Case Summaries

The Court in Strongsville affirmed the Board of Tax Appeals’ (“BTA”) decision to use an appraisal, as opposed to a recent sale lease-back transaction, to determine the subject property’s tax value. 

The Court in Strongsville affirmed the Board of Tax Appeals’ (“BTA”) decision to use an appraisal, as opposed to a recent sale lease-back transaction, to determine the subject property’s tax value.  Typically, a recent sale transaction will determine the property’s value for tax purposes, unless the sale is not at arm’s length.  Where it is shown that a recent sale was not an arm’s-length sale, appraisal evidence can be used to establish the property’s value.

In Strongsville, the owner was in a dire financial situation and had a balloon mortgage payment due.  It decided to sell the subject property to acquire the funds to pay the balloon payment.  It still needed to operate on the property, however, so it entered into a sale lease-back agreement with the purchaser of the property for $16 million.  The City of Strongsville School District filed a complaint with the Board of Revision (“BOR”), asserting that the true value of the property was $16 million, not the appraised value of $8,326,400.  The BOR found the property’s value to be $9.5 million, based on the owner’s appraisal evidence.

The Ohio Supreme Court agreed with the BTA that the recent sale lease-back of $16 million did not constitute an arm’s-length transaction; therefore, it was not the “true value” for taxation purposes and the appraisal evidence was properly used to determine the value.  The Court did not base its decision on the fact that the recent sale was a sale lease-back.  Instead, it reached its conclusion by finding that the sale was conducted under duress.  The Court cited three factors indicating duress on the part of the seller.  First, the company’s financial situation was unsteady.  Second, the company had an impending balloon mortgage payment and insufficient funds to make it.  Third, all the appraisers involved in the case treated the sale as not being an arm’s-length sale.  Specifically, the Court found that “the need to sell the building was so pressing that [the company] rejected an offer for the property higher than the one ultimately accepted because of the longer time it would have taken to complete the proposed transaction.” 

Strongsville Board of Education v. Cuyahoga County Board of Revision (2007), 112 Ohio St. 3d 309. 

 

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The Court held that improvements to a factory were part of the realty, not personal property, and were therefore subject to a mechanics' lien.

The sub-subcontractor provided work and materials as part of a factory’s paint line upgrade.  The contractor argued that Mid-Ohio’s mechanics’ lien was invalid because the paint line was personal property, not realty.  The court disagreed, holding that the work and materials Mid-Ohio furnished were, as a matter of law, improvements to a building, fixture, appurtenance, or other structure, noting that the legislature intended the mechanics’ lien statute to provide remedies for a broad range of work, including “appurtenances.”

Mid-Ohio Mechanical, Inc. v. Carden Metal Fabricators, Inc. (5^th Dist., 2006), 169 Ohio App. 3d 225. 

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The Court determined that the general contractor's negligence constituted an "occurrence" under its insurance policy, and thus the insurance company improperly denied coverage.

Dublin was the general contractor for several office  buildings. It retained Reitter Wall Systems to install stucco and cultured stone on the exterior walls of the buildings. After occupancy, the tenants started complaining of musty smells, eye irritation, and other health-related problems. A preliminary investigation found mold growing on the inside surface of the exterior walls.  The inspector concluded that the mold formed as a result of Reitter’s failure to seal the exterior joints of the building. 

The mold contamination rendered the buildings uninhabitable; plaintiff was required to remediate and restore the building walls to cure the mold damage. Plaintiff also incurred substantial costs in cleaning the mold from the buildings, relocating tenants from the uninhabitable office space, and conducting environmental testing.  Dublin filed a claim under a comprehensive commercial general liability insurance policy issued by Selective Insurance Company. The policy contained an exclusion for “business risks.” After Selective denied coverage under the policy, Dublin sued. The trial court found that Selective had properly denied coverage because the mold problems did not constitute “property damage” arising from an “occurrence,” as the policy required for coverage. The court further determined that coverage was precluded by the “business risk” exclusion. Dublin appealed.

Consistent with its prior decisions, the court held that Dublin’s negligent construction, through its subcontractor, constituted an “occurrence” because “occurrence” was defined in part as an “accident.”  The court reasoned that allegations of negligence in constructing or designing a building reasonably fall within the policy's definition of occurrence, that is, accident, because negligent acts are not done with the intent or expectation of causing injury or damage. The court acknowledged that other courts of appeal have held that negligent construction is not an “occurrence,” but rejected that line of cases.

The court also held that the business risk exclusion did not bar coverage, because it only excluded damage to the insured’s “product,” which was defined to exclude real property.  The defendant argued that real property included only land and not the building, but the court held that the accepted definition of “real property” included buildings.

Dublin Building Systems v. Selective Insurance Company of America (10^th Dist. Feb. 6, 2007), No. 06AP-213, 2007 WL 353675. 

 

 

FEATURE ARTICLE

 

The Top 10 Clauses to Watch for in Construction Subcontracts:  What Every Sub Should Know

 

By: Christopher M. Ernst

 

Contracts serve to govern how a concrete contractor does its job, and whether or not the job will be profitable. Navigating contracts and agreeing to terms that meet each party’s needs can be difficult, especially considering that a construction contract can be up to100 pages long. The subcontract can also reference and incorporate the terms and conditions of preceding documents, such as the prime contract and/or bid proposal which can be up to 500 pages in length.

