regional significance may also be one which has impacts to designated historic, archeological, paleontological, cultural, or scenic resources; would result in the creation of significant new geothermal or mining operations; or would have a significant effect on the natural resources, public services, public facilities, schools, or the adopted regional form of the region.

Outline of process

Prior to submitting the entitlement or subdivision application, you may want to consider scheduling a pre-application with staff members from the relevant jurisdiction. Depending on the type of request, the staff members may include representatives from the planning, engineering, police, fire, business licensing, and other divisions or departments of the local governments.

Upon submission, staff will provide comments to the application, which may include requests for additional information or clarification. Once all responses have been received, planning staff will set a hearing date and prepare a “staff report” which will provide a thorough analysis of the project and its compliance with legal requirements and findings of approval. Staff will typically make a recommendation of approval or denial for each project.

Before the hearing, legal counsel can work with you to contact members of the deciding body to share the details of the request, answer any questions that individual members may have, and learn of any concerns with the project. Typically, in Northern Nevada, during the hearing, planning staff will make a presentation, the applicant and/or representative will make a presentation, and members of the public will each be granted a 3-minute opportunity to speak. Finally, the body will make its decision.

Depending on the type of application, an appeal may first be made to the City Council or County Commission, and further appeals to the state district court are also possible. Legal counsel can assist with all stages of the process, either by carrying the application through the entire process, or assisting as needed.

The Colorado False Claims Act Brings New Risks for Government Contractors in Colorado

In June of 2022, Colorado Governor Jared Polis signed into law House Bill 22-1119, informally known as the Colorado False Claims Act (the “CFCA”). The CFCA is modeled after the federal False Claims Act and imposes liability relevant to contractors for false claims to the state or local government related to:

• Claims for payment from the government;
• Statements material to a false or fraudulent claim;
• Delivery of only a portion of government property or money that should be fully delivered to the government; and
• Knowingly falsely documenting receipt of property used by or to be used by the government.

Construction professionals must become familiar with and understand the requirements, penalties, and potential carveout to attempt to avoid liability. The penalties under the CFCA can add up, as a single project can contain multiple claims or parts of a transaction.

• Allows a private person (in the name of the government) and/or the Colorado Attorney General to bring a civil action against one who has made a false claim
• Imposes the following penalties for violation:
  • Between $11,800 and $23,600 (adjusted for inflation) per violation; plus
  • Actual damages incurred by the State, which may be multiplied by three (treble damages); plus
  • Attorney fees and costs for the investigation and prosecution of the false claim.
• Provides that penalties may be reduced if the person who made the false claim provides information to the investigators within 30 days after first learning of the potential violation and cooperates in the investigation.
• Allows for whistleblowers to receive robust protections and payments by authorizing them to recover up to 30% of the total recovery by the government.

We, and many industry professionals, trust that a robust government compliance program within a contractor’s organization may help reduce the potential liabilities associated with CFCA. It is certainly a good start to begin educating and managing up-front compliance with the CFCA and to run point when a potential CFCA violation is identified. But an in-house government compliance program is not a surefire way to avoid investigation, avoid liability, or necessarily significantly reduce damages as the reduction afforded is only a reduction to one category of damages.

Most of a construction professional’s risk related to the CFCA surrounds request for payment and receipt of payment from the government. A contractor’s best bet to avoid running afoul of the CFCA would be to understand the CFCA and require close attention to detail and accuracy in your company’s accounting and invoicing for state and local government projects. Like the federal False Claims Act, untangling from a false claim investigation and prosecution is typically costly, time consuming, and risky. An ounce of prevention is worth a pound of cure!

An Insurance Check Up for the Construction Industry

The New Year is an opportunity to reset and reflect on your present condition and ways to improve. One thing all members of the construction industry, from owners to contractors, should do is check in on their insurance policies and consider if they have appropriate coverage. This is especially important if there is a downturn in the economy. If the economy does slow down, many more owners and contractors may vigorously attempt to obtain insurance coverage for defense and indemnity coverage. With that in mind, here are some starting points for your insurance checkup.

Confirm Your Coverages: Regardless of your role, the most important step is to ensure you have your actual insurance policies that may cover your work or projects. Certificates of insurance are good to have, but usually by themselves do not provide coverage, so you need to have and understand the provisions of the policies you may one day seek to enforce.

If you are a contractor, not only do you want to have the coverage you think appropriate for your business, you also need to ensure that your insurance coverage satisfies your project requirements. On the first, it may be prudent to have a meeting with your insurance broker each year to determine what insurance coverage you need. On the second, it also may be prudent to send the insurance provisions to your insurance broker BEFORE you sign your contract so that you do not become the “insurer” for some insurance coverage that the contract required and the loss should have been covered by the required insurance, but you didn’t have such insurance coverage. Most (if not all) contracts include requirements for what type of coverage the contractor needs to provide. Examples include workers’ compensation, CGL and/or pollution coverage. Before signing is the best time to know what they are, but it will not get better if you ignore a problem.

