Law

Could an Employee Incentive Program Help You Hire and Retain Skilled Workers?

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By Brennan  P. Connor

Brennan Connor

Attracting and retaining quality employees is a concern of all businesses but, in today’s economy, is of particular importance in the construction industry. According to a recent press release from the U.S. Chamber of Commerce, more than half (52 percent) of contractors say they will hire more employees in the next six months, up from 46 percent in Q1 2021. However, according to the same press release, 88 percent of contractors surveyed stated they are currently having moderate to high levels of difficulty finding skilled workers.

One way contractors and construction business owners can attract potential employees and retain existing employees is to adopt an employee incentive plan. Awards made under an employee incentive plan can provide employees with additional income and/or equity ownership, motivate employees by tying such awards to the employer’s financial results and incentivize employees to remain with their employer until such awards vest and are paid out. 

Before designing and adopting an employee incentive plan, employers need to consider the related legal and tax implications, particularly when awards under an employee incentive plan are considered “deferred compensation” by the Internal Revenue Service. Below is a summary of different types of employee incentive plans and a high-level overview of the tax considerations when adopting a plan that features awards of deferred compensation.

Overview of Different Types of Employee Incentives

There are a wide variety of employee incentives that employers can consider when designing and adopting an employee incentive plan. Popular employee incentives include, but are not limited to, the following:

  • Phantom Stock – an unfunded, unsecured promise to pay the value of stock in cash, in the future. This is designed to replicate company stock without giving away actual stock.
  • Stock options – a right to purchase stock at a set price.
  • Stock appreciation rights – a right to receive the excess of the fair market value of granted stock over the exercise price for such stock.
  • Cash bonus – additional cash compensation which is generally tied to achievement of certain financial metrics by the employer and/or the employee.

Employee incentive plans may – and typically do – provide that awards granted under the plan shall vest over a period of time and then be paid out at a later date or upon the occurrence of certain events, such as retirement, change in ownership of the employer and others. In other words, the award is earned in one taxable year and then vests or is paid out in a later taxable year or years as deferred compensation.

If an individual’s employment terminates before his/her award vests or is paid out, the award is generally forfeited.  Accordingly, employees receiving awards of deferred compensation have an incentive to remain with their employers until their award vests or is paid out. Employers should be aware, however, of important tax considerations which arise when granting awards of deferred compensation. One of these tax considerations involves the requirements of Section 409 of the Internal Revenue Code.

Section 409A

Internal Revenue Code Section 409A governs all awards of deferred compensation and imposes penalties on employees and employers for noncompliance. While a detailed breakdown of all the requirements of Section 409A is beyond the scope of this article, employers should be aware that to be compliant with Section 409A, an award of deferred compensation:

  1. Must be made pursuant to a written plan.
  2. The plan must specify the form of distribution of the award, such as lump sum or installments.
  3. The award may only be paid out upon the occurrence of certain events, such as: an employee’s separation from service, disability or death; a fixed time or schedule; a change in control of the company’s ownership or a substantial portion of its assets; or an unforeseeable emergency.
  4. The award may not be accelerated/paid early, except in highly specific circumstances.

Noncompliance with 409A results in the employee being subject to income tax in the year the deferred compensation award becomes vested, regardless of when deferred compensation is scheduled to be paid. An additional 20 percent excise tax is also imposed on the employee plus any applicable penalties and interest, while the employer may be subject to penalties and interest for failing to timely report and withhold taxes for a noncompliant deferred compensation award.

While deferred compensation awards can help contractors and construction companies attract and retain employees, employers must take the requirements of Section 409A into account when designing and implementing an employee incentive plan to avoid unintended and adverse tax consequences.

Brennan P. Connor is an attorney at Carmody MacDonald in St. Louis. He focuses his practice in the areas of taxation, business law, estate planning, and real estate. He can be reached at bpc@carmodymacdonald.com or 314-854-8706.

This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.

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COVID-19 Pandemic Increases Coworking Space Demand, Spurs Flexible Lease Options

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Despite the COVID-19 pandemic uncertainty, markets have demonstrated that the demand for coworking or flexible workspaces will continue to grow. Commercial real estate firm Jones Lang LaSalle predicts 30 percent of the office market will be flexible by 2030. Employers are now seeking to reduce costs and office density, while employees are demanding more flexibility in their work schedules following a year of working from home.

In response, many companies are embracing hybrid work models. According to PricewaterhouseCoopers, 87 percent of executives anticipate shifts in their real estate strategy over the next year. Some organizations have turned to consolidating offices and providing memberships to coworking and flexible spaces to better support remote workers or employees who wish to work outside of the office one to two days a week.

