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Articles Posted in Construction Contracts

NSiegfried2013-thumb-200x300-94905-199x300Stuart-Sobel-2013-thumb-180x270-86799Firm shareholders Stuart Sobel and Nicholas D. Siegfried were quoted in an article that now appears on the main South Florida page of The Real Deal, the real estate news magazine and website.  The article, which is titled “Codina Partners affiliate allegedly owes $3.6M for Downtown Doral condo construction: lawsuit,” focuses on the firm’s work on behalf of the general contractor for the prolific developer’s new 5350 Park condominium tower in Downtown Doral.  The article reads:

. . . Grycon LLC is suing 5350 Park LLC and the project’s surety bond provider Arch Insurance Company in Miami-Dade Circuit Court for breach of contract. According to the complaint, Grycon hasn’t been paid for $3.1 million in construction services and $500,000 in bonuses for achieving completion milestones.

RDealIn February, the 20-story, 238-unit tower and attached garage were substantially completed, and buyers began closing on 5350 Park condos, the lawsuit states.

“When it came time to pay us and settle up, [the developer] has come up with excuse after excuse,” said Stuart Sobel, a Siegfried Rivera shareholder representing Grycon. “They have played it very heavy-handed.”

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For the South Florida construction industry, the coronavirus pandemic has caused suspensions of construction projects and a complete shutdown of the permitting/inspection department in Miami-Dade County.  Contractors facing these and other challenges during the COVID-19 outbreak will need to consider several strategies to help mitigate the impact and decrease their losses.

The process should begin with thorough contract reviews by qualified construction attorneys for their “force majeure” provisions, which are typically incorporated in construction contracts to afford contractors with relief in circumstances that are considered “acts of God,” “unforeseen events” or “natural disasters.”  These clauses may allow contractors to obtain time extensions on completions and possibly also recover additional costs or increase their total payment terms.

Legal counsel will evaluate whether current conditions categorize the COVID-19 outbreak as a force majeure event or whether other contractual provisions may apply to allow for claims for added costs and time extensions.  Though a virus has never impacted the construction industry to this magnitude before, contractors may be able to turn to force majeure law or other similar contract provisions to file claims and seek damages.

Contractors will also need to follow the notice provisions under their contracts for communicating delays and additional costs.  It is essential to use their contracts as the guide for the time limits for giving proper notice as well as determining who must be copied on the notice and how it should be delivered.

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At the height of the hurricane season, it is imperative for Florida’s developers, general contractors and community associations to have comprehensive storm preparation plans for their construction sites.

The best plans begin with continuous monitoring of storm fronts and threats. By keeping track of all the latest developments in the tropics, owners and builders can put their preparation plans into action with ample time to spare before conditions deteriorate.

Hurricane-2-300x169When a storm begins developing and may impact a construction site, the most critical tasks for all jobsite personnel will be securing the onsite equipment, materials, tools, portolets, dumpsters, trash, etc. All equipment needs to be tied down or removed from the site. Cranes, fence screens, signage, utility systems and other elements will require special attention, and all hazardous chemicals, electronics and project documents should be removed from the site and construction trailers.

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A recent ruling by the Fifth District Court of Appeal demonstrates the potential ramifications of ambiguities in the mediation and arbitration provisions of construction contracts. The ruling found the lower court correctly determined that the parties had a valid agreement to arbitrate certain claims because the contract clearly required arbitration for claims arising before final payment was due. However, it was silent regarding the procedure for resolving claims arising after the final payment became due, so the case was remanded back to the lower court for a determination as to whether the claims arose before or after final payment was due.

In Royal Palms Senior Apartments Limited Partnership v. Construction Enterprises Inc. et al., Royal Palms appealed the nonfinal order entered in favor of Construction Enterprises Inc. staying the developer’s lawsuit pending mediation and arbitration based on its assertion that the trial court erred in finding a valid arbitration agreement existed and its claim was subject to arbitration.

5DCA-300x183The Fifth DCA affirmed lower court’s finding that the parties had a valid agreement to arbitrate certain claims. However, because it is unclear whether Royal Palms’ claim was one subject to arbitration, it remanded the case for a determination of that issue.

The parties entered into a contract in 2006 for CEI to build the Royal Palms Senior Apartments. The agreement was comprised of the “AIA Document A201-1997 General Conditions of the Contract for Construction” (“General Conditions”) and a supplementary document (“Supplementary Conditions”), which modified and deleted portions of the General Conditions and controlled if the two documents conflicted.

