Construction Law Archives - Samuels Yoelin Kantor LLP

COVID-19 & Forbearance Agreements

March 8, 2021May 22, 2020 by Van M. White III

With new times come new terms. Six months ago we had never heard of Coronavirus or social distancing. Now, we hear those terms so often we look forward to the day we never hear them again. Another term we’re starting hear in the wake of the Coronavirus outbreak is forbearance. Prior to COVID-19, most of us probably didn’t know what forbearance meant. Unfortunately, the financial impact of COVID-19 will likely cause many businesses and individuals to seek forbearance agreements with their creditors.

Forbearance means the action of refraining from exercising a legal right, especially enforcing the payment of a debt. A forbearance agreement is an agreement between a lender and a borrower (or a creditor and a debtor) to temporarily suspend the payments owed by the borrower to the lender. Forbearance agreements are often entered into in lieu of the lender filing a lawsuit to foreclose a mortgage or trust deed.

Borrowers, or debtors, adversely affected by the Coronavirus outbreak may need to enter into forbearance agreements with their creditors if unable to make their payments when due. Pursuant to the CARES Act, persons who have a federally backed mortgage can seek forbearance of their mortgage payments for up to nearly a year (they can initially apply for 180 days and then seek a 180 day extension). Many mortgages are federally backed. Interested persons should contact their loan servicer to determine if their mortgage is federally backed. Even if a mortgage isn’t federally backed, given the widespread financial impact of the outbreak, there is a fair chance the lender has some forbearance or other options available.

Technically, a forbearance agreement is not a loan modification. Forbearance generally means that the lender agrees to forebear from taking action to enforce the borrower’s failure to make a payment when due and triggering the default clause under the agreement for payment failure. Persons facing the inability to pay their debts as a result of the outbreak need to consider promptly seeking forbearance or a modification of the payment terms of the loan or debt. Whether the parties enter into a true forbearance agreement or a loan modification, there are a number of considerations and competing interests.

While it is incumbent on the debtor to seek forbearance or a loan modification if the outbreak is or will likely cause them to not be able to make payments when due, a forbearance agreement can actually benefit both parties. For the borrower, one of the primary benefits of a forbearance agreement is that it gives them some breathing room with regard to their cash flow, cash on hand and long term ability to pay their debts. A forbearance agreement gives the debtor some time to figure out their next steps.

From the debtor’s perspective, it is important to recognize that a forbearance agreement can actually also benefit the lender. While the lender would obviously prefer to receive payment in a timely manner, a forbearance agreement can add certainty to the lender and improve the likelihood and level of repayment of the debt. It also allows the lender to avoid having to enforce the remedies under their contract, such as foreclosure. Enforcement of contract remedies can be expensive and time consuming. Furthermore, some remedies, such as evictions and foreclosures, have been prohibited by the government during the COVID-19 outbreak.

Some things to keep in mind with regard to forbearance agreements.

Forbearance Period: A forbearance agreement should include language with regard to how long the lender agrees to forebear the debt without taking action to enforce the terms of the agreement (e.g., accelerate the debt for failure to pay in a timely manner) and how much additional time, if any, the debtor might get to repay the debt. In most cases, the balance owed by the debtor continues to accrue interest while the debtor is not making payments pursuant to a forbearance agreement. The forbearance period may be for a specified time period or tied to the occurrence of a specified event (e.g., the governor of Oregon lifting the moratorium prohibiting on-premises consumption of food and drink and gatherings of more than 25 people).

Conditions: The lender will likely require the borrower (and, if applicable, personal guarantors) to meet specific conditions before the forbearance agreement becomes effective. Such conditions might include: providing financial statements; additional reporting requirements; an updated business plan; efforts to seek financial assistance or loans through available government and related programs; and the payment of a forbearance fee and the costs incurred by the lender while negotiating the forbearance agreement.

Acknowledgments and Reaffirmations: The lender will likely require the borrower, in consideration of the forbearance, to make acknowledgements regarding the validity and amount of the underlying debt. The reaffirmations usually also include language that the lender is not waiving the right to exercise their remedies under the contract in the event of future defaults by the borrower. Guarantors are generally also required to re-affirm their guaranties.

