Client Update – Real Estate in the Wake of Covid – 19. Vol. 4 – Construction Projects
Many industries have been upended by the Coronavirus epidemic and the local, state and national government response. Because of the fundamental role real estate plays in our economy and the broad umbrella of activity that falls under the category of “real estate development”, developers, property owners and tenants have been particularly impacted. Landlords, tenants, contractors, lenders, buyers and sellers of real estate, and all others who participate in the acquisition, development, leasing or sale of real property are all being impacted in different ways. This series of client alerts takes an in-depth look at specific questions, sectors or issues related to real estate development against the backdrop of COVID-19 and the nation’s response to it. In this alert, we focus on construction activity, common provisions in an AIA Contract that might be relevant to a contractor and owner, and the current status of executive orders concerning construction activity in various cities and states.
Construction activity continues to be adversely impacted by COVID-19 and related lockdown restrictions. Projects have been hit by a variety of factors: stay-in-place orders, workforce impacts, supply chain disruptions and economic uncertainty, just to name a few. While very few cities and states have prohibited construction activity from continuing, most still require that contractors engage in social distancing measures – effectively limiting the number of activities that can take place simultaneously and slowing progress considerably. In addition, supply chain issues may prevent contractors from receiving the materials they need in order to proceed on a job. Other logistical problems exist as well: for instance, in some jurisdictions, local practice concerning title insurance on construction loan draws has been hampered by registry shutdowns and title examiners unable or unwilling to expose themselves to possible contaminant threats. Permits are more difficult to obtain due to permit granting authorities closing their offices, and, even if relevant permits have already been obtained, contractors may find it challenging to schedule inspections in order to achieve final sign offs.
As a result, many developers and contractors are wondering what their rights might be if they have to stop work altogether, or allow work to proceed on a modified schedule. In order to determine a contractor’s and owner’s respective rights on a project impacted by COVID-19, the parties should look first to their contract. This alert looks at two such clauses from the ubiquitous AIA A201-2007 General Conditions – one that might benefit the contractor, and another that might benefit the owner. However, we caution anyone that is a party to a construction contract for an active project to ensure that contract is carefully reviewed prior to making decisions based on the information in this alert. A number of other contract provisions may be relevant, and during their construction contract negotiations contractors and owners often modify the standard text in the AIA forms.
Force Majeure and AIA Construction Contracts
Because of the COVID-19 pandemic, the “force majeure” provision has risen in profile from obscure boilerplate to one of the most talked about contract clauses. While the standard AIA A201-2007 General Conditions doesn’t use the term “force majeure”, Section 8.3 of the General Conditions does allow for extensions of time for the contractor for “causes beyond the Contractor’s control”, including “unusual delay in deliveries” and “unavoidable casualties”. It is likely that COVID-19-related delays fall under that definition.
In order for a contractor to avail itself of the right to receive additional time, however, Article 15 of the standard AIA A201 contract requires a contractor to follow a strict process. That process includes notifying the owner and Architect (as well as the “Initial Decision Maker”, if different), that a claim for delay is being made within twenty-one (21) days after the “occurrence of the event giving rise to such Claim” or “after the claimant first recognizes the condition giving rise to the Claim, whichever is later.” That notice should also specify an estimate of the cost and the probable effect of delay on the progress of the work being performed.
Under the AIA A201 General Conditions, if the Architect then determines that a delay is justified, the schedule should be extended by change order for the length of time the Architect thinks is reasonably appropriate.
However, it is particularly noteworthy that the AIA A201 specifically states that an extension of the contract time “does not preclude recovery of damages for delay by either party under other provisions of the Contract Documents.” Accordingly, a contractor following the process set forth above would not, very technically speaking, be in default of its obligations as a result of delays caused by COVID-19. Nonetheless, if (for instance) the construction contract included provisions for liquidated damages as a result of contractor’s failure to meet a specified deadline, the contractor would still be liable for damages (for instance, any such liquidated damages) due to such delay.
The Owner’s Right to Stop Work
Under Article 14.3 of the AIA A201-2007, the owner has the right to order the contractor to “suspend, delay or interrupt the Work in whole or in part for such period of time as the Owner may determine.” This right exists regardless of whether there is a specific reason for the suspension. However, an owner should be cautious about exercising such right to order a suspension of the work because the AIA A201-2007 gives the contractor the right to an extension of the Contract Sum and Contract Time for increased costs and time associated with such a suspension, including profit. In addition, if the length of time of such suspension exceeds the total number of days scheduled for completion, or 120 days in one year (whichever is less), the contractor may have the right to terminate the contract.
Based on that, an owner should probably exercise its right to suspend performance only if the owner is facing considerable short-term uncertainty or cash-flow issues, and the contractor is capable of continuing to perform under the contract.
Survey of Executive Orders
Determining a party’s rights under their construction contract will depend to a very large extent on whether a government order expressly prohibits performance under the contract by restricting construction activity. The list below analyzes local and state executive orders in the jurisdictions we most frequently practice in, to identify whether construction activity is prohibited in general. Please note that while we have made every effort to ensure this information is current as of the publishing of this Client Alert, orders are changing daily. Also, even where construction is permitted to continue, it is often the case that social-distancing measures must be observed. Finally, although construction activity remains a permitted activity in most areas, construction-related professionals, like architects and engineers, may be subject to their own COVID-19 related limitations. As such, we encourage you to reach out to us before making any decisions on whether certain activity is allowed in the areas listed below.
New York State – ”Nonessential” construction restricted, though liberal exceptions apply
New York City – Per the State order, “nonessential” construction is restricted, though liberal exceptions apply
New Jersey – “Nonessential” construction restricted, though exceptions apply
Florida – Construction Allowed, though some local communities have put restrictions in place
Miami – Construction Allowed
Massachusetts – Construction Allowed (but see below regarding Boston)
Boston – “Nonessential construction” is “temporarily paused”. Exceptions may apply
Rhode Island – Construction Allowed
Connecticut – Construction Allowed
New Hampshire – Construction Allowed
Michigan – Non-emergency construction restricted
Pennsylvania – Construction Allowed
North Carolina – Construction Allowed
Please note, our primary goal in providing these updates is to keep our clients informed. This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. We are working diligently to remain well informed and up-to-date on information and advisements as they become available. However, information is changing rapidly, and depending on the specific language in your contracts and the situation you are facing, the advice contained in this alert may not be appropriate for your individual circumstances. As such, please reach out to us if you need help addressing any of issues discussed in this alert, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.
Stay safe and healthy.