Law

COVID-19 Causes Breaches to Construction Contracts: Which Party Bears the Risk?

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By TYLER SCHAEFFER

Tyler Schaeffer

The COVID-19 pandemic has been extremely unpredictable in its effects on businesses. On March 16, 2020, at the very beginning of the pandemic, the Dow Jones Industrial Average plunged 2,997 points – the largest single-day point drop in history. By the end of 2021, however, the stock market had fully recovered and reached new record highs. At the beginning of the pandemic, the concern focused heavily on rampant unemployment and need for increased government benefits. More recently, the job market has been measured by the number of available jobs that remain unfilled. 

One of the most noteworthy – and perhaps not immediately predictable – consequences of the COVID-19 pandemic was its exposure of the fragility of our global supply chains; many businesses and industries experienced unprecedented delays in obtaining needed products and supplies. The breakdown in the supply chain coupled with drastic changes in consumer demand caused wild inflationary swings in the pricing of certain products and commodities. These swings in the availability and affordability of certain goods and services caused many businesses finding themselves unable to fulfill contractual obligations made before the beginning of COVID-19. 

 Which party bears the risk of pandemic-caused inability to fulfill the terms of a contract? Parties may allocate the risk of unforeseen circumstances in what is known as a “force majeure,” or escape clause, in the contract. “Force majeure” is a French term that means “greater force.” A force majeure clause allocates the risk if performance becomes impossible or impracticable especially because of an event or effect the parties could not have anticipated or controlled at the time of contracting. 

If the contract does not allocate risk through a force majeure clause, the common law provides several related defenses that may excuse performance due to unexpected causes: impossibility, commercial impracticality and commercial frustration.

  • Impossibility is the most stringent standard and excuses a party’s performance only when its performance is rendered impossible by an act of God, the law or the other party. Unforeseen difficulties, however great, will not excuse performance.
  • Commercial impracticality will excuse a party when an occurrence of a superseding, unforeseen event prevents performance, not within the reasonable contemplation of the parties at the time the contract was made and that goes to the heart of the contract.
  • Lastly, commercial frustration may excuse performance when the contract’s principal purpose is frustrated without fault by the happening of some event, the nonoccurrence of which was a basic assumption on which the contract was made.

Should a company find itself unable to fulfill its obligations under a contract due to COVID-19, looking to a force majeure clause as well as the defenses listed above provide potential avenues to escape liability for the COVID-caused breach of contract. Although COVID-19 has been with us for two years, the caselaw providing guidance on the applicability on typical force majeure clauses and these defenses is not fully developed and often has limited applicability to the specific facts in such cases. As such, none of the options above provide a sure-fire solution to an otherwise innocent party unable to meet its contractual obligations due to COVID-19.

The complications caused by COVID-19 have also inspired many companies to revisit and rethink the negotiation of their contracts to include greater protections for the risks of pandemics and their collateral consequences. Concepts such as pandemics and government shutdowns will surely be expressly appearing in future contract escape clauses. Additional rights for cancellation and for delay based on such events will also be appearing in such contracts. On the other hand, parties to contracts concerned about the other side’s potential delay or inability to perform due to unknown consequences of a pandemic will also wish to obtain protections in their contracts. There are many new and creative contract options for both sides to consider in a post-COVID-19 world.

Hopefully COVID-19’s effects on businesses will soon be a thing of the past. But, before memories of this time fade, businesses would be wise to ensure they protect themselves contractually from the risks of a severely disruptive pandemic or similar event in the future. Any contracting parties unable to fulfill their contractual responsibilities due to COVID-19 or wishing to negotiate a new contract with an escape for unforeseen circumstances caused by the pandemic should contact their attorney to explore available options.

Tyler C. Schaeffer is an attorney with Carmody MacDonald and concentrates his practice in business litigation. He works closely with businesses including construction companies in disputes, including contracts, business tort, financial restructuring and bankruptcy, and consumer protection. Contact Tyler at tcs@carmodymacdonald.com or (314) 854-8645.

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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What’s Your Marketing Budget for 2022 and How Do You Measure ROI?

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By STEPHANIE WOODCOCK

The average B2B company spends between 6 percent to 7 percent of its overall revenue on marketing costs. According to a study conducted by Deloitte and Duke University’s Fuqua School of Business, each industry varies based on different growth strategies. The energy industry, for instance, spends 3 percent of its total revenue on marketing and the construction industry spends 2 percent.

Based on these numbers, a small construction company with an annual revenue of 3 million dollars should be spending $60,000 on marketing.

To determine our own 2022 marketing budget, we need to know our growth objectives. Let’s start with what we have in common:

We all want qualified leads, repeat clients, better cross selling, greater market share, market recognition and brand loyalty. 

For those of us who want to grow in 2022, a quick overview of our numbers helps. What is our annual recurring revenue? And by what amount do we want to increase that revenue? The difference is the growth delta.

