Real Estate Advisor Law Blog : Ohio Real Estate Lawyer & Attorney : Ulmer & Berne Law Firm : Columbus, Cleveland OH

New rules promulgated under Ohio’s Public Construction Reform (the “Reform”) have been released by the Joint Committee on Agency Rule Review.  The new rules include:   (1) Rules for Prequalification of Prospective Bidders on Subcontracts; (2) Rules for Best Value Selection of Construction Manager and Design-Build firms; and (3) Rules for the Form of Subcontracts.  The Rules for Prequalification and Best Value become effective 2/02/12, and the Rules for the Form of Subcontracts became effective 12/26/11.  The Joint Committee also released a new form of subcontract for public jobs in Ohio.  

Among other requirements, the new Prequalification Rules: (1) place significant emphasis on a bidding subcontractors' goals and history related to diversity and economic inclusion; and (2) permit a public authority to require a construction manager or design-build firm to employ additional criteria, in order to suit the unique needs of a project, including "knowledge of the local area and working relationships with local suppliers."  As such, local subcontractors with strong supplier relationships, firm diversity goals and proven track records for economic inclusion should have an advantage when bidding public works in Ohio. 

The new Prequalification Rules and other important information concerning the Reform may be found at http://ocr.ohio.gov/

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The Ohio Legislature passed House Bill 153 on May 5, 2011. H.B. 153—a budget bill—which includes significant changes for Ohio’s public construction projects. Some changes will become effective on September 28, 2011, but others are forecast to become effective in early 2012. As such, we will have to wait a while longer to experience the full effect of the public construction reform.

The following is a sampling of impending changes to public construction works in Ohio:

(1)        Prevailing Wage Law (effective September 28, 2011):

These adjustments to Ohio’s prevailing wage law will take effect on September 28, 2011:

Threshold for prevailing wage application to new construction rises from $78,258 to $125,000.00;

Threshold for prevailing wage application to renovation, reconstruction, remodeling, enlargement, repair, or painting work rises from $23,447.00 to $38,000; and

Implementation of a “safe harbor” from liability for a contractor found to have underpaid prevailing wage, if the contractor makes full restitution and each violation is no more than $1,000.00 per employee.           

(2)        New Options for Construction Delivery (forecast to become effective in early 2012):

One aspect of the reform will allow Public Authorities in Ohio to utilize one of several construction delivery systems for Public Improvements. In addition to Ohio’s classic “multiple prime” public contracting, under which the public authority awards several contracts directly to heavy trade contractors, Public Authorities will now have the option to construct a Public Improvement under any of the following construction delivery systems: (1) Construction Manager at Risk; (2) Design-Build Firm; (3) Design-Assist Firm; or (4) General Contractor. 

(3)        Pre-qualification Criteria (forecast to become effective in early 2012):

The Ohio Department of Administrative Services, State Architect’s Office, is currently drafting “prequalification criteria” that will be required of subcontractors before they may work on a Public Improvement. Once the criteria are established and approved by the State Attorney General’s office, we should begin to experience Public Authorities’ implementation of the new construction delivery options. 

(4)        Bonding Requirements (forecast to become effective in early 2012):

H.B. 153 will also impact bonding requirements for Ohio’s public construction projects. The first draft of the new bonding regulations was circulated the week of September 12, 2011. The proposed regulations called for the Construction Manager at Risk, Design-Build Firm, Design-Assist Firm, General Contractor, or Multiple Prime Contractors to procure performance and payment bonds for projects under $20 Million. For projects over $20 Million, however, bonding could be passed down to subcontractors.   

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Has modular construction finally come of age ?  The Modular Building Institute thinks so.  Modular construction is no longer just for preparation of walls and roof joists.  Today, contractors are using prefabrication and preassembly in construction of steel framed structures, multi-story structures, health care and education facilities.  The benefits of modular construction positively affects:  

• labor and employment rates as the work on components can proceed in any weather conditions, no bad weather days and increased work place safety;
•  job site environmental conditions (less waste and scrap materials to dispose of);
• work crew scheduling;
• increased speed of construction and project completion; and
• reduce need for certain on-site storage of materials.