COVID-19 has adversely impacted the ability of many persons to pay their debts when due. Adversely impacted debtors should promptly inform their lender if they are encountering financial difficulties. Creditors understand that the outbreak has had a huge financial impact on many businesses and individuals. It is generally in the interest of the creditor to work with their debtors. Negotiated solutions between the parties, memorialized by a forbearance agreement or loan modification, are usually better than engaging in litigation, particularly given the current prohibitions and the fact that the courts are not operating at full capacity and won’t be for some time.

If you need any assistance with regard to a forbearance agreement or modification of a loan, whether you are a creditor or a debtor, please reach out to our team. We’re here to help you during the Coronavirus pandemic.

Van M. White III has more than 20 years of experience as a lawyer in Oregon and Washington. Van has been a partner at Samuels Yoelin Kantor since 2001 and has served on the firm’s management committee since 2010.

Contracts, Coronavirus, and Force Majeure: How Does COVID-19 Affect Contract Obligations?

March 8, 2021April 6, 2020 by Van White

When I was a first year law student I learned about contract formation, contractual obligations, and breach of contract. We also learned about a term called Force Majeure. You may have recently seen the term.

Force Majeure is a French term that means something along the lines of “superior or irresistible force”, but it is also a term used in conjunction with contract law. In the context of contract law, force majeure is an uncontrollable event that prevents a party from fulfilling their contractual obligations. Force majeure is commonly thought of as a provision included in the terms and conditions of a contract. But, because “uncontrollable events which prevent a party from fulfilling their contractual obligations” seldom occur, especially on a wide spread basis, force majeure provisions aren’t invoked very often.

I have reviewed many contract provisions meant to excuse a party’s performance under a contract when circumstances beyond their control (such as wars, strikes, government actions, Acts of God, natural disasters) make it so that they can’t perform their obligations, but the events meant to invoke or trigger such contract provisions don’t occur very often. The current COVID-19 outbreak may qualify as such an event, especially in light of the fact that World Health Organization has declared COVID-19 a pandemic and the Governors of Oregon and Washington have issued shelter in place orders and have prohibited many commercial activities. The coronavirus pandemic will cause numerous businesses to not be able to perform their contractual obligations.

A business unable to perform its contractual obligations as a result of COVID-19 should determine if their contract includes a force majeure provision which excuses or delays their performance because of an uncontrollable event, such as the current outbreak. Because of the widespread affect coronavirus has and will have on the ability of a business to fulfill their contractual obligations, force majeure provisions will likely become heavily debated. Professionals across the country have already begun to discuss force majeure provisions and their effect on contract obligations.

Whether or not a force majeure provision excuses or delays a party’s obligation under a contract depends upon the specific language of the provision and the surrounding facts and circumstances. Every situation is different. But, even if a contract does not include a force majeure or similar provision, there may be other legal doctrines that excuse or delay performance, including impossibility or frustration of purpose. This is especially true in light of the recent government stay at home orders and prohibition of many commercial activities. In addition, as a general rule, recognized legal treatises hold that performance prevented by an act of God or other uncontrollable event may be excused.

The outbreak has had an adverse impact on many businesses. It is my hope that parties to a contract will act promptly and honor their implied duty to act in good faith and deal fairly with one another while addressing the adverse affects of the outbreak. If so, it won’t be necessary to argue over whether or not a contract provision, government action, or legal treatise excuses a party from performance under a contract.

If the outbreak has or will affect a party’s ability to fulfill their contract obligations, they should promptly notify the other party to their contract. The sooner the better. We don’t know how long it will take for the situation to improve. Document your communications. Provide details with regard to the impact on your business.

Whether the outbreak causes a business to not be able to provide the goods or services they contracted to provide or delays their ability to do so, or causes them to not be able to pay their bills, rent, or mortgage, if they want their performance to be excused or delayed they should act promptly and be transparent. If concessions or delayed performance are being sought by a party to a contract, they may be asked if they have sought assistance through the government relief programs or insurance coverage. Parties seeking to be excused from performance under a contract should be prepared to provide financial information regarding the impact of the outbreak and a business plan to address the impact.

