Real Estate Transactions: Overview
At Neek Law Firm, the purchase, sale, lease, and development of real estate properties is what we know best. Not only have we participated in hundreds of millions of dollars in commercial real estate transactions; we have experience in working with most every type of property.
Unlike most firms, Neek Law Firm has the unique ability to assist in every part of the real estate purchase or development process–including procurement of investment funds. Furthermore, with our proprietary, in-house approach to identify value added properties including development or redevelopment projects, Neek Law Firm can actually provide our clients with prospective projects, coordinate the financing, and assist in all the legal work from the development process to leasing and sale.
In fact, Neek Law Firm will go a step further. Due to our strong relationships with various investors, owners, and brokers, and the expertise in identifying value added properties, we have the ability to offer clients the opportunity to join projects as joint venture partners. In forming a joint venture with Neek Law Firm, investors and developers align themselves with a seasoned, competent real estate development team that can take a project from start to finish. We believe this type of all-encompassing approach allows Neek Law Firm to offer quality legal services and investment opportunities that are unique to our firm.
Our Real Estate Transactional services include:
- Real Estate Purchase and Sale Agreements
- Letters of Intent
- Escrow Instructions and Agreements
- Due Diligence and Analysis
- Leases, including:
- Ground Leases
- Office Leases
- Retail Leases
- Industrial Leases
- Apartment Building Leases
- Residential Leases
- Sublease and Assignment Agreements
- Real Estate Financing, including:
- Acquisition Loans
- Construction Loans
- Conduit Loans
- Subordination Agreements
- Seller Financing Agreements
- Deed and Title Matters, including:
- Covenants and Restrictions
- Construction Agreements, including:
- Prime Construction Agreements
- Subcontractor Agreements
- Design Service Agreements (for Engineers and Architects)
- Construction Management Agreements
Commercial Real Estate Purchase & Sale Transactions
Letter of Intent
Often, the purchase or sale of a piece of real estate begins with a Letter of Intent (“LOI”) between the two parties. This is a relatively simple document outlining the tentative terms of the deal, and is usually struck between the two parties before engaging an attorney. LOIs help to ensure that the opposing party’s counsel does not renegotiate already decided-upon terms after the preparation of the sale agreement has begun. It also acts to put the buyer and seller at ease with the knowledge that the deal is likely to proceed on acceptable terms.
In general, LOIs are non-binding “agreements to agree,” and various iterations may be passed back and forth before the actual drafting of the purchase agreement begins. However, in certain instances, an LOI may bind one or both parties in particular ways, especially where one party has gone to some effort in preparation for the sale, or when confidentiality and nondisclosure of property’s financials are important. For this reason, even when preparing an LOI, it is important to have experienced legal counsel either draft or review the document; not doing so may result in binding terms that were never intended to be binding. More often than not, this leads to spending much more on legal fees in the future than could have been avoided by engaging Neek Law Firm to prepare the LOI.
Purchase & Sale Agreements
The purchase and sale agreement is the most essential document in a real estate transaction. It is a detailed agreement laying out the specific terms under which the buyer agrees to buy and the seller agrees to sell, so long as certain conditions are met or waived by each party. It establishes exactly what representations and warranties the seller makes to the buyer and vice versa, and sets forth how the property will be operated between the signing of the agreement and the closing of the deal (the escrow or “due diligence” period). Moreover, this agreement details exactly who will be financially responsible for any problems with the property, either past, present, or future, and for what duration those parties will remain responsible. These agreements may be highly complex and, particularly in the case of representations and warranties, often require line-by-line negotiation of terms with opposing counsel. Therefore, it is crucial to enlist an attorney that is not only detail-oriented and has a thorough understanding of a client’s goals, but is also a skilled negotiator that will maximize sale terms in his or her client’s favor. At Neek Law Firm, we have the experience and drive to help achieve these goals.
Typically, after both parties’ attorneys finish drafting the agreement, the buyer will generally deposit some “earnest money”—a down payment of sorts that will be held by an escrow company until the “due diligence” period is complete and the parties exchange the actual title to the property.
