Reviewing Residential Construction Contracts

Winter Park Home Magazine - Issue 2 2014

There are many high-quality contractors in Central Florida that do an outstanding job, building beautiful homes. They try to get their projects finished on schedule and within their client’s stated budget, as they know that their hard-earned reputations are on the line. However, given the complicated nature of construction, some of the best laid plans can go astray. Here are a few tips for protecting the homeowner’s interests in construction contracts.

Define the Scope of Work. The contract should be as specific as possible about what the owner is paying to have built. That may seem obvious, but contracts can be surprisingly vague. The contract should expressly incorporate the final set of design documents that are going to be submitted for the building permit.

Payment Structure. It is increasingly common for contractors to propose that the homeowner pay them on a “cost plus” basis, i.e., the homeowner reimburses them for their costs plus some percentage mark-up. With this approach, the homeowner cannot rely upon any cost estimate that may be stated in the contract. The contractor has no obligation (or even financial incentive) to keep the price within that estimate. From the homeowner’s perspective, the better approach for keeping the project within budget is to negotiate a lump sum price. But, the homeowner will need to decide the project details before contract signing and then guard against changing their mind during the job. While the homeowner can still change the project design under a lump sum contract, the contractor will justifiably require a change order to do so - typically at a premium.

Progress Payments. The contract should provide guidance on the amount of each progress payment until project completion. The contract should allow the homeowner to withhold enough unpaid contract balance to cover the cost of a replacement contractor if, for whatever reason, the original contractor is terminated. To accomplish this goal, the contract should include a “schedule of values”, which is a break-down of the lump sum price allocated for each of the major work items (e.g. foundation, rough carpentry, electrical, etc.), equating to the value of those respective work items. Each month, the contractor should get paid a percentage of the amount allocated for each of the work items based upon the work actually performed.

Protection Against Liens. Even if a homeowner pays the contractor every dollar owed on the project, if that contractor fails to use those funds to pay all of the material suppliers and subcontractors, the homeowner could end up paying twice for those materials and subcontractor services - plus their attorney’s fees and costs. And if you don’t pay, you can lose your house. It’s harsh, but it’s the law. The good news is that Florida’s lien law provides specific procedures for homeowners to protect themselves against such liens. Briefly, the homeowner needs to condition all progress and final payments on receipt of lien releases from all potential lienors. There are additional steps to take as well, and homeowners are strongly encouraged to contact their construction lawyer prior to contract signing to make sure that the contract will require the contractor to follow all of the procedures that will guard against liens.

Project Schedule. Perhaps the biggest complaint by homeowners is that the project takes longer than expected. If the delays were caused by things beyond the contractor’s control, such as a hurricane or multiple changes requested by the homeowner during the project, this is excusable. But, if that is not the case, then the contract should give the homeowner the right to terminate their contractor if the project is taking an unreasonable amount of time to finish. To establish that right, the contract should establish a firm substantial completion deadline (e.g. a certain number of days after the permit is issued) and specifically state that “time is of the essence” with respect to that deadline.

Insurance. The contractor should provide the homeowner a Certificate of Insurance reflecting that he has Comprehensive General Liability Insurance and Workmen’s Compensation Insurance. The contract should condition payment upon the contractor furnishing that Certificate of Insurance and keeping the insurance in force through final completion.

Attorney’s Fees. When projects do not go as planned, a lawsuit could result. If it does, the contract should provide the homeowners the right to recover their attorney’s fees if they win. If the contract is silent on attorney’s fees, it can create an unfair advantage for the contractor because if the owner breaches by failing to pay amounts due, then the contractor can lien the house and sue under Florida’s lien law, which provides a statutory right to recover attorney’s fees for the prevailing party. However, if the contractor breaches the contract by performing work defectively or delaying the job, the homeowner does not have any right to recover attorney’s fees unless the contract expressly authorizes it. So, unless the contract includes an attorney’s fees provision, the contractor would have an unfair litigation advantage.