Because every situation is different, if your business has or will be unable to perform your contractual obligations because of the outbreak, you should consider consulting with an attorney. Samuels Yoelin Kantor is available to assist with the legal issues raised by the COVID-19 outbreak. If you need legal advice or guidance, please feel free to reach out to us. Even if we’re working remotely, we’ll promptly get back to you.

Oregon Shifts Heavy Equipment Personal Property Tax Burden to Contractors starting in 2019

March 8, 2021May 14, 2018 by Valerie Sasaki

Large and small heavy equipment rental providers throughout the state of Oregon recently scored a huge victory when Governor Brown signed HB 4139 into law earlier last month. The new law replaces Oregon’s existing personal property tax system for heavy equipment with a 2 percent tax on every heavy equipment rental transaction starting in 2019. While many states have either eliminated personal property tax or have exempted certain manufacturing and construction businesses from ad valorem property tax, Oregon was one of the few remaining that offered no relief or reform of any kind for heavy equipment rental providers.

Critics often cited the compliance costs associated with the business personal property tax as complex and burdensome in a way that discouraged many companies from accurately reporting. The old system was a location-based tax. This means that a company would be taxed on heavy machinery it owned based on where it was sitting on January 1 of that year. Heavy equipment rental businesses often rent their equipment out all over the state and beyond. Tracking location of constantly moving equipment for tax purposes proved difficult and also created the potential of requiring companies to pay additional tax in multiple counties or states on the same equipment where assessment dates varied.

Under the new law, the location-based tax goes away and now a sales or value-added tax of 2 percent will be collected by the heavy equipment rental business at point-of-sale and remitted to the Department of Revenue. The Department is authorized to use up to 5{45ef85514356201a9665f05d22c09675e96dde607afc20c57d108fe109b047b6} of the revenue for administrative costs needed to enforce the tax. The remaining money will distribute out to the local counties based on where each rental transaction occurred. This ensures that the heavy equipment rental businesses have a much simpler system for determining the tax they owe and local counties receive revenue based on the number of heavy equipment rental transactions occur within its borders.

Many surrounding states such as California and Idaho have adopted state and local sales taxes on similar transactions. Supporters of this change say this makes Oregon more competitive in the construction market and will attract more business in general to the state.

According to Section 3 of the new law, every heavy equipment provider will need to register with the Department of Revenue by December 15 of this year to certify that they qualify for the rental tax program and exempt them from the old ad valorem property tax system. The providers will then be required to collect the rental tax on each transaction and file a return each calendar quarter to report the tax due. The change is meant to be revenue neutral, meaning that the amount of monies paid under the new system should equal to what the providers would have been paid under the old system. Section 5 states that any amount paid by a qualified heavy equipment provider that exceeds the old tax threshold will receive a refund in the amount of the excess.

While overall this new change will likely benefit both providers and local counties alike, heavy equipment rental businesses may receive more of a windfall from this change than initially planned. This is a quirk of the Oregon law that is different from other jurisdictions. Based on how the new law is worded, the providers are tasked with merely collecting and ensuring the proper amount of tax is transmitted to the Department of Revenue. The incidence of tax is on the party renting the equipment. So, the renter will remit the new tax to the equipment rental company along with the rental price, and if the amount of tax exceeds the amount “paid” under the old system, then the providers will receive a refund of any excess.

Based on the wording of the new law, it does not appear the Oregon Legislature has thought about this windfall possibility. It remains to be seen whether any modifications to the law will address this potential for abuse. We understand that the Oregon Department of Revenue is currently working on regulations to administer this new assessment.

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.

Special thanks to guest SYK co-author Nicholas Rogers. Nicholas is a 3L and 2019 J.D. candidate at Lewis & Clark Law School.

Construction Liens Explained

March 8, 2021October 20, 2016 by Van M. White III

Today, Van White will be presenting at the Building Materials Dealer’s Association (BMDA) Washington and Oregon Lien Law Seminar. The presentation includes information on preliminary notices, perfecting lien claims, bond claims, post lien requirements, and licensing requirements. This begs the question – what are Construction Liens? Van explains.