Usually the terms of the prime contract cannot be changed, but sometimes the subcontract can be negotiated. Because of this, concrete contractors need to review and be familiar with the contract’s terms to protect themselves from conflicts that may arise down the road. Here are 10 common terms every concrete contractor should watch for when entering into a contract:

1) Order of Precedence

Typically, when multiple contract documents are used, they will contain an order of precedence. This order determines how the documents’ provisions are interpreted and states which terms govern when there is confusion or contradiction between contract terms. More often than not, the purchase order is the controlling document, followed by the request for bid, and then the contractor’s bid. It is important to be familiar with the order of precedence because a term may be defined one way in the contractor’s bid, but it may be overruled by a different document.

 

2) Dispute Resolution

Many times, construction contracts require dispute resolution to be handled through an arbitration proceeding instead of a formal lawsuit. There are times when this can be advantageous, such as in particularly complex construction, but there are times when this is detrimental. For instance, if a contractor institutes an arbitration with the American Arbitration Association for an unpaid contract balance above $1 million dollars, the filing alone will cost $13,250. While this fee is only 1 percent of the sum at issue, it is much larger than a typical court filing fee of $100. Additionally, parties pay all arbitration costs, including the hourly rates of arbitrators, which, collectively, can exceed $1,000 per hour. Examine whether or not arbitration would be beneficial each time you enter into contract.

 

3) Jurisdiction

Contracts usually specify jurisdiction in the event that a project goes poorly and the parties end up in litigation. It is not unusual for a contract to specify jurisdiction in a state that is most convenient for the party that drafted the contract – typically, the project owner. Consider jurisdiction when weighing the pros and cons of a contract as this can increase the cost of litigation.

 

4) Plant Inspection

For some projects, particularly government-regulated jobs, the owner or general contractor may specify the right to inspect or audit the batch plant. Few things are worse than when the owner’s engineer inspects a batch plant to find everything in disarray. This reflects poorly on the concrete contractor, even if the plant is operating perfectly. Make sure the batch plant operator is aware of the potential for inspection and agrees to properly maintain its records, including all batch tickets and design mixes. By the same token, it is the concrete contractor’s responsibility to make sure the operator is actively managing these records.

 

5) Liability for Strength

Any concrete contractor knows that concrete strength can be affected by a variety of factors, ranging from the quality of ingredients in individual batches to procedures followed during curing. If the concrete does not come up to strength sufficiently, the contractor can be liable for an equally broad variety of damages, including consequential damages for delaying a project. However, if the cause for strength issue is not the fault of the concrete contractor but of another party, such as the batch plant, the concrete contractor must be able to obtain recovery from that party.  Consider incorporating the terms of the prime contract, including arbitration, into any other agreement entered into for the project. 

 

6) Liability for Design Mix

Subcontracts should spell out specifically who is responsible for – and, consequently, liable for – the design mix. It is to the concrete contractor’s benefit for the owner’s engineer to design the mix and specify exactly what should be included, however, sometimes contracts are vague and merely address strength requirements. Be sure the subcontract specifies that the final decision belongs to the owner or general contractor. This way, if the design mix becomes an issue, responsibility will not fall on the shoulders of the concrete contractor.

 

7) Naming the Design Mix

Confusing design mixes is one of the easiest mistakes made in the field. If the subcontract spells out the nature of the mixes, be sure they are distinctively named, so that a batch plant operator or driver is less likely to accidentally provide the wrong mix. For instance, if there are two types of concrete with 4,000 psi strength but different mixes, give each mix a distinctly different name to reduce the likelihood of confusion.

 

8) Record Maintenance

Most subcontracts will require the proper maintenance of records regarding the concrete, batches, placement, etc. Even if the subcontract does not include such requirements, it is a good business practice to maintain scrupulous records. For subcontracts that contain specific record-keeping provisions, it is vitally important to follow the requirements as closely as possible. This means establishing protocols for the field and accountability for those charged with maintaining records. Failure to maintain records the right way can be a major impediment to resolving any sort of conflict that may arise between the concrete contractors and others on the project.

 

9) Testing Costs

Each subcontract should clearly spell out who is responsible for independent testing of the concrete, and more importantly, assign financial responsibility. While it is customary for subcontracts to outline that testing the batches and placed concrete is required, some do not define who is responsible for that testing. Make sure to create a subcontract that defines these expectations.

 

10) Provisions for Delays

It is rare for a construction project to be completed on time. Because of this, each contract must include provisions regarding handling delays, apportionment of associated costs and how the project should proceed in light of delays. Be wary of contracts that place an inordinate amount of responsibility on one party as this can be a warning sign of future trouble.

Overall, contracts should clearly spell out the expectations and promises of the parties who sign the document. Each provision has importance and none should be taken lightly. Entering into a bad contract is equal to building a project with bad drawings, as it only begs for more trouble later. It is better to take the time before signing a contract to be sure that everyone is on the same page to avoid disagreements later.

This article was originally published in ForConstructionPros.com.

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Christopher M. Ernst is a Partner and a member of the Litigation and Real Estate & Construction Practice Groups.  He can be reached at cernst@bdblaw.com or 216.736.4216.