The Importance of Due Diligence:
Due diligence is perhaps the single most important part of the real estate purchase process. During the due diligence period, the buyer will have its only opportunity to closely inspect any and all aspects of the property, including title, the property’s compliance with any laws and ordinances, and any contracts or leases already existing and relating to the property. If there is anything wrong with the property or the seller has misrepresented anything to the buyer in any way, this is the buyer’s last chance to identify those issues (barring any representations and warranties that carry past the closing date). Thus, the success of a real estate transaction truly comes down to adequate due diligence. A sloppy due diligence analysis can quickly erode any profit a buyer hoped to reap from a project, and can lead to substantial conflict between buyer and seller after the close of the deal.
With backgrounds in land use law, real estate transactions, governmental compliance (including environmental, a particularly relevant issue here in California), brokerage, and real estate financing, Neek Law Firm helps to make sure our clients avoid the potential pitfalls caused by inadequate due diligence. This period is the main opportunity to closely inspect every aspect of the property. Conducting a detailed and airtight due diligence will help to make sure the deal closes in time and without any unwanted surprises.
Matters often handled in a due diligence include:
- Title matters, including:
- Inspection of any and all encumbrances
- Entitlement Issues including zoning and land-use complianc
- Land Survey
- Engineering Inspection and Reports
- Building Inspection, including:
- Legal compliance with planning and land-use
- Furniture, fixtures, equipment, supplies
- Architectural Inspection
- Environmental Law Compliance Analysis
- Phase I and II environmental assessment
- Financial Audit and Evaluation
- Analysis of all current loans, mortgages, liens, or other claims relating to the property
- Analysis of all current leases, including determining quality of tenants if necessary
- Analysis of any and all contracts with third parties relating to the property
- Property Tax Compliance
Escrow Agent and Escrow Instruction Agreements
The escrow company is a third-party neutral that serves as a way for the parties to independently exchange funds, deeds, deeds of trust, and any other relevant documents to effectuate a transfer, and provides a degree of protection against default for the seller or the buyer. The escrow company may also act as a clearinghouse of sorts, paying off any bona fide debts of the seller that are specified by the parties in negotiating the sale.
Normally, an escrow agent is engaged via an agreement called “escrow instructions.” In these instructions, the buyer and seller appoint an escrow agent to fulfill the terms of the purchase agreement. The agent will then take possession of any deeds to the property and the earnest money put down by the buyer for the extent of the due diligence period.
Interestingly, escrow instruction practices vary across the state of California. In Southern California, the convention is generally for the parties to file “joint” escrow instructions, in which both parties submit one set of instructions together to avoid any confusion between multiple sets of instructions. In Northern California, however, parties tend to file separate escrow instructions. Often this is done to avoid the difficulty of jointly drafting the instructions. In either case, escrow instructions are often included as part of the purchase agreement itself.
Residential Purchase Agreement and Distinctions with Commercial Agreements
Generally speaking, a residential purchase agreement is very similar to a commercial purchase agreement, although slightly less complex. Whereas the buyer and seller in a commercial purchase agreement are often sophisticated parties with substantial experience and powerful legal teams, the buyer or seller of a residential property may be an individual or family. Or, as is frequently the case, the seller of the property may be a large, sophisticated party, while the buyer is an individual or a family. Particularly in the latter case, it can be very worthwhile for the buyer to enlist an attorney to review the purchase agreement, particularly with an eye towards ensuring that the appropriate disclosures in regards to the property are made in the agreement. Considering that a title insurance company will not protect the buyer from governmental notices of legal non-compliance on the property, it is critical to address any such issues before the sale closes.
Before clients purchase a home, we strongly encourage them to allow Neek Law Firm to review the purchase agreement and underlying documents. In particular, there are several necessary disclosure to review, including:
- Structural details of the home
- Any amenities or features that do not function properly
- Any structural defects with the home or property (including foundation, floors, plumbing, etc)
- Environmental Hazards
- Easements and Encroachments
- Property Line or Title Disputes
- Compliance with building codes & Proper Permitting (has any remodeling been done that is not to code?)
Despite the fact that a residential purchase is less in-depth than a commercial property purchase, several important aspects cannot be neglected. Particularly in the case that an undisclosed problem arises on a property after the sale closes, such as title issues and encumbrances; having taken the time to carefully review the purchase agreement and related documents is well worth it.