Construction Liens (also known as Mechanics Liens) are a charge against or interest in privately owned real property to secure payment of a debt obligation. They are granted by statute to persons who have provided labor, materials, or certain services, which are incorporated into, consumed in, or contributing to the improvement of real property. When correctly placed upon real property, the Construction Lien gives the contractor or materials supplier the right to enforce a charge upon the real property they improved or that their materials were added to. The purpose of Construction Lien laws is to ensure that persons are paid for the value they add to someone’s property.

While Construction Liens are an effective collection device for contractors and material suppliers, there are a number of statutory requirements that must be followed in order to secure the right to file and foreclose a Construction Lien in the event of non-payment. Said requirements include: intent to lien notices to the property owner prior to or soon after commencing construction or providing materials; filing the lien in a timely manner; post-lien filing notification letters; and foreclosure of the lien in a timely manner. The requirements regarding intent to lien notices differ depending upon whether the subject property is residential or commercial, as well as the relationship between the lien claimant and the property owner. Construction Lien laws also differ by state.

If you are a contractor or provide materials to construction projects, you should familiarize yourself with the Construction Lien laws in your state. Please feel welcome to contact me if I may be of any assistance with regard to Construction Liens in Oregon or Washington. For over 20 years, I have been helping contractors and material suppliers with Construction Lien issues.

Van M. White is a partner at Samuels Yoelin Kantor. His practice emphasizes construction, real estate, and business litigation. His legal work regularly includes the drafting, review, and negotiation of construction and real estate contracts; construction liens and collections; the prosecution and defense of claims relating to construction projects; business disputes; bond claims; and general counsel to construction contractors, material suppliers, property owners, landlords, and business owners. Please contact Van directly at vmw@samuelslaw.com.

Due Diligence: Just Who Are You Dealing With?

March 8, 2021April 6, 2016 by Van White

DO YOU KNOW WHO YOU’RE DEALING WITH?

Due Diligence Before You Enter Into An Agreement

I’ve represented a number of clients over the years who failed to perform any due diligence with regard to the party they were contracting with before they entered into the contract. Had they performed some quick and easy due diligence before they signed the contract, they would have saved themselves a lot of headaches, hassles, and money.

Before you enter into a contract and obligate yourself to do something, take some time to learn about the other party. If you are entering into an agreement with a business entity (e.g. corporation, LLC), check the Secretary of State/Corporation Division website to learn about the entity. You’ll be surprised the number of situations I’ve seen where clients entered into contracts with defunct or non-registered entities. Find out who the principals of the entity are. The Oregon Secretary of State website enables you to do a business search by individual– whereby you learn of the businesses (active and inactive) for which an individual has been an owner or corporate officer. Red flags include individuals who started numerous businesses in the past and businesses that fail to file annual reports and pay annual fees.

If the person or entity with whom you’re negotiating provides services which requires a license or registration (i.e. contractor, realtor, medical professional, etc.), you should be able to search on-line records regarding their licensing history and complaints. Red flags include numerous complaints, suspensions, or an inactive license/registration.

If you are contracting to perform work on real property, perform research with regard to the ownership of the real property (after obtaining a good address for the property) to determine who owns the property and who has authority to allow work to be performed on the property. If you cannot locate on-line information with regard to the subject property, contact a local title company and ask for a trio or list-pack for the property.

In light of the amount of information available on the internet these days, you should also consider doing a Google or Bing search with respect to the potential new client and/or their principals. You might be surprised as to the amount of information available about them on the internet.

Your time is valuable. You don’t need to be dealing with individuals or entities who have bad intentions or who are deceptive. You’re probably better off taking a vacation to the beach or the mountains than you are dealing with unscrupulous people. Take some time to learn about the party with whom you will be dealing before you obligate yourself or your company. You may find out that they aren’t who they claim to be. Such time is time well spent. The time spent performing due diligence before you enter into the contract could be as important as the time spent fulfilling your obligations under the contract. As the old Benjamin Franklin quote goes, “an ounce of prevention is worth a pound of cure.”