Efficiency and green, modular construction is coming of age.  See the video below to see the process. 

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The Associated General Contractors of America's and Navigant's recent industry-wide survey "Finds More Construction Firms Plan to Hire than Lay Off in 2011."  Read the AGC article with more links to state-specific data for the industry-wide Survey.  Included are numbers for Illinois and Ohio.  Survey results in both Illinois and Ohio indicate that the construction market should begin to grow again in 2012.  Hopefully, that prediction comes true a year early.       

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To follow up on a series of prior posts, the Internal Revenue Service will now allow taxpayers with defective drywall to deduct the cost of repairs and replacement of damaged appliances in the year in which the loss occurred.  In Revenue Procedure 2010-36, the IRS has, however, imposed certain restrictions which include that the losses are not compensated by insurance or other parties and the taxpayer must itemize their federal returns to claim the deductions (which are allowed only on amounts that exceed $500 and ten percent of the taxpayer’s gross income for the year).

A taxpayer can claim the full tax break, provided they have no pending claims for reimbursement (and do not intend to file for any). For those taxpayers with pending claims, a loss for 75% of the unreimbursed amount can be claimed.

In related news, the importers, manufacturers and distributors of Knauff Plasterboard Tianjin drywall have entered into a settlement with over 300 homeowners in four states. The Agreement, approved by a New Orleans federal judge, will cause Knauff and related firms to remove and replace the company’s drywall, the electrical wiring, gas tubing and appliances, as well as paying relocation expenses while the homes are being repaired (which repairs are expected to take several months to complete). The cost of such repairs is estimated to be about $150,000 for a 2,500 square foot home. This settlement (a product of a special committee appointed by a federal judge) is seen as a possible model for the resolution of other pending state and federal lawsuits. 

One area to watch going forward, however, is the possibility of additional claims regarding health concerns. The settlement does not preclude future suits concerning potential adverse health effects of the drywall on residents, as the parties agreed to table that issue to resolve the home repair aspects of the lawsuits.

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The Situation:

Certain covered dwellings that are not designed or constructed in strict compliance with the Fair Housing Act are increasingly subject to suit, with strict liability befalling developers, designers, and contractors alike.  In fact, contractors are strictly liable for FHA violations even if they correctly follow a designer's noncompliant drawings.  Further, courts across America are consistently holding that potentially liable parties cannot sue each other for alleged contribution for a FHA defect, which enhances exposure for those sued directly by FHA protected class  members.  Needless to say, the financial risk of FHA noncompliance is grave.   

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Green building is quickly becoming the "norm" across America, and those who are not familiar with it could be missing important opportunities in today's construction climate.  The United States Green Building Council ("USGBC") is a non-profit community of leaders working to make green buildings available to everyone.   USGBC developed the Leadership in Energy and Environmental Design ("LEED") process for green building.  LEED  is an internationally recognized green building certification system, providing third-party verification that a building or community was designed or built using strategies aimed at improving performance across metrics for green building: energy savings, water efficiency, CO2 emissions reduction, improved indoor environmental air quality, and stewardship. 

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 The Situation:

Certain covered dwellings that are not designed or constructed in strict compliance with the Fair Housing Act are increasingly subject to suit, with strict liability befalling developers, designers, and contractors alike.  In fact, contractors are strictly liable for FHA violations even if they correctly follow a designer's noncompliant drawings.  Further, courts across America are consistently holding that potentially liable parties cannot sue each other for alleged contribution toward an FHA defect, which enhances exposure for those sued directly by FHA protected class members.  Needless to say, the financial risk for FHA noncompliance is grave.   

FHA Coverage:

The FHA applies strict liability to developers, designers, and contractors who participate in the design or construction of a covered dwelling.  Under the FHA, each participant in the design and construction of covered dwellings has an independent obligation to comply with the FHA.  The term "covered dwelling" is construed broadly and applies to points of access in popular mixed-use commercial, retail, and residential properties. 