Leases, particularly commercial leases, can be very complicated and multifaceted agreements. A lease represents an ongoing contract between property owner and tenant, and thus can commit both parties to a variety of specific and pricey obligations. Whether our client is a tenant or landlord, Neek Law Firm negotiates each and every lease with the detail necessary to ensure the most favorable terms possible.
At Neek Law Firm, we assist our clients in the preparation of a variety of lease types and related transactions, including:
- Ground Leases
- Office Leases
- Retail Leases
- Industrial Leases
- Apartment Building Leases
- Residential Leases
- Sublease and Assignment Agreements
Commercial Property Leases
Commercial leases tend to be large, intricate, and often long-term agreements. Not only does a commercial lease specify the length and payment terms of a tenant’s occupancy (which alone can be quite complex), it also specifies who is financially responsible for a variety of damages or improvements to the property. Moreover, lease specifics may have long-term effects on a tenant’s tax exposure, or even the viability of the tenant’s business—which can subsequently affect the value of the landlord’s property.
Commercial leases are generally for two basic types of properties: multi-tenant or stand-alone, each with their own subtleties that need to be carefully addressed in the lease agreement.
Multi-Tenant Commercial Property Lease
As the name implies, these leases involve single pieces of property rented to multiple tenants. This types of properties could range from a small multi-tenant industrial building, a shopping center, to a 30-floor apartment complex and everything in between.
On one hand, a landlord must be selective in what sort of tenant he or she is going to allow on his or her property. If a tenant fails to maintain its portion of the property, fails to pay its rent regularly, or for some other reason brings a negative connotation to the property, the other tenants will likely be affected. As the other tenants are affected, so are their lives or businesses, and, subsequently, so is the future viability of renting that property. The quality of tenants and occupancy rate of a property has a direct correlation with the market value of that property. Moreover, particularly in terms of retail or industrial properties, existing tenants may have contracts with other third parties in place that need to be taken into consideration when drafting leases for future tenants, or may even have the right to terminate a lease in the event of a sale of the property. It is crucial for property owners to execute well thought-out agreements that take into account both the goals and requirements of an owner as well as the variety of business and legal concerns involved with drafting a comprehensive lease.
On the other hand, it is equally important that the tenant have the right legal counsel when negotiating a lease with a landlord. While a landlord may have multitude of properties, each with a number of tenants, the terms of a lease may have much more profound effects for an individual tenant. Whether that tenant is opening their first retail location, upgrading to a larger location, or expanding its brand to an additional location, a tenant’s lease terms may have a direct impact on the future viability of its business. For example, if a landlord does a poor job of maintaining a property and drives away a tenant’s customers, but that tenant has no recourse against the landlord or a way to void certain terms of the lease agreement, that tenant may be locked into a location that will ultimately drive its company out of business. Moreover, unless the tenant is a large, powerful company (such as a national retail chain), the property owner has probably drafted the lease agreement in its favor, and this document will often need to be modified to be more tenant-friendly. Thus, vigorous legal representation on behalf of the tenant is vital to a successful lease negotiation.
Stand-Alone Commercial Property Leases
These properties are typically stand-alone structures leased to a single tenant. These properties include restaurants, pharmacies, fast-food chains, office buildings or multi-floor office towers wholly leased to a single tenant. While leases on stand-alone properties may not have to account for the intricacies involved with multiple tenants, these agreements present their own set of challenges, particularly as it relates to customization of the property. In these circumstances, tenants will often require that a landlord add or remove certain features of a property, or that the landlord pays for specified tenant improvements required to satisfy the tenant. Generally, the landlord would rather have the tenant pay for any modifications or improvements to the property as opposed to the other way around. In these circumstances, both landlord and tenant require the type of skill and dedication that Neek Law Firm provides. It is the best way to maximize lease terms in one’s favor.
Ground-Up Construction Leases
At Neek Law Firm, we have a keen understanding and extensive experience in the formation of ground-up construction leases. A construction lease occurs where a landowner has a vacant piece of property and intends to lease the land for a long period of time to a tenant who requires a new building. Either the owner or tenant (or some combination of the two) agrees to construct the new building required by the tenant, and the tenant agrees to an extended lease term on the land (often for multiple decades).
Where the landowner agrees to do the construction, he or she will expect to be additionally compensated with higher annual lease payments from the tenant. This will often be the case where the tenant does not have the requisite capital to construct the sort of property it needs and is thus willing to pay a higher rate per square foot in exchange for the landlord providing the construction.