Opportunities for New Construction

This increase in hybrid and remote work structures provides opportunities for mid-size cities such as St. Louis, following the exodus of workers from larger metropolitan areas such as New York and Los Angeles. With workers relocating to smaller markets, employers can still retain the best talent by utilizing coworking spaces. This shift has led to new development in the St. Louis area. Recently, the St. Louis Cardinals partnered with The Cordish Companies to develop a 30,000-square-foot coworking space in Ballpark Village; it will include a mixture of individual workstations, private offices and suites. This is the third location for The Cordish Companies’ coworking brand, with locations in Baltimore and Kansas City’s Power & Light District.

Modifying Existing Spaces & Leases

More than just an office, coworking and flexible spaces are also a favorite amongst small business owners seeking collaboration, flexibility and growth. St. Louis-based coworking spaces such as CIC@Cortex, ThriveCo, OPO Startups or RISE Collaborative Workspace, offer members part-time and full-time private offices, collaborative spaces and business amenities such as Wi-Fi, furniture, coffee bars and community events space. A touted benefit of a coworking space is the opportunity to meet other individuals. Many members have found success establishing new clients and business connections due to the relationships they have built in the shared space. With month-to-month memberships, companies and individuals can try different locations to find the best fit without worrying about long-term leases. Coworking spaces such as ThriveCo also provide tailored concierge services that grant access to virtual assistants, business consultants, graphic designers and more. Accountants are also available in some coworking spaces to promote business development and success.

ThriveCo’s co-owner Katie Silversmith says her firm has seen an increase in interest during the pandemic. ThriveCo reported a waitlist for new members seeking offices in this coworking space.

According to Coworking Insights’ 2020 Future of Work Report: What the Future Holds for Coworking & Remote Work, 71.5 percent of workers who used coworking spaces prior to the pandemic will continue to do so, while 54.9 percent of remote workers who had not previously used coworking spaces are considering joining one as a remote or hybrid work model option.

Conclusion

With the future of office space continuing to evolve, industry sources project a substantial growth in flexible workspace supply and demand. Investors are expected to incorporate more flexible leasing options in their real estate operational models. Therefore, we anticipate a growing need to negotiate contracts for redeveloped spaces and renegotiate existing leases to reflect the changing market. Following the opening of St. Louis’ first coworking space in 2010, more than one dozen distinct coworking locations have developed across the greater St. Louis area, each with its own unique atmosphere and amenities. While still a developing market, one-third of commercial real estate portfolios could include coworking or flexible space by 2030.

Ashley N. Dowd is an attorney at Carmody MacDonald in St. Louis and focuses her law practice in the areas of banking, real estate, corporate and business law. She can be reached at and@carmodymacdonald.com.

This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.

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Can Employers Legally Require Their Employees to Get a COVID-19 Vaccine?

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Candace Johnson

As the COVID-19 vaccine becomes more widely available, many employers are asking if they can require employees to receive the vaccine and the risks in doing so.

Employers may require employees to get a COVID-19 vaccine as a condition of employment, subject to limited exemptions, which are outlined below.

Religious Beliefs – Employees may request an exemption from a mandatory vaccination requirement based on their religious beliefs. Title VII of the Civil Rights Act covers protected groups, including those with religious beliefs. Employers must provide accommodations for employees with “sincerely held” religious beliefs.

Disability – Employees may also request an exemption from a mandatory vaccination requirement based on a disability. If employees have a qualifying medical reason to not get a vaccine, employers must accommodate such requests under the Americans with Disabilities Act (ADA). 

In these situations, employers and employees should work together and sufficiently communicate to determine whether a reasonable accommodation can be made. When considering an accommodation, employers should evaluate:

  • The employee’s job functions.
  • How important it is to the employer’s operations that the employee be vaccinated.
  • Whether there is an alternative job the employee could do that would make vaccination less critical.

Confidentiality – Also pursuant to the ADA, employers should not disclose which employees have or have not been vaccinated. Under the ADA, employees’ health information must be kept confidential.

Because exceptions must be made in certain circumstances, if an employee refuses to be vaccinated, employers should endeavor to find out why.

If employers are hesitant to implement mandatory vaccines, they can alternatively strongly suggest the vaccine and focus on steps they can take to encourage and incentivize employees to get vaccinated. Such incentives could include:

  • Make obtaining the vaccine as easy as possible for employees.
  • Cover any costs that might be associated with getting the vaccine.
  • Provide paid time off for employees to get the vaccine and to recover from any potential side effects.