Likewise, if you are an owner, you should pause to consider what insurance you actually want your contractor to provide. While coverage is critical and it is tempting to “buy it all,” a prudent contractor will pass that cost on to you. Your contractor will buy the insurance you require in the contract, but you are likely ultimately paying a higher cost to the contractor if you require too much or unnecessary insurance. It is up to you to balance the risks you are willing to face versus immediate savings.

Dates: With the new year, now is a good time to ensure your policies cover the appropriate time period. For example, if you started a job back in late 2021, now is a good time to double check that there is not a temporal limit to coverage (i.e. coverage did not end in 2022 for work continuing into 2023). This is especially important for jobs suffering from delays or other time extensions, possibly due to supply chain issues or labor shortages.

Claims: Consider what has been happening on your projects and if you need to put your carrier on notice of any claims. Have you heard whispers around the water cooler that things are not working right or is there a recurring design problem coming up during meetings? Now is the time to press for details and evaluate if you have a claim. Notice periods may be set forth in your policy and can be shorter than you anticipated and will likely be used as a way to avoid providing coverage. Also, keep in mind any statutes of limitation or statutes of repose.

Tender: Related to timely submission of claims is ensuring you know how to tender. Failure to follow the policy’s procedural requirements could lead to denial of coverage.

Review any Reservations of Rights: If you have made claims, understand what your carrier is telling you. Are they denying coverage outright or looking for more information? Consider what the carrier’s letter says and respond accordingly.

While not an exhaustive list, the above is a starting point for your insurance checkup. If you have further questions, consider contacting your broker or agent, or otherwise your attorney for advice.

General Contractors—In a Challenging Economy Beware of the Pitfalls In Subordinating Your Mechanics’ Lien Rights to an Owner’s Lender

Lenders on commercial real estate projects typically require that the general contractor subordinate its mechanics’ lien rights to the lender’s deed of trust and other financing documents in order to assure the lender that its security interests in the project will have priority over any mechanics’ lien rights of the general contractor. While the general contractor is not in privity with the lender under the construction loan documents per se, the typically required subordination, consent and assignment agreement that is a condition from the lender to make the construction loan directly places the general contractor in privity with the lender in enforcing the terms of the subordination, consent, and assignment agreement.

The impacts that subordination agreements have on general contractors are significantly exacerbated in challenging economic times – foreclosures become a reality and contractors are more truly at risk without the protection of their mechanics’ lien rights. Under these circumstances, most often there is little the general contractor can do to protect itself from having its mechanics’ lien rights primed by the lender. There are, however, practical suggestions regarding the subordination agreement in order to place the general contractor in the most advantageous position it can be in the event of an owner’s loan default.

1. Carefully review the progress payment procedures in place as part of the lender’s loan to assure that there will not be delays in receiving progress payments, and that the forms of partial lien waivers and other progress payments documents are clearly identified.
2. Have a clear understanding that the lender’s construction loan budgets are lining up with the general contractor’s budgets and that the owner has sufficient equity at stake in the project to make certain that there are no contemplated shortfalls in the budgets, at least as the budgets are determined at the time of the closing of the construction loan.
3. Try to strike from the subordination agreement any broad grants to the lender of a power of attorney on behalf of the general contractor, especially in dealing with subcontractors.
4. Make sure the change order procedures are understood by all parties and that there is no confusion as to when a change order will be required and what documentation will be a condition to the change order.
5. Clearly define the general contractor’s rights to retainage toward the end of the project, as well as the conditions the lender will require for disbursement of retainage.

California courts have clearly held that subordination agreements are enforceable as long as the agreement to subordinate is clearly laid out, and the general contractor knowingly waived its mechanics’ lien rights.¹ As a result, general contractor challenges to the enforceability of subordination agreements will most likely not be successful absent some unique circumstances. Nevertheless, taking the time to clarify the types of issues described above will at least provide the general contractor with some modicum of protection in waiving its mechanics’ lien rights.