Conclusion. This article discusses only a few of the issues to be addressed when reviewing a construction contract from the perspective of the homeowner. It is strongly advisable to retain the services of an experienced construction attorney to guide you through the process – not only for the negotiation of the contract, but also as a part of the team to help through the issues that might come along throughout the project. 

Frank and his wife, Joan, have two daughters. They have lived in Winter Park, Florida since 1980. Joan is a retired Speech Pathologist. Their older daughter, Allison, who is a mixed media artist, lives in Venice, California and is a 2007 graduate of Hamilton College, graduated from Parsons The New School For Design with a postgraduate degree in Graphic Designs in 2008, and received her Master of Fine Arts in Electronic Media Arts and Design from the University of Denver in 2010. Their younger daughter, Rachel, who works at the Aspen Institute, lives in Washington, D.C. and is a 2011 cum laude graduate of Hamilton College and received her Master of Arts from Georgetown University in 2013.

Closing Problems & Pitfalls

Winter Park Home Magazine - Issue 1 2014

Occasionally unexpected issues arise that delay, or even stop, a real estate closing. There are also situations in which a Purchaser obtains title to property, and after closing learns that the property is subject to significant problems that would have been disclosed by the advice of an attorney or the review of a survey. Here are four recent examples:

Number 1 – Use of a Durable Power of Attorney after death of Principal. John and Michael, both single, own platted Lot 8. They enter into a Contract to sell Lot 8 to the Kelleys, with John signing the Contract on behalf of Michael utilizing a Power of Attorney. At closing John presents an original and properly executed Durable Power of Attorney signed by Michael (the "Principal"), which authorizes John to sign the deed on Michael’s behalf. At closing John then signs the deed and companion documentation, both individually and as Attorney in Fact for Michael. When presented with the Affidavit of the Attorney in Fact (the "AIF"), which includes the confirmation by the AIF that the Principal is still alive, John hesitates. He then advises the closing agent that Michael recently died, and that he did not realize that he could no longer use the Power of Attorney after John’s death. The closing agent has no choice but to stop the closing.

The title work reflects that John and Michael owned the property as tenants in common. Michael's estate will therefore need to be probated to determine his heirs for his one-half interest in Lot 8. Furthermore, the Contract was signed by John as AIF after Michael had died. Michael’s estate is therefore not contractually bound to sell the property, and the deposit will be returned to the Kelleys. If the Kelleys still wish to purchase Lot 8, they will have to renegotiate the Contract at a later date once Michael’s heirs have been judicially determined.

Number 2 - “Too much” cash at closing. Andrew and his wife agree to purchase property for $150,000.00, with no financing contingency. Three days before closing they indicate they will bring $10,000.00 in cash, and will wire the remainder of the funds. This potential delivery of a large sum of cash immediately raises a red flag. The Buyers are advised by the closing agent that all funds need to be wired into the closing agent’s account before the closing can be completed. There may be some minor exceptions to this rule. For example, a Buyer may be allowed to bring a small amount of cash (e.g. $350.00) to cover any additional costs due to last minute changes to the settlement statement.

In recent years the State of Florida (Chapter 896 – the Florida Money Laundering Act) and the federal government (the Anti-Drug Abuse Act of 1988) have imposed mandatory reporting requirements for transactions involving more than $10,000.00 in cash received in a trade or business. These laws also impose substantial penalties and fines if the closing agent fails to comply with these guidelines. The reporting of these cash funds must be filed without delay. To avoid the penalties potentially associated with receiving cash in excess of $10,000.00, the prudent closing agent will therefore stop, or at least delay, the completion of the closing until such time as the issues associated with these funds can be satisfactorily resolved.