Where the tenant itself agrees to do the new construction on the land, the landowner will generally accept a lower rate per square foot in exchange for avoiding the expense of construction. These tenants are often large businesses that have very specific construction requirements for their properties and will only lease land if they may do the construction themselves.
In either circumstance, the assistance of Neek Law Firm can help to make the construction lease process more smooth. Whether helping to maximize a landowner’s revenues from a project or negotiating construction terms on behalf of a tenant, our lawyers have the knowledge and track required to serve our clients in the best way possible.
Deed & Title Matters
Deed and title matters can have a substantial effect on the value of a property, and perhaps more importantly, the owner’s ability to recover when problems arise after a transaction closes. Often, such problems surface when it is unclear that the seller of the property does, in fact, have the legal right to sell. Moreover, a multitude of title rights may be filed with the county recorder and may date back decades or later. These could range from easements to liens to a variety of other encumbrances or restrictions on the property, each with previously-filed underlying legal documentation. Not only do each of these title rights need to be identified, often the quality of the underlying legal work needs to be scrutinized. By taking the time to confirm that each and every title matter is legitimate and was handled correctly, we at Neek Law Firm assist clients in understanding exactly what they are buying or selling, while also identifying any potential title issues with the property before they become problematic. After having done so, we can help negotiate the appropriate title insurance policy so that clients are adequately protected moving forward.
A deed is a legal instrument that transfers some or all of a party’s rights in a property to another party. In California, two types of deeds are used most often:
Grant Deeds are generally executed between buyer and seller, and serve as a way for owners to warranty that they are, in fact, the legal owner of the property being sold and have the legal right to sell it. A grant deed allows for recourse against the seller (or “grantor”) if, after the transaction, the buyer (or “grantee”) discovers that the alleged “owner” did not actually have the legal right to sell the property. In this case, the grantee may be able to recover damages caused by the fraudulent transfer, and the transaction itself may or may not be completely rescinded by the courts. That is to say, the sale of the property may be completely canceled, placing both parties back where they would have been had the transaction never occurred. Generally speaking, title insurance companies will require a grant deed before agreeing to insure title to a property.
A Quitclaim Deed is very similar to a grant deed in that it is a simple legal instrument that effects the transfer of property. This deed basically states that the owner of the property relinquishes any and all rights he or she may have (except those specifically reserved) in the property. However, unlike a grant deed, there is usually no recourse against the “grantor” in the case that he or she did not have the legal right to transfer certain property rights. Thus, if any third parties make additional claims of property ownership after the close of a deal, the now-owner usually has no way to recover against the seller (subject to certain restrictions).
Accordingly, quitclaim deeds are best used when there is no concern or question as to the property’s ownership. For example, an individual may want to transfer a piece of property from himself to an LLC that he owns. He may choose to quitclaim his right to the property so that the LLC may assume ownership. Since he trusts the grantor in this situation (himself), he does not need to provide a grant deed. Likewise, transfers between spouses are often done by quitclaim deed. However, in the case of an arms-length business transaction, a title insurance company will likely require a grant deed; a quitclaim deed does not provide the insurance company with any degree of recourse in the case that it needs to pay out a claim.
In most cases, a deed does not officially take effect unless signed in writing or delivered. Today, most deeds are in writing, signed, notarized, and recorded in the county where the property is located; generally, the recording satisfies the delivery requirement.
Title Matters & Title Policy
Title is the set of rights that various parties have to a piece of property. In actuality, when one buys a property, what they are really purchasing is the title to that property–thus, title matters are of the utmost importance. Title may include easements, which are most often in the form of government taxes or utility right of ways. It may also include any liens or other claims against the property by creditors, any encumbrances on the property, any covenants or other restrictions on the use of the land, and a variety of other similar matters.
Because taking the time to scan the public records for this information is difficult and expensive, a title insurance company is generally engaged to carry out the process. These firms create title reports that specify each title matter currently available in the public records, and on the basis of this report, will then agree to “insure title” or not. Title insurance protects the new owner from any claims to the property made after the transfer is complete, subject to certain exceptions and exclusions. For example, if, after the completion of a purchase for a piece of land, a previously unknown third party claims to own an easement on the property, the title insurance company will contest the claim and must pay any settlements or damages granted to that third party as a result of the claim.