In the end, navigating the COVID-19 pandemic has been challenging for both employers and employees. Therefore, communication is critical to keeping employees safe and healthy.

Candace Johnson is an attorney at Carmody MacDonald and focuses her practice in the areas of labor and employment, real estate, and general civil litigation. Contact Candace at cej@carmodymacdonald.com or (314)854-8647.

This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.

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COVID-19 Health Crisis Increases Importance of Boilerplate Lease Provisions

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By ANDREW J. WILLIAMS

Andrew Williams

While the COVID-19 pandemic has obviously resulted in far-reaching and fundamental impacts to the commercial real estate market, one phenomenon I have noticed in my leasing practice is the increased interest and focus my clients have on lease provisions that they previously thought of as “boilerplate.” This is understandable, since the pressures of the pandemic have stress-tested the enforceability of leases in several unique ways. Below are a few examples of lease provisions that have taken on new significance for my clients, both with respect to analyzing existing leases and negotiating new ones.

Force Majeure/Frustration of Purpose

Much has been written about the applicability and enforceability of force majeure provisions as they relate to COVID-19 lockdowns and the disruptions of the pandemic. Once a provision located near the end of most lease forms that many landlords and tenants glossed over during their review, the question of whether or not it applies in a given lease dispute is now of great importance. Most commercial leases contain the caveat that force majeure arguments will not excuse the failure to pay rent. To counteract this limitation, some of the new leases I have negotiated over the past several months include specific provisions permitting the partial abatement or deferral of rent in case of a new round of COVID-19 lockdowns. This concept is attractive to tenants for obvious reasons. However, some landlords see it as an opportunity to avoid the costly process of dealing with tenant requests for relief on a case-by-case basis, usually requiring attorney-prepared amendments or addenda to existing leases. 

Assignment/Subletting

No tenant enters into a lease with the intention of needing to assign or sublease its space before the end of the lease term, but the new realities of the COVID-19 pandemic have greatly increased the scrutiny that these provisions receive. Many offices and businesses remain closed or are operating at reduced capacity, so the option of subletting to a new tenant to reduce or eliminate rent expenses is attractive to many. However, before hitting the market to look for a subtenant or engaging a broker to do the same, it is important to dust off this provision in the existing lease to understand whether subletting requires prior written consent from the landlord, which it often does. Some leases even permit a landlord to terminate the lease in response to a request by the tenant to assign or sublet space, which may be a shock to tenants simply exploring their options. It is also common for leases to include a review fee or expense-covering mechanism for approval requests to landlords. 

Subordination and Attornment

It is difficult to think of a standard lease provision more obscure and filled with “legalese” than provisions related to subordination and attornment, but overlooking these provisions can have very significant impacts in the event of a default or foreclosure under a landlord’s mortgage or deed of trust. With the COVID-19 pandemic straining landlords and causing an increase in loan defaults, these provisions are more important than ever. Many leases contain automatic subordination provisions, meaning that the lease is automatically made subordinate to mortgages and deeds of trust in favor of the landlord’s lender. If the landlord subsequently defaults on its loan and the lender forecloses, the lender can sweep away any existing tenant lease that has been subordinated in this way. This may be disastrous to tenants, especially if they have invested significant dollars building out their spaces or if replacement space is not easily found. As protection, some leases provide that subordination of the lease is conditioned upon the execution of a subordination, non-disturbance and attornment agreement (often referred to as an SNDA). An SNDA typically confirms the rights of the lender to foreclose and receive rents, while also providing that the tenant will not be disturbed from possession of its space if the tenant is not in default under the lease. For tenants dealing with foreclosure resulting from a landlord’s loan default, a signed SNDA can be the difference between business as usual and lease termination.

While we all hope the end of the pandemic is in sight, attention to detail in drafting and negotiating lease terms to best protect your interests during unexpected times remains essential.

Andrew J. Williams is an attorney at Carmody MacDonald in St. Louis and focuses his practice in the areas of real estate, corporate law and mergers and acquisitions. He can be reached at ajw@carmodymacdonald.com or (314)854-8671.

This column is for informational purposes only. Nothing herein should be considered legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.

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Financing Issues Surrounding Modular Construction

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By ELIZABETH A. BARRETT

Elizabeth Barrett

Modular construction is on the rise in the commercial construction industry, including the new AC Marriott NoMad New York Hotel in New York City, the world’s tallest modular hotel originally scheduled to be stacked late fall 2020.