Those held liable for FHA non-compliance risk more than a "slap on the wrist."  Rather, FHA damages include (1) the cost to rebuild a covered dwelling; and (2) the prevailing party's attorney's fees.  Thus, developers, architects, engineers, and contractors must take caution and ensure their own compliance with the FHA. 

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In the much-publicized "Kenwood Towne Place" litigation in Cincinnati, which involves over $40MM in lien claims, presiding Judge Beth Myers issued a Decision and Entry that disposed of subcontractor claims against the Port Authority of Greater Cincinnati (the Public Authority involved with the project).  The Court dismissed the subcontractors’ claims for takings and negligence. 

One aspect of Judge Myers' decision makes it glaringly important for contractors of all shapes and sizes to perform independent assessments of front-end protection on a public project: the Court determined that the requirement of a performance and payment bond (or lack thereof in this case) was a matter of discretion for the Port Authority and, consequently, not mandatory under Ohio law.

To reach its Decision, the Court focused on Sections 4582.31 (specific to port authorities) and 153.54 (applies to public projects) of the Ohio Revised Code.  The Court determined that Section 4582.31 gives the Port Authority discretion whether to require competitive bidding and whether to require security--"As a matter of law, it had no duty to require a performance or payment bond."  The subcontractor claimants relied on Section 153.54, which requires performance bonds in competitive bidding, and the competitive bidding provision of 4582.31.  But the Court found that the Kenwood Towne Place litigation is governed by the discretionary provisions granted to port authorities because the project was funded exclusively from bond proceeds and special funds (bond discretionary) instead of general revenue funds or funds raised through taxation (bond mandatory). 

Among other things, the Court summarily dismissed the subcontractors' common law claims for negligence because, under Ohio law, when a statute imposes a duty upon a public entity which is intended for the public good, the failure to adequately perform the duty does not permit a private right of redress for injuries caused by that failure. The Court's ruling may come as a surprise to many contractors in the public sector.  Notwithstanding, Judge Myers' decision should be a lesson to all that significant diligence for adequate assurance of payment should not be delegated or accepted at face value.  The current economic climate places that duty at an all-time high for those contracting for work in the public arena. 

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The Leadership in Energy and Environmental Design (LEED) certification by the U.S. Green Building Council is a certification program for the design, construction and operation of commercial and residential “green” buildings. Although the LEED certification program includes a neighborhood design component, one area not specifically addressed by LEED is landscape design. In an effort to establish a standard for landscape design comparable to the LEED certification for buildings, the Sustainable Sites Initiative—a partnership of the American Society of Landscape Architects, the Lady Bird Johnson Wildflower Center at The University of Texas at Austin and the United States Botanic Garden in conjunction with a diverse group of stakeholder organizations—recently published the first set of national guidelines and performance benchmarks for sustainable land design, construction and maintenance. 

The ratings system works on a 250-point scale, based on achieving 15 prerequisites and a certain percentage of credit points. Achievement of 40% of the possible points equals a one-star level and achievement of 80% of the points equals the maximum four-star level. Points can be achieved for using vegetation to minimize building cooling requirements, providing opportunities for outdoor physical activity, and rehabilitating lost streams, wetlands and shorelines. 

Owners interested in minimizing their environmental impact and implementing sustainable design principles now have specific guidelines on how to do so with respect not only to their building, but the surrounding site as well.         

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That EXIT sign illuminating over the door could contain a radioactive gas called tritium, subjecting it to regulation by the Nuclear Regulatory Commission (NRC) or one of the Agreement States. The Agreement States have assumed limited regulatory jurisdiction over the use of radioactive materials.  

NRC estimates that more than 2 million tritium EXIT signs are currently in use in the United States. To determine whether your sign contains tritium, first look for a label that mentions tritium (H-3), displays the three-bladed radiation warning symbol, and states “Caution-Radioactive Materials.” If you cannot find the label, then turn off all the lights in the vicinity of the sign. The glow of tritium is green.