For obvious reasons, title insurance can be an extremely valuable form of protection for property buyers. It is a way to mitigate the risk that the selling party is behaving fraudulently in any way (knowingly or unknowingly), and without it, it would be very difficult to make real estate transactions work. However, at Neek Law Firm, we believe that the specific terms of title insurance policies are, on average, significantly under-negotiated. More often than not, a title insurance company will offer a standard (and insurance company-friendly) policy agreement, and most parties accept them as-is. Often, this can result in insufficient coverage in certain ways and excess coverage in others. Because the sort of insurance required can vary greatly from property to property and might relate to very specific issues, buyers neglecting to carefully negotiate the terms of their title insurance policy risk being insufficiently covered.
In addition to protecting oneself against potential future claims against title, it is critical that a buyer understand the covenants, conditions, and restrictions (“CC&Rs”) associated with the property. CC&Rs are limitations placed on a property, usually by a developer, homeowners’ association, builder, or other similar party. They are functionally a set of rules governing what must be done, can be done, and cannot be done in regards to the property. For example, there may be a restriction against painting a property any color other than white in a certain area.
Generally, CC&Rs can restrict real estate use and modification in many ways. For this reason, it is extremely important to pay special care to an area’s CC&Rs before purchasing a property; failing to do so could leave a buyer with a property that cannot be used as he or she had intended.
Whether handling an entire real estate transaction or simply reviewing a third-party title insurance policy, the Neek Law Firm will carefully inspect each title matter and, if necessary, any underlying documents that support those title matters (and do so while keeping in mind the specific needs of the property and the buyer/seller). In doing so, we help to maximize coverage for the issues that matter most for a given property.
Real Estate Financing
Locating a property or drafting high-quality purchase or lease documents is only part of the process; all projects require funding of some sort. At Neek Law Firm, not only can we assist in the various complex legal matters associated with buying or leasing a property, we can also help our clients to secure funding from a wide array of investors, banks, hedge funds, life insurance companies, and other institutional capital providers, who we have developed strong relationships with over time. Once we have identified the right investor or funding partner for a client, we may proceed to drafting a detailed loan agreement specifically tailored to the scenario and type of financing being provided. We are also happy to review any pre-existing loan agreements to help clients maximize terms in their favor.
At Neek Law Firm, we offer a broad variety of financing services, focusing primarily on the negotiating and drafting of:
- Acquisition Loans
- Construction Loans
- Conduit Loans
- Subordination Agreements
- Seller Financing Agreements
- Customized Financing Agreements for any real estate scenario
The negotiation and execution of a construction agreement, whether it be for a ground-up construction project or an improvement, is a multifaceted process that involves a wide array of parties. From property owners to contractors, subcontractors, architects, engineers, and governmental agencies, there are several participants in the project, each of which has its own interests in mind.
Before a project is undertaken, it is important to review matters such as title, deed, and legal compliance (including environmental and disability law compliance issues). Any easements, liens, deed restrictions, covenants and other restrictions, zoning problems, or building setback requirements could have a drastic impact on the viability of a project, and an owner or contractor must take care to ensure that the construction can be completed in light of these matters. Without a thorough review ahead of time, these sort of issues can derail a project later on.
After determining that a property is suitable for construction, the process of negotiating the agreement begins. Pre-drafted form agreements have become increasingly popular in construction agreements in recent years. However, these agreements are almost always drafted in favor of one party or the other, and without adequate legal assistance clients risk entering into a “fair” standardized agreement that, in actuality, favors the other party. Neek Law Firm can help to avoid this pitfall and can help clients get the best terms possible in the construction contract negotiation process.
Types of Construction Contracts
At each step of the process (including pre-deal issues with the property, negotiating and writing an agreement, and the actual completion of construction), we at Neek Law Firm have the experience to take into account the broad range of issues involved in a construction project and the negotiating prowess necessary to maximize results in our clients’ favor.