Modular construction is touted as being faster, better and cheaper than traditional construction; however, many traditional commercial lenders are hesitant to toss their hat in the ring and lend money to such projects due to the collateral timing issues involved with such financing. Understanding the basic distinctions between the applicability of governing law is crucial to structuring the modular build contract and avoiding potential pitfalls. 

Background

Modular construction is an alternative construction method in which 60 percent to 90 percent of a building – usually complete with flooring, ceilings, lighting, plumbing and appliances – is prefabricated offsite in individual modules, under safer controlled plant conditions, using the same building materials and designed to the same building codes and standards as normal construction, yet in about half the time with less waste and without the hindrance of weather-related delays. Simultaneously, excavation and foundation work can be completed at the jobsite, saving time and speeding up the total length of construction. Once complete, the modules are transported to the job site and installed like perfectly fabricated building blocks constructed to seamlessly fit together. When implemented effectively, modular construction results in an efficient high-quality product with greater quality control in about half the time, with more predictable costs and with less waste than traditional construction.

The Financing Hurdle of Modular Building

Despite all its positives, there are still many challenges surrounding modular construction, especially when it comes to searching for financing from traditional commercial lenders. The largest financing hurdle of modular construction is the lack of security for the lender. Because the modules are constructed offsite, some courts have held that the prefabricated modules are considered the personal property of the modular builders as building materials, and the modules do not become real property of the modular builder until they are delivered to the jobsite. Accordingly, when financing modular builds, many lenders will only release loan proceeds after the modules are delivered and installed on the real property to ensure the disbursement is secured. This causes issues for the modular builders, as they need the loan proceeds disbursed up front to construct the modules offsite.

A Potential Legal Fix

A solution may be found in the courts’ treatment of mobile homes, modular homes and prefabricated buildings. Some courts have treated mobile homes, modular homes and prefabricated buildings as “goods” under the UCC. The UCC defines “goods” as “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale…” If the modules are considered goods, fixtures or commingled goods rather than building materials, this offers lenders the possibility of taking a security interest in the modules as “goods that are fixtures or …goods that become fixtures” prior to the modules being incorporated as part of the real estate. This would allow lenders to disburse loan proceeds to the modular builders to construct the modules offsite, while providing the lenders with their desired security. Win-win, right?

Pros and Cons of Applying UCC to Modular Builders

As stated, from a lender’s perspective, a shift to the UCC view would be beneficial and extend their security interest into the fabrication stage when the modules are offsite. However, this may be easier said than done.  Modular construction is challenging in that it is a hybrid that combines both goods and services; therefore, labeling modules as “goods” may not be that simple. Additionally, from a modular builder’s perspective, labeling modules as “goods” may not be as beneficial or desired. Under the UCC, a seller’s security interests in goods are extinguished upon sale to a buyer in the ordinary course of business, even if the security interests are perfected and the buyer knows of its existence. Thus, if modular construction is governed under the UCC, a modular builder (as a seller of goods) could be stripped of any remaining security interests it may have in the modules after a project owner (as a buyer of goods) has paid the general contractor and incorporated the modules into the finished building. This may cause more hesitation on behalf of the modular builders when considering entering into a modular build contract governed by the UCC. 

The Future of Modular Build Financing

Arguably, if courts would shift their interpretation of modular construction to be within the realm of the UCC as “goods,” it would allow lenders to take a security interest in the modules prior to delivery making it more comfortable for traditional lenders to offer financing to modular construction projects. The courts’ prior treatment of mobile homes, modular homes and prefabricated buildings as “goods” under the UCC opens the door for this possible future shift. However, there is no case law applying this interpretation to larger-scale commercial construction. Until then, careful construction of modular build contracts is required to clarify the parties’ mutual understanding of whether the UCC applies and how the various security interests run with the modules. As modular building becomes more prevalent, we can likely expect to see the nuances of whether the modules are defined as building materials or goods and the applicability of the UCC worked out within the legal system to, hopefully, make modular building more palatable to traditional lenders.

Only time will tell.

Elizabeth Barrett is an attorney at Carmody MacDonald in St. Louis and focuses her practice in the areas of banking, real estate, corporate and business law. She has represented financial institutions and other lenders in complex commercial loans and secured transactions, and other clients in general real estate acquisition and development matters.

This column is for informational purposes only. Nothing herein should be considered legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.

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The Basics of Eminent Domain for Property and Business Owners

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By RYANN C. CARMODY

The concepts involved in eminent domain law are complex and confusing. To shed some light, below are answers to some frequently asked questions many people have about eminent domain and the condemnation process.

What is eminent domain/condemnation?