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Michael-Clark-Gort-photo-thumb-160x240-13551Firm partner B. Michael Clark Jr. authored an article that appeared as a “Board of Contributors” guest column in today’s edition of the Daily Business Review, South Florida’s exclusive business daily and official court newspaper.  The article, which is titled “Statute of Limitation Begins to Run When Principal Under Surety Bond Abandons Construction Project,” focuses on a recent ruling by the Second District Court of Appeal finding that the limitations period for action on a surety bond began to run when the principal under the bond abandoned a construction project.  Michael’s article reads:

The [Lexon Insurance v. City of Cape Coral and Coco of Cape Coral] case stems from an ordinance that was adopted by the city of Cape Coral in January 2005 to initiate the development of an approximately 450-acre parcel, which included a single-family subdivision to be built by Priority Developers.  The city’s ordinance required the developer to provide a surety bond, and Lexon issued two subdivision bonds totaling $7.7 million. Disputes arose, and the contractor stopped work on the project in March 2007.

dbrlogo-thumb-220x41-94239In March 2012, Coco of Cape Coral purchased the project for $6.2 million, and in July of the same year the city adopted a resolution demanding that Lexon fulfill its obligations under the bonds. When Lexon declined, the city filed suit against it for breach of contract and declaratory relief, and the claims were later assigned to Coco.

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The American Institute of Architects’ (AIA) contract documents, which are generally regarded as the construction industry standards, are updated by the organization every 10 years, and the 2017 update released earlier this year contains considerable changes from the 2007 editions.

The changes in the documents directly impact the roles and responsibilities of each of the parties in construction and design contracts.  Some of the major owner/contractor changes include:

  • New exhibit with comprehensive insurance and bonds provisions that can be attached to many of the AIA owner/contractor agreements.
  • Expression provision in the AIA A201-2017 General Conditions addressing the rights of the contractor and the obligations of the owner in the event of a loss on the project if there is no property insurance procured.
  • New provisions relating to direct communications between the owner and contractor.
  • Revised provisions pertaining to the owner’s obligation to provide proof that it has made financial arrangements to pay for the project and the contractor’s rights related thereto.
  • Simplified provisions for the contractor to apply for, and receive, payments.
  • Single Sustainable Projects Exhibit that can be used on any project and added to most AIA contracts to address the risks and responsibilities associated with sustainable design and construction services.

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LindseyTLehr-200x300The firm’s Lindsey Thurswell Lehr authored a guest column that appeared in the “Board of Contributors” page of today’s Daily Business Review, South Florida’s exclusive business daily and official court newspaper.  The article, which was titlted “Ruling Reinforces Need to Abide by Contracts in Construction Disputes,” focused on a recent Florida appellate court ruling finding that property owners which forgo the contractual mechanisms for resolving construction disputes will not prevail in the state’s courts.  Her article reads:

Strictly adhering to the modus operandi for addressing and resolving disputes that is codified in construction contracts is essential to prevailing in any resulting litigation.

The Florida Third District Court of Appeal recently reinforced the obligation of construction defect litigants to adhere to the terms of their contract, finding that property owners which forgo the contractual mechanisms for resolving disputes will not succeed in Florida’s courts.

The ruling by the Third DCA in the case of Magnum Construction Management v. City of Miami Beach relieved the contractor of liability for alleged safety concerns with a playground that it installed at the city’s South Pointe Park. The appellate panel ruled that the city did not give the contractor the opportunity to fix the purported issues with the playground as required under its contract. Instead, the court stated that the city replaced the playground in its entirety without considering that the safety concerns could have been corrected by the contractor.

dbrlogo-thumb-220x41-94239The court’s decision in this case reinforces the importance of abiding by all contract terms and requirements in construction disputes. Construction contracts often allow the contractor which performed the work to have the opportunity to fix and cure any purported problems and defects. If a property owner ignores this contractual stipulation, as the city of Miami Beach appears to have done in this case, Florida’s courts are very likely to rule against them.

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Stuart Sobel 2013-thumb-180x270-86799Firm shareholder Stuart Sobel authored a guest column that appeared in the May issue of Construction Executive magazine, one of the leading construction industry trade publications in the country.  His article, which was titled “Dispute Review Boards: An ADR Technique That Works,” focused on the use of DRBs for major projects as an effective means to avoid or resolve disputes that may arise during construction.  Stuart’s article reads:

Disputes are endemic to the collaborative nature of construction. It seems prudent to anticipate the disputes, even where the precise nature of the dispute is unknowable, and create a structure for proactively addressing and resolving them when they do arise. Traditional dispute resolution, whether arbitration or litigation, when invoked at the end of the project, takes place too late to save it or get it back on track. Instead, proactive onsite real-time dispute resolution is warranted to protect working relationships, cash flows and schedule progress.

Arbitration has become the preferred alternative dispute resolution forum for resolving construction disputes because it is private, streamlined and presided over by experienced construction professionals.