Number 3 - Property purchased at foreclosure sale. Some investors independently search the public records websites when deciding whether to bid on property at a foreclosure sale, and do not obtain a title insurance commitment, thereby losing the benefits of a professional search and examination. A title insurance commitment (when issued in conjunction with a final Owner’s Policy) not only serves to identify the current owner of a property, and to identify all liens impacting the property that will be eliminated or remain as liens on the property after the issuance of the Certificate of Title, but it also serves to protect the prospective purchaser by shifting the burden of correcting any mistakes in the examination of title to the title insurance underwriter. This shift of burden, of course, only occurs when a title insurance policy has been issued in conjunction with the title insurance commitment.

Recently, I spoke with one investor who had purchased property at a foreclosure sale. His “online” title search failed to pick up the existence of a $125,000.00 mortgage recorded prior to the foreclosed mortgage. If this investor had obtained a title insurance commitment, the outstanding mortgage would have been disclosed, and the investor could have elected not to purchase the property. Alternatively, if this prior mortgage had been misindexed or missed by the title insurance underwriter, and no exception for this mortgage appeared in the title commitment and the Owners' Policy (after issuance of the Certificate of Title), then the investor, under the parameters of the title insurance policy, could look to the title insurance underwriter, and not to himself, to pay the cost and expense of eliminating the prior mortgage as an encumbrance on the property.

Number 4– Ordering a Survey for closing. To save money, a Buyer sometimes chooses not to obtain a survey for closing. This money saving approach can be very expensive. In one recent example, an individual purchased a vacant metes and bounds parcel of land and chose not to obtain a survey until six months later – when he submitted plans to construct a new home. At that time he learned that he had purchased the “wrong” lot, i.e. a lot lying between two neighboring parcels of land, and not the corner lot on the street that he thought he was purchasing. In another example, a Purchaser acquired vacant land subject to an access easement that bisected the property. The Purchaser did not obtain a survey or read the easement terms prior to closing, and never retained counsel to review the contract or the related title work. As a result, this individual had to subsequently, and at considerable expense, attempt to negotiate with the beneficial owner of the access easement to change its location. If the Purchaser had retained counsel prior to closing, the attorney could have reviewed the easement terms, determined their impact, and advised his client of his contractual options. Alternatively, if a survey reflecting this easement had been obtained and reviewed prior to closing, the Purchaser could have elected to retain an attorney to determine his options under the contract. Ideally, the Purchaser would have wanted to place the burden of moving the easement onto the Seller – or otherwise have elected not to purchase the property.

Not even a well-prepared and knowledgeable closing agent can anticipate every issue that may arise at a closing. Having an attorney guide you through these potential pitfalls is probably the best way for you to protect what is often the greatest financial investment of your lifetime.

This Article is not a substitute for hiring an independent

attorney to review your title commitment and closing documents.

 Frank and his wife, Joan, have two daughters. They have lived in Winter Park, Florida since 1980. Joan is a retired Speech Pathologist. Their older daughter, Allison, who is a mixed media artist, lives in Venice, California and is a 2007 graduate of Hamilton College, graduated from Parsons The New School for Design with a postgraduate degree in Graphic Designs in 2008, and received her Master of Fine Arts in Electronic Media Arts and Design from the University of Denver in 2010. Their younger daughter, Rachel, who works at the Aspen Institute, lives in Washington D.C. and is a 2011 cum laude graduate of Hamilton College and received her Master of Arts from Georgetown University in 2013.

Review of the Owner/Design Professional Agreement from The Design Professional's Perspective

ProNetwork News - December 2013 - Volume III - Issue 12

This article reviews some of the issues addressed in a standard Owner/Design Professional Agreement, outlines concerns from the Design Professional’s perspective, and discusses how the Design Professional can reduce liability on a project and ensure equitable adjustments to the contract price and schedule for changed or additional design services. The agreement contemplated by this article is one to be used as part of a traditional design-bid-build approach.