Eminent domain or condemnation is the power to take property for public use and requires just compensation to the landowner. The legislature has adopted legislation that allows the taking of property for redevelopment if the taking removes blight.

Both personal and real property are subject to condemnation. In Missouri, eminent domain proceedings are governed by Missouri Revised Statute §523.000.  

Who has the authority to exercise the power of eminent domain? 

The legislature has the right to delegate the exercise of the sovereign power of eminent domain. Cities, counties, sewer districts and library districts – to name a few –

have the power. Unless restricted by the constitution, the power is unlimited and practically absolute. The right to exercise the power of eminent domain does not automatically lie in counties’, municipalities’ or public service corporations’ authority.

How will I know if my property is going to be taken? 

Pursuant to Statute §523, there are several steps a condemnor must take before your property can be taken by eminent domain. Missouri law requires that the condemnor engages in good-faith negotiations before a condemnation order is entered by a court. You must be informed by the condemnor at least 60 days before the Petition in Condemnation can be filed. Next, you must receive a formal offer letter from the condemnor at least 30 days prior to the filing of a petition. This offer should contain an appraisal by a state-licensed appraiser to justify the offered purchase price. Further, this offer must remain open for 30 days. At this time, you may choose to accept this offer in lieu of further litigation, or you may reject it either in writing or by a lack of response.  

What if MSD (Metropolitan St. Louis Sewer District) wants an easement? Is that a “taking?”

Yes. That is a partial taking. You have the same rights as if your property were to be totally taken. However, damages in a partial taking are calculated as to the loss in market value to the land.

What happens if I reject the condemnor’s offer letter

Generally, in Missouri, the condemnation proceedings are divided into the following categories: 

  1. Condemnation Hearing – An evidentiary hearing conducted in court to determine if the condemning authority has the legal right to condemn your property.  
  2. Commissioners’ Hearing – At or around the time that the order of condemnation is entered, the court must appoint three commissioners to assess the damage you have sustained as a result of the taking. These commissioners will hear evidence from both parties and make a just compensation determination.  
  3. Commissioners’ Award – After the commissioners determine the amount that must be paid for the taking, the award will be filed with the court. The title to your property will transfer when the condemning authority pays the commissioners’ award into the court’s registry.

If you reject the offer, the condemnor will likely file a petition in court. A judge will then conduct a hearing to determine if the condemning authority has the legal right to condemn your property. The judge may then appoint three commissioners to determine the compensation you should receive for the taking. These commissioners then file their award with the court.

What if I think my damages are more than what the commissioners awarded? 

Either party can request a jury trial on the damages.

Can the condemnor come onto my property to perform studies before he/she takes the property?

It depends. Oftentimes the condemning authority will need access to the property for surveying, geological or environmental testing. First, you can always allow access to your property. However, if you refuse access, the condemnor can ask a judge to order the access. The courts look to see how intrusive the undertaking will be on your use and enjoyment of your property. For example, courts have found that simply putting land surveying stakes in a property is permissible. Conversely, certain geological and environmental tests may require a more invasive test that could affect the use of the land and the value. Therefore, this type of testing would constitute another taking for which you would be separately compensated.

Ryann Carmody is a partner at Carmody MacDonald P.C. in St. Louis. She concentrates her practice in the area of general civil litigation, including Eminent Domain and Title IX matters. Carmody can be reached at rcc@carmodymacdonald.com or 314.854.8620.

This column is for informational purposes only. Nothing herein should be considered legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.  

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The Pandemic-Proof Construction Contract: What is a Force Majeure Provision?

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FacebooktwitterlinkedinmailBy MEGHAN M. LAMPING

It’s safe to say that 2020 isn’t going how anyone had planned.

When it comes to contracts, this can be a very big problem – depending upon the wording in your contract.

Whether you are looking to enforce a contract, renegotiate a contract or escape a contract as a result of the COVID-19 environment, here’s a common starting point for all parties: review the contract carefully and look specifically for an important clause called Force Majeure.

What is a Force Majeure Provision?

A force majeure clause (translated to “superior force”) may free either party from performing under a contract when events beyond their control prevent them from fulfilling their obligations. The clause may be triggered by extraordinary events such as labor strikes, war, government acts, natural disasters – and potentially, global pandemics.

What doesn’t trigger a force majeure clause is almost as important as what does and is often the source of debate. Generally, anything that is foreseeable, resulting from negligence or could be fulfilled with reasonable alternate means will not excuse performance or be covered under a force majeure clause.

What to Be Aware Of

Because force majeure interpretations may differ, the specific language in your contract is critically important. Here are key questions to ask as you review the provisions through a new, COVID-19 lens.