Typically, a company will spend 40 percent of that growth delta in effective marketing to achieve certain goals. Isn’t that fascinating? Many of the companies I see who want to grow miss the big picture. They buy more equipment, onboard an expensive CRM program, get better computers but neglect to realize their website has a slow load speed, is not optimized for mobile, is not SEO friendly and has no value proposition to set them apart from their competition.

Companies typically spend money on items that count the money rather than make the money because it’s easier to measure than make. 

I was recently asked in a new client meeting, “How do you measure ROI (return on investment)?” Great question. 

ROI is based on whether you meet your key performance indicators (KPIs) with your marketing strategy and implementation.

You can’t determine your KPIs until you know your marketing objectives.  A KPI of 4 new clients a month may be good for one company but not good for a firm that wants to increase market share with 10 product lines.

What is your KPI? How do you want marketing to move the needle for your business?

Here’s where so many company owners differ, stating:

I want to grow my company XX amount. 

I want to increase my brand presence and enhance my company image.

I want to grow the company through more product lines or services.

I want to increase customer loyalty.

I want to impress existing customers with technology enhancements.

Your marketing budget should be based on determining your objectives and putting real numbers to those objectives. Finding the right strategy and a good workable budget depends on which of these objective(s) you want to meet.

Now the good part. How do we get in front of those new clients? What’s our strategy?

We find the events where they are. We use the marketing channels they pay attention to. We get in front of them with inbound and outbound marketing. 

Measuring the ROI is no easy task because our key performance indicators are so dependent on the quality and accuracy of our strategy. 

I once had a client who spent the bulk of his budget being a platinum sponsor in a customer-rich association. He attended every meeting, spent beyond his annual platinum sponsorship and knew the value of each customer attained through that association. Event marketing was his main strategy to reach his KPIs. 

I had another client who needed website leads nationwide. He had a new product on the cusp of an emerging market but needed brand recognition. His marketing budget was devoted to revamping his website, optimizing it for higher Google rankings and investing in paid search.

I have another client who writes articles and sends them out in press releases, magazines and online newsletters. She creates her own tribe of followers through thought leadership articles and can charge top dollar for her services because she has personally helped construct its value.

We can be successful with a variety of strategies. The key is to BE where the customers are or where they are going to be. 

Your marketing team’s focus should not be on improving the measurables to prove their own success and better measure ROI. Rather, they should be focusing on tactics that will make an impact.

We can become so consumed with trying to measure the data and determine ROI that we forget to use common sense and our instincts. Marketing in this industry takes instinct. Our buyers take a long time to become customers.

It’s easier for me to measure the ROI of an email marketing campaign than it is to measure the value of an event sponsorship or a print ad. The three work together, so which strategy gets the marketing credit?

Together we learn how to carefully curate the best value for our customers with the right marketing channels. 

My favorite strategies for the construction industry are content, email and event marketing. Content marketing delivers 3 times the leads versus tradition advertising. It also has a longer sales cycle because you’re often developing brand awareness with customers before they are “now” buyers. Traditional advertising works as well strategically in the right environment. 

The research backs me up. In a 2019 survey of 1,000 senior-level B2B marketers, the most effective B2B marketing channels were reported as:

1.) In Person Events (41 percent)

2.) Content Marketing (27 percent)

3.) Email Marketing (14 percent)

4.) Paid Social and Search (6 percent)

5.) Organic Social and Search (3 percent)

But I’m getting ahead of myself. Once you answer some of the questions above and find a budget line for marketing, contact me to discuss strategy and ROI.

Stephanie Woodcock is president of Too Creative, a St. Louis-based design and marketing agency. She can be reached at stephanie@toocreativestl.com.

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Is Your Insurance Company Refusing to Pay Out a Claim?

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How the Law’s “Good Faith” Measure is On Your Side

By MEGHAN M. LAMPING

Responsible business owners and companies understand they face risks every day. To manage – and potentially mitigate – those risks, companies purchase insurance. In exchange for sometimes hefty premium payments, companies expect their assets to be protected in the event of a claim for damages or a lawsuit. 

In fact, companies turn to their insurance carriers for help in many situations. Companies may look to their insurance carrier if they experience property damage or are dragged into a lawsuit alleging claims of negligence or unworkmanlike performance. In these types of situations, companies expect their insurer to step in and either pay out a claim for damages or settle a lawsuit. When an insurance company balks at paying out a claim or settling a lawsuit on the company’s behalf, that company is, understandably, frustrated. 

But there are some mechanisms built in the law to encourage insurance companies to treat their insureds fairly, act promptly and in accordance with the policies of insurance they issue.  Insurance companies owe their insureds certain duties and obligations under the law and the policies of insurance issued. When insurance companies do not act properly, they can then find themselves facing additional liabilities. 

For instance, in Missouri, an insurance company can be liable for causing damages to its own insured if it “vexatiously” refuses to pay claims covered by its policy. Damages, including attorneys’ fees and monetary penalties, can be awarded when an insurer’s refusal to pay a claim is determined to be “vexatious and without reasonable cause.” The statutory protections exist, in part, to incentivize insurance companies to pay legitimate claims without litigation. 