Standard of Care

When trying to hold a Design Professional liable for negligence, one of the first legal considerations is the standard of care owed. Absent an express contractual warranty, the law does not require the Design Professional to guarantee that the design will be perfect. Rather, the standard of care that the courts will typically apply is that degree of care which a reasonably careful architect/ engineer would use under like circumstances. However, nothing prevents an Owner from seeking contractual language that increases the typical standard of care owed by the Design Professional to the level of an express warranty of the design; in fact, Owners frequently attempt to do so in their proposed agreements – and courts will enforce such language. This is a danger to the Design Professional, as it is possible that the increased standard of care could go beyond professional liability insurance coverage available to the Design Professional. Thus, the Design Professional should insist on the deletion of any such guarantee as unreasonable.

Similarly, a Design Professional should insist on the deletion of any proposed language that attempts to establish a fiduciary duty between the Design Professional and the Owner, as such language also results in an increased standard of care owed on the Project.

Owner’s Project Criteria

Before commencing with design services, the Design Professional should insist upon a well-defined project criteria from the Owner, upon which it may rely for establishing the overall parameters of the project. The agreement should expressly state that the project criteria furnished by the Owner describes all of its program requirements and objectives for the project, including use, space, budget, time, site, maintenance requirements, and expandability requirements, as well as submittal requirements and other requirements governing the Design Professional’s performance of the work on the project. Ideally, the Owner’s project criteria includes conceptual documents, design criteria, performance requirements and all other Project-specific technical materials and requirements needed by the Design Professional to commence work without further information gathering after the contract is executed.

Any language that requires the design documents to reflect the Owner’s “intent” or other such wording should be deleted (as mind reading should not be a contractual requirement). The Design Professional should insist on express contractual language that states that if the Owner seeks to supplement or change the project criteria after the contract price is established or after the Design Professional commences work, then the Design Professional is entitled to an equitable adjustment to the contract price and schedule as a condition precedent to performing any such additional work.

Similarly, to the extent that the Owner changes the project budget, there should be contract language entitling the Design Professional to an equitable adjustment in the contract price and schedule, to be reflected in an executed change order, for all resulting value-engineering needed to reach the revised budget. However, if value engineering is needed because the bids from all contractors exceed the project criteria’s budget (possibly resulting from inaccurate pricing estimates by the Design Professional), then the contract should include language that states whether a Design Professional must perform that value engineering work without additional compensation. Perhaps the contract states that the Design Professional is only required to do so if the lowest responsive and responsible bid exceeds the budget by some threshold percentage. Regardless, the Design Professional should expressly limit any liability for any claims or damages sought by the Owner arising from the cost of the work exceeding the project criteria’s budget.

Equitable Schedule of Values

Owners may seek to establish a draw schedule that withholds most of the contract price until after the construction documents are 100% complete and approved and permitted by the governing building authorities, i.e. when the Owner has a work product in hand that would allow construction to commence. However, the Design Professional should insist on a payment draw schedule that equitably reflects the value and time required at all preliminary stages: schematic phase, design development phase, the staged percentage completion milestones of the construction documents, negotiation/bid review phase and contract administration. Moreover, the contract should define the work product required at each such stage, as applicable, that would trigger entitlement to each successive draw payment.

Construction Contract Administration

While the standard AIA Documents for construction contemplate intensive contract administration services to be performed by the Architect during the construction phase, oftentimes a companion AIA design agreement is not used on the same project. Indeed, even if a percentage of the Design Professional’s contract price is dedicated to contract administration, often the design agreement does not define well the Design Professional’s contract administration duties (or may not address them at all). This disconnect creates fertile ground for conflict. It is difficult, if not impossible, to predict the amount of involvement required by the Design Professional during the construction phase for some contract administration duties, such as RFIs. Accordingly, the Owner and Design Professional should attempt to define the Design Professional’s scope of contract administration services to be performed during the construction phase and break-out and identify certain contract administration services to be performed on an hourly fee basis (with a rate schedule agreed to and incorporated into the agreement).

Additional Services

The agreement should expressly state that the Design Professional is entitled to an equitable adjustment in the contract price and schedule for the following items:

• as previously discussed, any change in the project criteria;
• change in the instructions or approvals given by the Owner that necessitate revisions in the design documents;
• enactment or revision of codes, laws or regulations or official interpretations which necessitate changes to previously prepared design documents;
• decisions of the Owner not rendered in a timely manner;
• failure of performance on the part of the Owner or its agents;
• preparation for an attendance at a any deposition, dispute resolution proceeding or other legal proceeding.