Is it narrow or broad? Does your contract specify what events constitute force majeure? Does it include terms such as “pandemic,” “disease” or “public health emergency?” Or does it use broader, catch-all language such as “events beyond control” or “including, but not limited to?”

Who is responsible for what? Understand which parties are responsible for what actions. For example, which obligations are excused? Does either party have the right to invoke the clause?

What obligations are covered? Are all obligations subject to the clause? Generally speaking, an obligation to pay for materials or work that has already been performed will not be impacted by or subject to a force majeure clause. Are there specified obligations that must be met after invoking the clause? Do you need to provide a specific notice or engage in specific mitigation efforts?

What are the pertinent timeframes? Some clauses may specify a window of time between the event and invocation of the clause, so determining when to use force majeure is important. And moreover, force majeure clauses typically aren’t going to relieve one party’s obligations indefinitely. Instead, they may be suspended for the duration of the force majeure event or require a party to communicate a window of time for delays. The contract may also allow termination for nonperformance after a certain amount of time.

What is required?  If you are considering invoking a force majeure clause, carefully review notification and response requirements to understand when and how communication, such as written notices, should be handled. Some contracts may include other requirements, such as the submission of a mitigation plan within a certain time after invoking the clause.

No Force Majeure Clause?

If an express force majeure clause is not present in the contract, there may be other legal theories that allow one party to be excused from performance on the grounds that it is impossible to perform the contract obligations, or the purpose of the contract has been frustrated due to circumstances that could not be anticipated. Whether these legal theories will apply to COVID-19 matters remains to be seen.

Additionally, it’s always good practice to investigate whether there is insurance available to mitigate some or all of the losses.

When we emerge in a post-COVID-19 world, construction leaders will review their standard contracts with fresh eyes. The importance of the force majeure clause is often far underappreciated until the unforeseen suddenly becomes reality. While it’s difficult to plan for things you don’t see coming, a well-worded contract will help to reduce uncertainty and stress during extraordinary times like we are experiencing now.

Meghan M. Lamping is an attorney at Carmody MacDonald in St. Louis. She focuses her practice on construction law, business litigation, and trusts and estates litigation. Contact Meghan at mml@carmodymacdonald.com or 314.854.8600.

This column is for informational purposes only. Nothing herein should be considered legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.Facebooktwitterlinkedinmail

The Pandemic-Proof Construction Contract: What is a Force Majeure Provision?

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FacebooktwitterlinkedinmailBy MEGHAN M. LAMPING

Meghan Lamping

It’s safe to say that 2020 isn’t going how anyone had planned.

When it comes to contracts, this can be a very big problem – depending upon the wording in your contract.

Whether you are looking to enforce a contract, renegotiate a contract or escape a contract as a result of the COVID-19 environment, here’s a common starting point for all parties: review the contract carefully and look specifically for an important clause called Force Majeure.

What is a Force Majeure Provision?

A force majeure clause (translated to “superior force”) may free either party from performing under a contract when events beyond their control prevent them from fulfilling their obligations. The clause may be triggered by extraordinary events such as labor strikes, war, government acts, natural disasters – and potentially, global pandemics.

What doesn’t trigger a force majeure clause is almost as important as what does and is often the source of debate. Generally, anything that is foreseeable, resulting from negligence or could be fulfilled with reasonable alternate means will not excuse performance or be covered under a force majeure clause.

What to Be Aware Of

Because force majeure interpretations may differ, the specific language in your contract is critically important. Here are key questions to ask as you review the provisions through a new, COVID-19 lens.

Is it narrow or broad? Does your contract specify what events constitute force majeure? Does it include terms such as “pandemic,” “disease” or “public health emergency?” Or does it use broader, catch-all language such as “events beyond control” or “including, but not limited to?”

Who is responsible for what? Understand which parties are responsible for what actions. For example, which obligations are excused? Does either party have the right to invoke the clause?

What obligations are covered? Are all obligations subject to the clause? Generally speaking, an obligation to pay for materials or work that has already been performed will not be impacted by or subject to a force majeure clause. Are there specified obligations that must be met after invoking the clause? Do you need to provide a specific notice or engage in specific mitigation efforts?

What are the pertinent timeframes? Some clauses may specify a window of time between the event and invocation of the clause, so determining when to use force majeure is important. And moreover, force majeure clauses typically aren’t going to relieve one party’s obligations indefinitely. Instead, they may be suspended for the duration of the force majeure event or require a party to communicate a window of time for delays. The contract may also allow termination for nonperformance after a certain amount of time.