However, just as with litigation, arbitration only comes into play after a dispute has ripened. The arbitration process usually extracts a considerable toll on the project participants through damaged relationships and expenses. The parties involved are very unlikely to continue doing business together in the future. In addition, discovery in arbitration proceedings is now wider, longer and more expensive, and its growing resemblance to litigation has become unmistakable. Thus, despite its reputation as a cheaper alternative to litigation, arbitration has become more expensive as the process permits more litigation-like discovery, with attendant administrative costs and arbitrators’ fees.

Instead, consider the scenario where an independent person or board, respected by all project participants, is designated in the operative construction contracts to stay abreast of the design and construction and to attend and observe all pertinent meetings (owner/architect/contractor meetings, change order meetings and even important contractor/subcontractor meetings). Through this process, the dispute resolution neutral or, where there is more than one, the Dispute Resolution/Review Board (DRB), can quickly understand theConstruction-Executive-Logo nature and genesis of disputes that are blossoming — before they slow or stop the construction progress.

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MichaelKurzman_59661.jpgThe recent ruling by the Third District Court of Appeal that firm shareholder Michael Kurzman wrote about in the preceding blog post below was the subject of a front-page article in the Oct. 1 issue of the Daily Business Review. The article, which was titled “Third DCA Says Company Can’t Foreclose on Itself,” focused on the tactics used by a Coral Gables developer to attempt to eliminate the claims and liens filed against it by general contractor CDC Builders, Inc.

CDC Builders was represented on appeal by Michael Kurzman, together with John K. Shubin and Deana D. Falce of Shubin & Bass. The South Florida Chapter of the Associated General Contractors also provided an Amicus Curiae brief through Gary Stein of Pecar and Abramson.

The article reads:

. . . [Developer Brian] McBride struggled to repay SunTrust and took an “unusual step” of renegotiating the construction loan, court records show.

As a condition, SunTrust required curtailment payments that reduced its exposure. McBride authorized SunTrust to debit these payments from other accounts he owned or controlled at the bank.

“He specifically directed SunTrust that these payments should not be treated as reductions in the principal amount of the loan, which would have reduced the interest on the loans. Instead, he insisted the payments be treated as junior liens against the property,” Judge Thomas Logue wrote in a Sept. 17 opinion. “He took this unusual step, the SunTrust officials noted, in order to limit the equity available to satisfy the contractor’s construction liens.”

“These statements by SunTrust officials support an inference that McBride was taking affirmative steps for the express purpose of defeating the contractor’s construction liens in the event that a court upheld the liens,” Logue concluded.

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[Development company] Biltmore took one more step in its fight with the contractor.

Even though SunTrust was not marketing the construction loan, a Biltmore affiliate approached the bank to purchase the debt. McBride did not ask for extensions. Instead Biltmore used a new loan from Royal Bank of Canada to purchase the SunTrust loan at full face value in 2010, court records show.

“BSDI was able to obtain this loan although it had no assets,” Logue wrote. “When questioned, McBride could not recall where the collateral or guarantees for the Royal Bank loan originated. He could not recall whether he had guaranteed the $10 million loan.”

Once Biltmore gained control of the note, it moved to foreclose on the property, which would have wiped out secondary liens like the builder’s lien.

“They foreclosed on their own company and loan,” Kurzman said. “They realized they owed my client $2.3 million they didn’t want to pay, and that’s when they got crafty.”

As Michael concluded in his blog post about the case:

“A contrary decision at the appellate level could have proven to be particularly problematic for Florida’s construction industry, as it would have surely led to other developers applying this same scheme in order to terminate construction liens and avoid paying their contractors, subcontractors and material suppliers. Thankfully for CDC as well as for the health of the construction industry in Florida, that will not be the case.”

We congratulate Michael, John, Deana and Gary on this extremely important win for firm client CDC Builders as well as for the Florida construction industry.

Click here to read the complete article in the Daily Business Review website (registration required).

On behalf of my client CDC Builders, Inc., I was very pleased to have served as the company’s lead trial court counsel and appellate co-counsel (special thank you to John K. Shubin and Deana D. Falce with Shubin & Bass, P.A.for all of their hard work on this case) in its recent successful appeal before the Third District Court of Appeal. CDC appealed a trial court’s decision that could have had significant negative implications for Florida’s construction industry. Indeed, we were assisted on the appeal by the South Florida Chapter of the Associated General Contractors in an Amicus Curiae brief, as this case was of critical importance to the construction industry.

In the case of CDC Builders, Inc., v. Biltmore-Sevilla Debt Investors, LLC, the Third District Court of Appeal reversed the lower court’s summary judgment, which allowed a developer (through a newly created, developer controlled entity) to purchase its own construction loan from its lender and foreclose on the loan expressly for the purpose of:

  • eliminating the construction liens filed against it by CDC, and
  • transferring the developers’ only assets (the real property) to the newly created, developer controlled entity.