Utah Court Confirms “Seller Beware” Rule in Failed Sale Suits, Requiring Return of Earnest Money Before Seeking Other Remedies

Utah Court Confirms “Seller Beware” Rule in Failed Sale Suits, Requiring Return of Earnest Money Before Seeking Other Remedies In Utah, if you are a seller of real property, you have to let the bird in the hand go before pursuing the two in the bush. The seller of a motel trying to recover damages from a prospective buyer for breach of contract got a rough start on the holidays when the Utah Supreme Court recently affirmed the trial court’s dismissal of a suit seeking damages for a failed motel sale, citing the seller’s failure to remit earnest money prior to filing suit. In Rocky Mountain Hospitality, LLC v. Mountain Classic Real Estate, Inc., 2022 UT 44, the Court considered whether a trial court had properly dismissed a suit for damages arising from a failed motel purchase. In that case, the buyer (Rocky Mountain) had entered into a contract with seller (Mountain Classic) to purchase a Super 8 motel for $3.4 million. Buyer tendered a $30,000 earnest money with the offer to purchase, which the seller accepted. Importantly, the contract had a provision stating that if the buyer failed to complete the purchase, the seller had to make an election, choosing either to retain the earnest money as liquidated damages for the failed sale, or return the earnest money, and then sue for any other remedies. Buyer failed to close on the sale, and the seller eventually sold the motel for $2.75 million. Claiming more than $780,000 in the reduced selling price as damages for the failed sale, the seller filed suit against the buyer for breach of contract without first releasing the $30,000 earnest money back to the buyer. When buyer filed a motion to dismiss the complaint, citing a Utah Court of Appeals decision considering the same issue (McKeon v. Crump, 2002 UT App 258), seller tried to tender the earnest money back to the seller. The trial court dismissed and, on appeal, seller made two arguments, both of which the Utah Supreme Court rejected. The first argument was that the McKeon court got the law wrong in enforcing the specific provisions of the default clause. The Utah Supreme Court rejected that argument, citing a long history of Utah jurisprudence enforcing plain terms of contracts, specifically default clauses. Secondly, seller argued that equitable doctrines excused strict compliance with the contract. The Utah Supreme Court rejected that argument as well, citing to the same caselaw wherein multiple Utah courts had explicitly and implicitly required plaintiffs to make an election. The Utah Supreme Court did not find the “form over substance” or “substantial compliance” arguments persuasive when the contract language was plain and clear.

To help parties in the future, the Utah Supreme Court set forth four rules to guide plaintiffs in Utah seeking similar relief.

1. Default clauses like the earnest money clause at issue require sellers to choose between keeping the deposit, or pursuing other remedies;
2. If a seller retains the deposit, it has made an election without taking any other action;
3. A seller cannot simultaneously retain a deposit and pursue other remedies; and
4. A seller exercises the option of retaining the deposit if, at the time of declaring a breach, the seller has not tendered the deposit back to the buyer. The court here recognized that the result may seem “harsh,” but opted to make very clear, and to establish for parties to purchase contracts a “clear-cut, return-before-filing rule.” To further make the point, the court awarded fees to the buyer, again enforcing the specific provisions of the contract.

Perhaps the most surprising “rule” to come from this was number four, indicating that before a party even makes a claim for breach, it should consider whether retaining the deposit as liquidated damages is enough. If it is not, a seller should tender the money back, and only then start the claim process.

California 2023 Construction Law Highlights

SB 674 High Roads Jobs-Transportation

• This bill would establish the High “Road Jobs in Transportation – Related Public Contracts” to support the creation of equitable high-quality transportation and related manufacturing and infrastructure jobs. This relates directly to the State’s intention to purchase EVs and related equipment valued at $10 million or more to incorporate high road job standards which need to be developed. The intent is to incorporate social justice policy into construction contracts in alternate energy infrastructure public works.
• What is a High Road Job? A High Road Job is one that pays good wages, follows labor standards, adheres to practices of substantial environmental policies and incorporates social justice. There are no construction criteria but a state law to force undefined “justice” social policy into public works contracts.
• This bill will require a contractor every 12 months to submit information necessary to demonstrate its compliance with the specified requirements to the relevant public agency regarding High Road Job regulations and compliance thereof. Failure to comply submits the contractor to a $10,000 fine for each report that’s missed to be deducted from final payment. The bill is intended to cover the electrification in public works to accommodate EVs.

AB 2232 School HVAC Requirements

• This bill requires that a covered school, defined as a school district, the County office of education, a chartered school, a private school, the California Community Colleges, the California State University, and requests the University of California, to ensure their facilities have HVAC systems that meet specified minimum ventilation rate requirements, unless the existing HVAC system is not capable of safely and efficiently providing the minimum ventilation rate in which case the bill would require a covered school, and request the University of California, to ensure that its HVAC systems meet the minimum ventilation rates in effect at the time the building permit for installation of the HVAC system was issued.

AB 2446 Carbon Emissions Construction Materials

• This bill would require the State, by July 1, 2025, to develop a framework for measuring and then reducing the average carbon intensity of the materials used in the construction of new buildings, including those for residential uses. The bill would require the framework to include a comprehensive strategy for the State’s building sector to achieve a 40% net reduction in greenhouse gas emissions of building materials, as determined from a baseline calculated using a certain 2026 report (to be created). The bill would require the strategy to achieve this 40% target as soon as possible, but no later than December 31, 2035, with an interim target of 20% net reduction by December 31, 2030.