What is required?  If you are considering invoking a force majeure clause, carefully review notification and response requirements to understand when and how communication, such as written notices, should be handled. Some contracts may include other requirements, such as the submission of a mitigation plan within a certain time after invoking the clause.

No Force Majeure Clause?

If an express force majeure clause is not present in the contract, there may be other legal theories that allow one party to be excused from performance on the grounds that it is impossible to perform the contract obligations, or the purpose of the contract has been frustrated due to circumstances that could not be anticipated. Whether these legal theories will apply to COVID-19 matters remains to be seen.

Additionally, it’s always good practice to investigate whether there is insurance available to mitigate some or all of the losses.

When we emerge in a post-COVID-19 world, construction leaders will review their standard contracts with fresh eyes. The importance of the force majeure clause is often far underappreciated until the unforeseen suddenly becomes reality. While it’s difficult to plan for things you don’t see coming, a well-worded contract will help to reduce uncertainty and stress during extraordinary times like we are experiencing now.

Meghan M. Lamping is an attorney at Carmody MacDonald in St. Louis. She focuses her practice on construction law, business litigation, and trusts and estates litigation. Contact Meghan at mml@carmodymacdonald.com or 314.854.8600.

This column is for informational purposes only. Nothing herein should be considered legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.Facebooktwitterlinkedinmail

Fifty Years of Construction Delay Claims: Few Cases Are Without Them

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FacebooktwitterlinkedinmailBy JAMES R. KELLER

St. Louis CNR celebrated 50 years in 2019. By coincidence, I wrote an article for The St. Louis Bar Journal in its summer 2019 edition entitled “Missouri Construction Delay Law: A 50-Year Review.”

The article was penned for lawyers, containing about 50 Missouri appellate reported cases over the past 50 years. These 50 cases made the short list as the most important from the more than 2,000 I had reviewed.

The first section focused on owners and the second on contractors and subcontractors.

Here are a few observations about delay disputes during the last 50 years:

Delays so dominate construction disputes that few cases do not include a delay claim.

Missouri case law does not favor any particular party in the construction food chain over any other party on delay issues. Both owners and contractors (including subcontractors) benefit from clearly, fairly worded contracts that cover potential delay issues. The courts will enforce such provisions as written.

Absent contract direction, the courts tend to look to common-sense solutions to decide which party or parties are at fault for the delay(s). If there are multiple parties responsible, the consequences may be shared on a pro-rata basis.

Contract provisions specifically addressing delay issues protect everyone, but owners tend to benefit the most from such provisions.

Missouri courts generally will enforce contract requirements for timely written notice of potential claims. This means that if there is no notice, the claim may collapse for procedural reasons.  The particular facts of any case, of course, could provide an exception and there have been some during the last 50 years. (That is why lawyers have a job.)

The decisions of a contractually designated professional on how to enforce the contract and interpret it are final. This should be comforting news to architects and engineers who are typically named as the contract referees.

Surprisingly, no Missouri case has specifically addressed if a “no damage for delay” clause is enforceable. In my opinion, most Missouri construction lawyers believe they generally are.

Missouri has not adopted the concept of cardinal change. Contractors apply this concept to “throw out” the contract – especially its restrictions on delay claims and recovery – when the project experiences rampant, widespread or substantial changes in scope through no fault of the contractor, thereby drastically altering the contract’s original intent and purpose.  Contractors then ask judges, juries and arbitrators to award them their “total costs” as opposed to the contract-specified amounts.

A contractor’s best legal friend to compensate for delays is establishing they are excusable.  Missouri’s Supreme Court affirmed this concept in 1972, upholding a trial court decision that the contractor’s delays were the owner’s fault. Owner nonpayment is another reason to excuse delay.

James R. Keller is counsel with Sandberg Phoenix & von Gontard P.C. where he concentrates his practice on construction law, complex business disputes, real estate and ADR. He also is an arbitrator and a mediator. Keller can be reached at (314) 446-4285 or jkeller@sandbergphoenix.com.Facebooktwitterlinkedinmail

Architect’s Mechanic’s Lien Filed Too Late: Timing Is Everything, Appellate Court Says

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James R. Keller

By JAMES R. KELLER

Missouri’s Eastern District Court of Appeals recently decided that an architectural firm filed its mechanic’s lien too late. Consequently, the lien was not enforceable.

The case is Bates & Associates, Inc. v. Providence Bank & Vision Ventures, LLC, 2019 WL 4419698, September 17, 2019.

Architects rarely file mechanic’s liens in Missouri. Their liens are against real estate.