 Reimbursable Expenses

Briefly, as the amount of Reimbursable Expenses will necessarily remain an unknown contingency, they should not be limited to a Reimbursable Expense Allowance (as is sometimes requested by the Owner), but rather should be additional compensation over and above the contract price.

Insurance

The Design Professional is strongly advised to consult with its insurance broker to review the contract’s insurance requirements to determine whether its current policies comply and whether additional coverage is required. If so, the Design Professional will need to ensure that any additional premium to be paid is included in the contract price or otherwise covered as a reimbursable expense.

Limitation of Liability

As it relates to the Owner, the Design Professional should seek to limit its total liability for any and all claims or injuries arising from the project to the amount paid on behalf of or to the Design Professional by its insurer in settlement or satisfaction of such claims. If no such insurance coverage is provided with respect to the Owner’s claims, then the Design Professional’s total liability to the Owner for any and all such uninsured Owner claims should nonetheless be capped at some dollar amount, such as some percentage of the contract price that reflects the Design Professional’s profit on the Project. Such limitation of liability provisions are generally enforceable (although the Design Professional should confirm with an attorney licensed in the state whose laws govern the contract).

Instruments of Service

The contract should expressly state that all drawings, specifications and other documents and electronic data furnished by the Design Professional per that same contract are deemed to be instruments of service, and that Design Professional shall retain the ownership and property interests in them, including the copyrights. Only upon the Owner’s payment in full for all amounts due under the agreement should the Owner be granted a limited license to use the Instruments of Service in connection with the Owner’s occupancy or use of the project.

The contract must also address what happens if the design contract is terminated at any point prior to completion of the design documents. What rights, if any, does the owner have to the Design Professional’s work product under that scenario? Since the Design Professional is no longer involved in the design, if the Owner is granted license to still use the work product to complete the project, then the Owner should be required to indemnify and defend the Design Professional as a result of any claims arising from such use.

The issues outlined herein are not intended to be exhaustive. Design Professionals are strongly advised to have each design agreement separately reviewed by their construction attorney and insurance broker.
__________________________

Frank L. Pohl, Esq. and James C. Washburn, Esq. are partners in the law firm of Pohl & Short, P.A. in Winter Park, Florida. Pohl & Short, P.A. represents architects, engineers and other participants in the construction industry throughout Florida. Mr. Pohl has been advising clients involved in all aspects of real estate development for over 30 years. Mr. Washburn has focused his practice in construction law for over 15 years and is Board Certified in Construction Law by The Florida Bar. Additionally, the law firm’s attorneys practice in the following four main areas of business law: commercial litigation, real estate law, corporate law and trusts and estates. Further information about the law firm can be obtained by visiting its website at www.pohlshort.com, by calling the office at (407) 647-7645 or via e-mail at pohl@pohlshort.com.

Vesting Property Title 2: The Sequel

John Smith and Michael Jones are two friends who enjoy fixing and remodeling homes. They decide to go into business together, to buy distressed properties through foreclosure sales, to repair and remodel them, and then to sell the remodeled homes for a profit. They shake hands and agree to proceed, with each contributing one half of all expenses, and with each sharing one half of the profits. John Smith then comes to me for advice.

I advise John that he and Michael have effectively entered into a general partnership agreement, and that Florida law does not require their agreement be in writing. I advise John, however, that their agreement needs to be in writing, to more completely set forth the parameters of their understanding, thereby avoiding many of those disputes which occur with oral agreements. I also advise John that all property acquired by the partnership should be vested solely in the partnership’s name, in order to avoid any claims of creditors against either of the partners in their individual capacities. I told John to consider the following scenario.