Tritium EXIT signs are considered “generally licensed devices” because they are inherently safe enough to be handled or used by anyone with no radiation training. The owner of the sign is considered a “general licensee.” The general licensee must designate an individual responsible for complying with the regulatory requirements.

A general licensee using tritium EXIT signs must comply with certain requirements regarding use and transfer of the signs. Additionally, when it is time to dispose of the EXIT sign, the signs must not be thrown in the general trash. Although tritium EXIT signs pose little or no threat to public health and safety, damaged or broken signs could cause mild radioactive contamination requiring expensive clean-up.  So it is important that the signs be properly disposed. Failure to comply with any of the requirements may subject the owner to civil penalties.  One more item for the transaction checklist and one more issue to address in agreements of sale and purchase !

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We have been following the continuing saga of the homeowners affected by Chinese drywall used mainly throughout Florida, Louisiana and Virginia when U.S. supplies ran low. According to affected homeowners, the Chinese drywall emits a gas that causes health problems such as headaches and nosebleeds, erodes metal and electrical fixtures, and leaves a foul rotten egg odor throughout the home. The only known remedy—removing and replacing all the Chinese drywall in the home—is costly and to this point has not been covered by insurance. Unable to sell the property, and unable to live in it, some owners have been forced into temporary housing and bankruptcy, the New York Times reports. 

Homeowners have filed hundreds of lawsuits against the Chinese companies that manufactured the drywall. These lawsuits, however, face a number of significant hurdles. For one thing, much of the drywall is simply stamped “Made in China,” with no indication of the specific manufacturer. Even when the manufacturer is known, many of them have gone out of business or refuse to respond to the lawsuits. China does not enforce civil judgments from U.S. courts and international court is costly and time-consuming. Some lawyers have proposed creative solutions to the problem, such as seizing the ships that transported the drywall to the U.S., but it’s not clear that any court would approve that remedy.   

The affected homeowners may have other avenues for a successful resolution outside of the legal process, however. Congress ordered the Consumer Products Safety Commission to conduct a study of the Chinese drywall. That study, while finding that the Chinese drywall had higher levels of sulfur and strontium than U.S. drywall, was unable to make a connection between those higher levels and the health and other problems experienced by U.S. homeowners. Further testing to establish a connection is under way. The chairwoman of the Consumer Products Safety Commission met recently with Chinese officials and discussed the drywall issue with the hope of reaching some agreement to help U.S. homeowners. Whether political pressure results in any substantial relief for U.S. homeowners remains to be seen.

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Congress has recently introduced a number of measures in response to the problems caused by defective drywall imported from China. Both the House and Senate introduced identical bills titled the Drywall Safety Act of 2009 (H.R. 1977; S. 739), which, if enacted, would require the U.S. Consumer Product Safety Counsel to study at least ten samples of drywall imported from China between 2004 and 2007 taken from homes in Florida, Louisiana, Mississippi, Texas and Virginia. The study is to include an analysis of (1) the chemical and organic composition of the drywall, (2) the effect of the drywall compounds on metal wiring, air conditioning and heating units, and other metal fixtures, and (3) any health or environmental impact of the compounds. The Act further directs the CPSC to initiate a proceeding to determine whether a consumer product safety standard regulating the composition of materials used in drywall is necessary to protect the health and safety of residential homeowners and imposes a temporary ban on the importation of drywall exceeding five percent organic compounds.

Additionally, the House passed a measure to amend the Mortgage Reform and Anti-Predatory Lending Act, H.R. 1728, to direct the Secretary of Housing and Urban Development to study the effect on residential mortgage foreclosures of (1) the presence of defective Chinese drywall in such residences and (2) the availability of property insurance for residences where such drywall is present.  HUD is required to report its findings, conclusions and recommendations to Congress. This bill has been referred to committee.