This had the effect of extinguishing CDC’s construction liens and rendering the developer entities judgment-proof, leaving CDC with no ability to get paid for work performed, while allowing the original developer to obtain ownership of the real property (through the newly created, developer controlled entity) with the benefits of CDC’s unpaid hard work. The trial court found that the developers’ brazen maneuver was legal and allowed for the foreclosure to proceed.

Fortunately for CDC as well as other members of Florida’s construction industry, the Third District Court of Appeal reversed the lower court’s decision and, in so doing, prevented the creation of a new formula for unscrupulous Florida developers to cheat their contractors, subcontractors or material suppliers out of payment for work performed or materials provided.

In this case, Riviera Biltmore, Riviera Sevilla and Riviera Almeria (all mostly owned and controlled by Brian McBride of Riviera Development, www.rivieradevelopment.com) retained CDC to build 25 luxury homes and townhomes on several parcels in the Biltmore Hotel area of Coral Gables. The developers then borrowed $20 million from SunTrust to finance the construction. To initiate the construction loan, SunTrust required that Brian McBride and McBride Family Properties provide personal guarantees. The McBride family (original owners of the NFL’s Cleveland Browns) is a wealthy and successful family with deep roots in Cleveland and Coral Gables.

Consistent with the construction loan documents which limited the number of spec homes that could be built at any one time, the developers directed CDC to begin construction on 8 of the 25 homes. When the economy soured, the developers exercised their contractual right to terminate the contracts for convenience but requested that CDC complete the eight homes under construction. CDC continued working and also presented the developers with a claim for lost profit on the 17 homes that were terminated for convenience, per the terms of the written contracts. To hedge their exposure, the developers began withholding payments from CDC for work being performed on the eight homes under construction. The developers asserted improper billings as a basis for withholding payments. Despite reduced payments and eventual non-payment of its monthly draws, CDC completed the eight homes and obtained certificates of occupancy from the City of Coral Gables.

CDC recorded claims of lien for the unpaid work performed on the constructed homes, and it filed suit seeking money for the work performed and unpaid, money for the lost profits on the homes not constructed, and foreclosure of its construction liens. The construction liens covered the work performed and unpaid on the homes, but they did not cover the claims for lost profits on work not performed, as those items are non-lienable under Florida law.

When the construction loan matured, McBride (as the personal guarantor of the loan) paid curtailment fees from his other companies to SunTrust to extend the loan several times. Then, rather than extending the loan further (which would have had the effect of reducing the loan and increasing equity in the property for the benefit of CDC), the developers took an extremely untoward and questionable next step. McBride created a new LLC owned by other LLCs made up of him and his family members, acquired a new loan from another lender and used the funds to have this new LLC acquire an assignment of the SunTrust construction loan and mortgages for the full amount owed to SunTrust. In internal documents, SunTrust stated that the loan was paid off by the borrower.

3rd district court of appeal.jpgMcBride’s new LLC then held a first priority interest because it had “purchased” the original SunTrust construction loan. McBride’s new LLC then filed a foreclosure action against the developers (McBride’s other developer entities) and CDC in order to eliminate CDC’s liens as subordinate liens, and to transfer the real property (developers’ only assets) to McBride’s new LLC. The trial court found the crafty maneuver to be legal, and thankfully for CDC as well as many other participants in Florida’s construction industry, the appellate court disagreed.

In a lengthy 16-page opinion, the Third DCA stated in relevant part as follows:

“The law does not permit a person to borrow money from a bank, give the bank a mortgage, incur additional liens and junior mortgages on the property, purchase the mortgage back from the bank, and then foreclose on the mortgage for the primary purpose of eliminating the additional liens and junior mortgages . . . [I]nvestors cannot grant mortgages, contract for the improvement of the property mortgaged, and then use a network of companies to purchase and foreclose the mortgage for the primary purpose of extinguishing the construction liens that increased the value of the property. To hold otherwise would undermine the long-standing principle . . . persons cannot do indirectly what they are not permitted to do directly.”

Unquestionably, fairness and justice prevailed in this case. Unfortunately, the developers delayed payment to CDC by years and caused CDC to incur significant attorney’s fees and costs, at great sacrifice, to right this wrong.

A contrary decision at the appellate level could have proven to be particularly problematic for Florida’s construction industry, as it would have surely led to other developers applying this same scheme in order to terminate construction liens and avoid paying their contractors, subcontractors and material suppliers. Thankfully for CDC as well as for the health of the construction industry in Florida, that will not be the case.

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