Architects typically work for real estate owners. Liens tend to compromise such working relationships, both on current matters and future opportunities.

The architectural firm in this case is Bates & Associates Inc., a licensed architectural firm under Missouri law. The original owner of the real estate was Vision Ventures LLC.

Providence Bank became the owner through a non-judicial foreclosure. Bates sued both to enforce its mechanic’s lien.

While filing an architect’s lien is uncommon, the facts in this case, although somewhat complicated, are not that uncommon for architects and owners on construction projects.

In 2013, Bates entered into a contract with Vision for architectural design and construction services for a senior care facility. The project was located at 17655 Wild Horse Creek Road in Chesterfield.

Financing was involved to make the project a reality. There was an initial loan secured by a deed of trust for $2.48 million in 2008. An additional promissory note secured a modification to the deed of trust for an additional $1.37 million.

Vision defaulted on the loan and note by failing to make all of the payments when due. Vision also filed for Chapter 11 bankruptcy in March 2015, listing Bates as an unsecured creditor.

Bates filed its lien on July 15, 2015 for the work performed for Vision. By doing this, Bates obviously hoped to become a secured creditor in the bankruptcy estate.

Under Missouri law, a mechanic’s lien relates back to the first day of work, regardless of when the lien was filed – provided it was timely filed. This can provide a potential priority when there are several secured creditors.

Two days later, the non-judicial foreclosure took place. Providence obtained title to the property.

Bates filed a three-count petition against Vision and Providence. In Count II, the mechanic’s lien count, Bates sought $305,279 against both, asserting its lien was superior to Providence’s interest in the property.

Bates sued Vision in Counts I and III for breach of contract or in the alternative quantum meruit (for services rendered where there is no specific contract).

After a bench trial, the trial court awarded Bates $276,000 on its breach of contract claim.  Expressly finding there was a contract, the court denied the claim for quantum meruit. Under Missouri law you can recover for one or the other, but not both.

The trial court also denied Bates’ claim to enforce its mechanic’s lien and granted Providence’s counterclaim to quiet title to the property. This gave Providence ownership over Bates.

The trial court concluded that the architectural services were not directly connected to any construction or other improvements to the property. It also concluded that Bates did not timely file its lien.

The appellate court focused on the timing issue.

What makes the facts of this case somewhat common is that the architect performed design services under an original 2013 contract. Then Bates did work later that it alleges was pursuant to this original contract. Architects often find themselves in this situation. If Bates was correct, its lien could have applied to all the work it did from the first day of work until the last.

The reason the timing is important is because a mechanic’s lien under Missouri law must be filed within six months of the last day of work performed by that party. Missouri law affords no grace period. A lien filed one day too late is the same as a lien filed one year too late.

Under the original contract, Bates’ last day of work was July 7, 2014. A lien for that work expired on January 7, 2015. Bates filed its lien on July 15, 2015.

Bates claimed that it performed additional work between January and March 2015 and this work was an extension of the original contract. Bates’ timesheets showed internal meetings about the project. In February 2015, Bates sent Vision a proposed contract for additional services in the amount of $70,000.

Bates’ proposal included removing kitchens from the second-floor apartments and a redesign on each floor to reduce overall square footage. This work did not advance beyond discussions in meetings.

There was a fact dispute as to whether Vision agreed to the additional services. Appellate courts defer to the trial court’s determination of fact questions. The trial court found there was an agreement for the original work, but it is unclear if the court’s judgment included any of the later work under the breach of contract claim.

Appellate courts decide for themselves legal questions. In this case, the legal question on appeal was whether the work from January through March 2015 was in accordance with the original 2013 contract and thus lienable according to Section 429.015 of the Revised Statutes of Missouri.

The contract between Bates and Vision required that any additional changes to the original scope of Bates’ work required written authorization. In this case, there was no written authorization.

The appellate court concluded for this reason alone, the later work was not within the original scope of the contract and thus not lienable.

In addition, the Eastern District also concluded that the additional work to develop and communicate its proposal was not necessary to complete the original contract. The drafting of a proposal for additional services, according to the court, did not constitute a lienable improvement upon the land.

The court concluded that a “proposal for a contract for additional services is not the same as a partial or complete set of designs.”

James R. Keller is counsel with Sandberg Phoenix & von Gontard P.C. where he concentrates his practice on construction law, complex business disputes, real estate and ADR. He is also an arbitrator and a mediator.  Keller can be reached at (314) 446-4285 or jkeller@sandbergphoenix.com.Facebooktwitterlinkedinmail

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