Contractor Forfeits Right to Construction Lien by Accepting Mortgage Or Trust Deed As Security For Debt

March 8, 2021July 25, 2012 by Van M. White III

The Oregon Court of Appeals recently issued a ruling which made it clear that a contractor’s acceptance of a mortgage or trust deed as security for the debt owed to them constituted a waiver of their construction lien rights. While the ruling at first glance sounds fairly logical and straight forward, it could have negative unintended consequences for contractors who release their construction lien rights in exchange for a mortgage or trust deed.

In the case of Evergreen Pacific, Inc. v. Cedar Brooke Way, LLC, filed July 11, 2012, Case No. A146478, the owner of several parcels of land being developed hired a contractor to pave parking lots and perform related work. To finance the development, the property owner obtained a line of credit from a bank and provided the bank with a trust deed against the subject property as security.

The owner/developer failed to pay the paving contractor following the substantial completion of the paving contractor’s work. The paving contractor subsequently filed a construction lien against the subject property. A construction lien foreclosure lawsuit resulted from the paving contractor’s construction lien filing and owner’s failure to pay the paving contractor.

The parties settled their differences before the foreclosure lawsuit went to trial. Pursuant to the settlement agreement, in exchange for the owner’s agreement to pay a specified sum to the contractor (including an immediate payment of approximately 40 percent of the settlement amount), the contractor agreed to make some repairs to its original work, perform some additional work, and release its construction lien. In addition, the owner agreed to provide the contractor with a trust deed against the subject property as security for the remaining amounts owed under the settlement agreement.

After the parties entered into the settlement agreement, the owner made the initial payment to the contractor and the contractor released its construction lien. A trust deed in favor of the paving contractor to secure the remainder of settlement payment was subsequently recorded. The contractor then proceeded to complete all the new work contemplated in the settlement agreement, as well as some of the repairs. However, the owner failed to pay the remaining amounts owed to the contractor under the settlement agreement. Such failure caused the paving contractor to file a new construction lien against the property. The contractor’s attempt to foreclose its second construction lien, as well as it’s foreclosure of the trust deed, were the basis of the court’s decision that is the focus of this article.

The owner did not appear in the second foreclosure case and the court issued a default against them. However, there was a trial, which included the bank who had provided a line of credit to the owner, concerning the validity (and priority) of the paving contractor’s lien. The bank took the position at trial that the paving contractor’s lien was not valid because (1) the paving contractor waived its right to a construction lien when it released its first construction lien, thus precluding a second construction lien against the same project; and (2) the paving contractor had forfeited its right a construction lien when it accepted a trust deed to secure the project debt. The trial court ruled that the construction lien was valid, and per Oregon’s super-priority statute for construction liens, also ruled that it was superior in priority to the bank’s line of credit trust deed against the subject property. The bank appealed the trial court ruling and renewed its position that the construction lien was invalid because the paving contractor had forfeited its right to a construction lien by accepting the trust deed from the owner as security for the project debt.

The court of appeals, while citing a case from 1877 which held that a contractor waives its rights to a construction lien when they accept a mortgage or trust deed to secure the underlying debt, ruled that the trial court erred in finding that the second construction lien was valid. Accordingly, the court of appeals reversed the foreclosure judgment in favor of the paving contractor. In making its ruling, the court of appeals held that the 1877 case upon which their decision was based established a bright-line rule, which follows: When a contractor takes a mortgage (or trust deed) to secure construction debt, the contractor forfeits the right to a construction lien.

In light of the fact that the paving contractor received a trust deed against the subject property to secure the remaining project debt in exchange for the release of its first construction lien, the ruling of the court of appeals initially appears to be without negative ramifications. However, contractors could cause themselves some problems if they release a construction lien in exchange for a trust deed against the same property. The potential problems relate to the priority of the construction lien against other encumbrances on the subject property.

Oregon has a super priority statute for construction liens which holds, with exceptions, that a construction lien, once perfected, has priority over “all prior liens, mortgages, or other encumbrances against the property”. Said statute is contrary to the general priority rule of “first in time, first in line”. Thus, an unknowing contractor could lose the priority its construction lien has over other encumbrances by releasing its construction lien and accepting a trust deed in exchange for the released construction lien. As such, it is important that contractors consult with an attorney that is familiar with the intricacies of Oregon’s construction lien laws before they accept alternative security for their construction liens.