SB 1422 No Bid Contracts

• This bill would authorize the Director of General Services to use alternative no-bid contracting procedures for contracts for the installation or purchase and installation, of carpet, resilient flooring, synthetic turf, or lighting fixtures that will satisfy existing law. Existing law authorizes state and local agencies to contract with suppliers awarded those contracts without further competitive bidding.
• The state or agency may contract with suppliers and may award these no-bid contracts if all of the following requirements are satisfied: 1) the installation work is not performed in connection with new construction; 2) compliance with the labor code; and 3) commitment that a skilled and trained workforce will be used to complete the installation work.

SB 1354 Design Build- ADA Compliance

• This bill would authorize a city, county, or city and county to use the design build contracting process for contracts for constructing projects that are necessary in order to comply with construction-related accessibility standards.

SB 991 Design Build- Water Projects

• This bill, and until January 1, 2029, authorized local agencies, defined as any city, county, city and county, or special district authorized by law to provide for the production, storage, supply, treatment, or distribution of any water from any source to use the progressive design build process for up to 15 public works projects in excess of $5 million for each project.
• After selecting a design build entity, the local agency may enter into a contract to direct the design build entity to begin design and preconstruction activities sufficient to establish a guaranteed maximum price for the project.
• Upon agreement of the guaranteed maximum price for the project, the local agency, at its sole and absolute discretion, may amend its contract with the design build entity to contract for the remaining design, preconstruction, construction activity sufficient to complete and close out the project, consistent with the guaranteed maximum price. There are exceptions for unforeseen conditions.
• If the cost for completing all remaining design, preconstruction, construction activity sufficient to completely close out the project exceed the guaranteed maximum price, the cost exceeding the guaranteed maximum price shall be the responsibility of the design build entity.
• If the cost for these activities are less than the guaranteed maximum price, the design build entity shall not be entitled to the difference between the cost and the guaranteed maximum price unless there is a prior written agreement concerning the sharing of these funds. For purposes of this section, costs shall include the design build entity’s direct costs, general conditions, overhead, and fee.
• The design professionals responsible for performing design services on behalf of a design build entity that has been replaced pursuant to this statute, shall have sole liability for the design errors and omissions, provided the local agency elects to use their complete and stamped designs.
• This is a comprehensive multipage statute and is new law without any case law guidance.

AB 1932 Construction Manager At-Risk

• Existing law authorizes, until January 1, 2023, a county, with approval of the Board of Supervisors, or a public entity, of which the members of the County Board of Supervisors makeup members of the governing body of the public entity, with the approval of its governing body, to utilize construction manager at risk construction contracts for the construction, alteration, repair or improvement of any infrastructure, owned or leased by the county, subject to certain requirements including that the method be used only for products that are in excess of $1 million. This bill extends those provisions until January 1, 2029.

AB 2173- Exception to 5% Retention Withholding- Public Contract Code

• Existing law, to January 1, 2023, authorizes the retention proceeds withheld from any payment by an awarding entity, as described, from the original contractor, by the original contractor from any subcontractor, and by subcontractor from any subcontractor, to exceed 5% on specific projects where the director of the applicable department, as specified has made, or the governing body of the public entity or designated official of the public entity has approved, a finding prior to the bid that the project is substantially complex and requires a higher retention in the department or public entity includes both this finding and the actual retention amount in the bid documents. This bid would make these provisions operative indefinitely. Public Contract Code 7201.

Notable Construction Cases

• One issue that has finally been resolved is whether B&P Section 7031 bars a licensed contractor from seeking compensation for work performed by an unlicensed subcontractor. In Kim v. TWA Construction, Inc., Case No. H045900 (May 13, 2022), the 6th District Court of Appeals finally addressed that issue. The Court of Appeals looked at the Contractors State License Law and determined the statutory scheme of which it is part of and concluded that section 7031 bars a licensed contractor from seeking compensation for work performed by an unlicensed subcontractor.
• In Cell-Crete Corporation v. Federal Insurance Company, 82 Cal.App.5th 1090 (2022), the 4th District Court of Appeal examined whether a payment bond surety, who prevails in a claim against the payment bond, is entitled to statutory attorneys’ fees when the party actually incurring the attorneys’ fees was the general contractor, pursuant to its defense and indemnity obligations, as opposed to the surety itself. The surety argued on appeal that it was entitled to recover its costs in the plain language of CCP 1032 in any action or proceeding. The Court of Appeal explained that a judge must award reasonable attorney’s fees to the prevailing party regardless of whether the prevailing party ultimately is responsible to pay for the fees. For payment bond sureties and their principals this case clarifies that prevailing payment bond sureties, even if defended by their principals pursuant to a defense and indemnity agreement, are entitled to recover the attorneys’ fees incurred in defending against claims against the payment bond.