The focus of the legislation under consideration is the evaluation of the drywall problem and its impact upon residential owners, and addressing future drywall imports, as opposed to providing any relief to those whose homes contain the defective Chinese drywall. If the proposed studies show that Chinese drywall issues have caused environmental, health, foreclosure or insurance issues for residential property owners, there may be another round of legislation to address those issues. Check back here for updates as we track the progress of these measures through Congress.       

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US EPA has amended the Standards and Practices for All Appropriate Inquiries (“AAI”) to acknowledge another ASTM standard can be used to satisfy the AAI requirement for the landowner defenses to liability under Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) – innocent landowners, bona fide prospective purchasers, and continuous property owners. In addition to ASTM International Standard E1527-05, you can now use, when applicable, ASTM International Standard E2247-08 entitled Standard Practice for Environmental Site Assessments:  Phase I Environmental Site Assessment Process for Forestland or Rural Property (“ASTM E2247-08”).

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A mechanics’ lien claim can give the contractor, subcontractor or material supplier making the claim a significant amount of leverage over a property owner in a payment dispute. This makes sense, of course, because the concept behind mechanics’ lien law is to provide some assurance that people will receive payment for work and materials they provide to improve real property. But what can the owner do where the claim for payment is disputed and the mechanics’ lien threatens to put the owner in default of its mortgage covenants or disrupt a sale or refinancing of the property?

When there is no external pressure from a lender or pending sale of the property, the owner does not necessarily need to do anything to address a lien. Ohio mechanics’ liens are valid only for a period of six years from the date of recording. If the owner believes the lien is invalid and therefore unlikely to be foreclosed upon, the owner can simply wait six years until the lien expires. 

If, however, the lien needs to be removed prior to the expiration of the six-year period, the owner has several options. Ohio’s mechanics’ lien law is complex and contains many traps for the unwary that may render a mechanics’ lien invalid.  For instance, on commercial projects, a mechanics’ lien claimant only has 75 after the last date of work in which to file the lien affidavit with the recorder’s office. The lien must then be served upon the owner or owner’s designee within 30 days. Failure to meet either of these deadlines will render the lien invalid. 

Another stumbling block for potential lien claimants occurs when the owner has recorded a notice of commencement (which the owner typically should). The recording of the notice of commencement triggers an obligation on behalf of subcontractors or material suppliers to serve a notice of furnishing upon the owner in order to preserve their right to claim a lien. Check to see that a notice of furnishing was properly served by the lien claimant. If not, the claimant may have lost the right to file a lien. Note that the requirement to serve a notice of furnishing does not apply to someone who has a contract directly with the owner. 

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Imagine purchasing a brand new home, only to discover it has a persistent rotten egg smell. On top of that, your new appliances mysteriously stop working and the home’s copper wiring turns black. It sounds like a nightmare, but for those in Florida and other southern states whose homes contain defective Chinese drywall, it is reality.

Although it now seems a distant memory, there was a time not long ago when new homes were being constructed across the country at a record pace. This housing boom, combined with the need to repair damage from severe hurricanes in Florida, created unprecedented demand for building materials such as drywall. When domestic sources of drywall ran low around 2005, some contractors and builders, particularly in Florida, began using drywall imported from China. It has been estimated that enough Chinese drywall for 60,000 homes was imported to the U.S.   

Unfortunately for the owners of the homes containing the Chinese drywall, it emits sulfur gas that corrodes copper and gives off a rotten egg smell. Attorneys for the affected homeowners also allege that the gas causes respiratory and other health problems, though the manufacturers of the drywall contend that it does not.

Class action lawsuits have been filed against builders and drywall manufacturers in a number of southern states. So far, it does not appear that any Chinese drywall made it as far as Ohio, although one Columbus-based builder, M/I Homes, has been named as a defendant in a lawsuit concerning homes it built in Florida.

Though certain builders have stepped up and voluntarily replaced the defective Chinese drywall in some homes, others are unwilling or financially unable to do so, frustrating owners who have already seen their property values plummet due to the mortgage crises. It remains to be seen whether these owners will receive any relief as a result of the lawsuits.

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