Additionally, an insurance company can face tort liability, including punitive damages, if it unreasonably refuses to settle a claim or lawsuit against its insured. In Missouri, an insurer runs the risk of a legal liability where, in bad faith, it assumes control over a legal proceeding against its insured and refuses to settle a claim within insurance policy limits after the insured has demanded that the claim be settled. Missouri courts describe “bad faith” as “the intentional disregard of the financial interest of the insured in a hope of escaping responsibility imposed upon the [insurer] by its policy.” Again, the purpose of these laws is to encourage insurance companies to settle cases or claims covered by the policies. 

To be sure, the penalties and awards of damages ordered against insurance companies, where liability is found, are not insignificant. Litigation against an insurance company is expensive and courts often recognize this burden when they award litigants tens or hundreds of thousands of dollars in attorneys’ fees. Damages awarded to an insured – apart from attorneys’ fees – can similarly be significant. In 2013, a Missouri court of appeals affirmed a jury’s verdict of more than $6 million in favor of an insured over its insurer where the jury “apparently believed the refusal to pay the claims or make a determination of coverage was unreasonable.” In another Missouri case, an insurer was ordered to pay its insured more than $900,000, including punitive damages, for denying a claim and defaming the insured by claiming – incorrectly – that the insured had burned down his own house.   

It’s obviously important to mitigate risks in business by having the proper insurance coverage. It’s also important to remember insureds have legal protection when working with insurance companies not acting in good faith. Specifically, the existing applicable laws and stiff penalties associated with running afoul of the purchased protections. 

Meghan M. Lamping is an attorney at Carmody MacDonald and focuses her practice in the areas of general civil litigation. Contact Meghan at mml@carmodymacdonald.com or (314) 854-8676.

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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New Bankruptcy Law Provides Welcome Changes for Small Contractors

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Chapter 11’s New Subchapter V Helps Achieve Successful Restructuring

By ROBERT E. EGGMANN and THOMAS H. RISKE

Thomas Riske
Robert Eggmann

Shortages of materials and skilled labor continue to put increased pressure on some small construction contractors and subcontractors to consider bankruptcy reorganization. Unfortunately for them, the hope of re-emerging in Chapter 11 is often unsuccessful because the rules are complicated, challenging and not traditionally well-designed for their needs.

Last year, the federal Small Business Reorganization Act (“SBRA”) became law, added a new “Subchapter V” to Chapter 11 that streamlines bankruptcy procedures for small contractors and provides new tools designed to achieve more successful restructuring.  Subchapter V should be welcome news for many small contractors facing financial difficulties, although individual circumstances will dictate whether this is the right course of action.

Eligibility

A person or entity must be engaged in commercial or business activity with an aggregate liability below $2,725,625. At least half of the debt must have arisen from the business. The CARES Act provides for a temporary increase of this threshold to $7.5 million that is scheduled to roll off in 2021.

Creditors’ Committee

In Subchapter V, no creditors’ committee is appointed unless a court orders otherwise, making it the exception and not the rule and saving the small business money.

Appointment of Trustees

The SBRA created a new type of trustee, a Subchapter V trustee, to be appointed in every case. The trustee’s duties include appearing at the first status conference and hearings that concern major case milestones, facilitating the development of a consensual reorganization plan, and making payments to creditors under the plan. 

Disclosure Statement

No disclosure statement is required unless a court orders otherwise, which removes a common source of protracted battles among the parties involved.

Reorganization Plan

Only the small business debtor may file a plan of reorganization under Subchapter V and must do so within a shortened 90-day timeframe from the order for relief. The rules for the contents of a Subchapter V plan of reorganization are more debtor-friendly. Notably, a loan secured by a principal residence can now be modified if the proceeds of the loan were used for the business.

Plan Confirmation

There are two ways to have a plan confirmed:

  1. Consensual. Subchapter V strives to help the debtor and creditors reach a consensual plan. Confirmation of a consensual plan terminates the trustee and the debtor receives a discharge upon confirmation, two important incentives for debtors.
  2. Cramdown. A plan can still be confirmed if some or even all classes of creditors don’t accept it, so long as the plan doesn’t discriminate unfairly, and is “fair and equitable” to impaired unsecured creditors.  A “reasonable likelihood” of repayment must be demonstrated, and the plan must provide remedies to protect creditors if payments are not made.

Voting

Voting rules change significantly under Subchapter V. As mentioned above, a debtor can now confirm a plan with no votes from creditors.

Absolute Priority Rule

In Subchapter V there is no absolute priority rule, allowing debtors to retain ownership without adding new value – provided the reorganization plan does not discriminate unfairly and funds the repayment of creditors in three to five years by committing all projected disposable income.

Robert Eggmann and Tom Riske both serve as Chapter 11 Subchapter V trustees in the Central and Southern Districts of Illinois, respectively.They practice in the financial restructuring and bankruptcy department at Carmody MacDonald P.C. in St. Louis. Contact any of Carmody MacDonald’s attorneys at 314.854.8600.

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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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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