Two partners buy a parcel of land. Immediately after closing, one of the partners unexpectedly has to leave the state to deal with a family emergency. The second partner undertakes all the necessary improvements to the property in partner one’s absence, and upon his return the two partners sign a contract to sell the property. At closing, Second Partner insists that he be paid a greater share of the profits since he had been the only partner to work on the house. He also “reminds” his partner that they once had a phone discussion in which they had both agreed that there may be circumstances in which one partner may provide more services than the other, and that the profits would need to be adjusted accordingly. Partner One says he does not remember that conversation, and that if Partner Two refuses to split the profits evenly that he will file a lawsuit to “clear up the record.” Unless the partners can come to an amicable resolution, not only will this matter end up in court, but realistically the partnership agreement will come to an end. A properly drafted written partnership agreement could have addressed this situation, and the partners could then have looked to the partnership agreement to address their differences.

A General Partnership is defined in chapter 620 of the Florida Statutes as “an association of two or more persons to carry on as co-owners a business for profit.” Unlike most business entities that must register with the Florida Department of State, there is no registration requirement for a General Partnership. These business entities, whether oral or written, are governed in Florida by the Revised Uniform Partnership Act (“RUPA”). Under RUPA, the general partners share both the profits and the obligations of the general partnership, and each partner is jointly and severally liable for all obligations of the partnership. A person who is later admitted as a general partner, however, will not be personally liable for any partnership obligation incurred before that person’s admission as a partner.

The manner in which title is vested in the general partnership will impact the enforceability of judgments against real property owned by the partners and the partnership. The general rule is that judgments against a person who is a partner of a partnership do not attach to property vested in the partnership. Partnership property is viewed as separate and distinct from the interests of the individual partners. As a result, if John Smith and Michael Jones create the JSMJ General Partnership (“JSMJ”), and title is vested in JSMJ, a duly perfected judgment against JSMJ will be enforceable against the real property owned by that partnership. A judgment against John Smith as one of the principals of that partnership, however, would not attach to the partnership’s property.

It is therefore important to properly vest title in the partnership name, and not in the individuals creating the partnership. Let’s assume that John Smith and Michael Jones have created the JSMJ General Partnership to buy Whiteacre. Title to Whiteacre, however, is mistakenly vested in their individual names, and not in the name of the partnership. A certified copy of a $50,000.00 judgment against Michael Smith is then recorded in the public records of the county in which Whiteacre is located. The Smith judgment will then automatically attach to Michael Smith’s one-half interest in the investment property. If title had been vested in the JSMJ General Partnership, the judgment against Michael Smith would not have attached to Whiteacre.

What if a partner does not want to be personally liable for the debts of the partnership, while sharing in the profits of the business? Florida law permits the formation of a Limited Partnership, which is a form of legal entity by which there may be one or more general partners and one or more limited partners. Unlike a general partnership, a limited partnership cannot legally exist unless it is in writing and registered with the Florida Department of State. The name of the partnership itself must also end with the words “Limited Partnership”, “L.P.”, “Ltd.” or “LP”. In a validly formed limited partnership, each of the general partners will have the same rights and obligations of general partners in a general partnership. The limited partners however are passive investors (similar to shareholders in a corporation). The limited partner has no control over the partnership business, and also has no personal liability for any of the acts of the partnership. The Limited Partnership is generally the preferred form of partnership agreement for those investors who do not want to be held liable for the debts and obligations of the partnership.

Judgments against limited partnerships attach to all real property titled in the partnership name. Judgments against a person who may be either a general or limited partner in the partnership will not attach to the property that is vested in the limited partnership’s name.

In future articles we will discuss other forms of legal entities which can acquire real property, and the impact that judgment liens may have on those particular forms of ownership and their respective principals.

This Article is not a substitute for hiring an independent attorney to assist in the determination of the appropriate legal entity by which a purchaser should acquire title to real property.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank’s legal practice has concentrated on complex real estate, tax and corporate transactions throughout Central Florida. Frank has been involved in the Central Florida community for more than thirty years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M from New York University School of Law in 1980.