There are a wide variety of construction contracts, each slightly unique to the situation and project at hand. While Neek Law Firm can assist our clients with any variety of construction agreements, the majority fall into one of the following categories:
- Prime Construction Contracts, including:
- Lump-Sum and Fixed Contracts
- Cost-Plus Contracts
- Cost-Plus Contracts with a Guaranteed Maximum Price
- Subcontractor Agreements
- Design Service Agreements
- Construction Management Agreements
Prime Construction Agreements:
A prime construction contract involves a general contractor and a property owner, tenant, easement holder, or other party that has the legal right to make improvements to the property, where the general contractor agrees to complete the entirety of the project on behalf of the owner. The general manager will generally do a portion of the work itself, and, depending on the size of the job, will hire and manage a number of subcontractors to complete the remainder of the improvements. Often in prime construction agreements, the owner of the property itself will hire architects and engineers to first draft plans of the improvements and then create detailed plans for craftsmen to follow. However, in some instances the owner will simply allow the general contractor to hire these parties.
While prime construction agreements provide owners the ease associated with handling an entire project over to a general contractor, for the same reason, these agreements must be very carefully negotiated and drafted in great detail. Often, particularly in large projects involving sophisticated parties, owners will pre-qualify a set of potential general contractors for the project, who will then place bids based on the owner’s proposal (sent out to potential contractors in a “bid package.”) In this way, the owner guarantees that all potential bidders would actually be acceptable for the job–meaning that the low-cost bidder will generally win the project.
After receiving the bid package, general contractors will then take bids from their chosen subcontractors, which will then form the basis of the general contractor’s bid to the owner. After the bids have been placed and the owner has selected a general contractor, the negotiating and drafting of the contract begins.
In construction contracts, many of the primary issues requiring negotiation revolve around the general contractor’s compensation. Due to the large amount of uncertainty associated with a construction project, carefully negotiating this portion of the agreement is particularly important. Prior to the start of construction, a general contractor’s cost figures are merely projected estimates. The amount of time, price of materials, weather, and various other factors can have a profound impact on the amount of money required to complete a project. For this reason, a general contractor will usually try to push for a compensation system in which he is guaranteed a profit, while an owner will normally prefer a guaranteed flat fee payment. Clearly, each of these forms has its own advantages and disadvantages for each party, and each make more sense in certain circumstances. Moreover, a general contractor’s compensation can be structured in any way the parties desire. However, most agreements fall into one of the following three categories of payment systems:
A Lump Sum Contract takes place where the owner agrees to pay the general contractor a specific dollar figure for the construction, regardless of any unexpected costs or delays. In this system, the general contractor must swallow any costs in excessive of the lump-sum figure, thus risking his profit margin. A lump-sum or (“fixed”) payment scheme is generally only advised when the timing and cost of the project are easily and accurately projected. In this case, a general contractor may want to offer a flat rate in order to win projects amongst other competing contractors. Owners are attracted to the lump-sum system because it shifts the uncertainty associated with construction costs to the general contractor.
A Cost-Plus Contract, as its name suggests, entails an owner recompensing the general contractor for all costs associated with the construction, plus paying him or her a small percentage (or flat-fee) beyond the cost of the project. For general contractors, this is likely the best option. It gives contractors the opportunity to lock-in a profit before the project begins, and frees them to work without having to be concerned about minimizing costs. However, this option is usually disfavored by owners because it creates no incentive for the contractor to minimize costs and time spent on the project; he or she will be compensated the same way regardless.
A Cost-Plus Contract with a Guaranteed Maximum Price is a compromise between the lump-sum and cost-plus compensation structures. In this type of construction agreement, the owner agrees to pay all costs as well as a percentage or lump-sum on top of those costs to ensure the contractor makes a profit. However, the owner only agrees to pay under these terms up to a certain amount, or Guaranteed Maximum Price. For each dollar that the cost of the project exceeds the Guaranteed Maximum Price, the general contractor’s profits are decreased. Therefore, the contractor can take a job knowing that there will be profit so long as the project does not exceed the Maximum Guaranteed Price, and the owner creates incentive for the contractor to operate in an efficient and low-cost manner.
Often, it is not as simple as the parties choosing which payment structure they prefer and the numbers will often dictate that choice. If a contractor is willing to accept a fixed, predetermined payment in exchange for a project, that contractor is assuming a substantial amount of construction cost risk. In exchange for doing so, that fixed amount of money will likely have to be relatively high. Likewise, if an owner agrees to a cost-plus payment structure, he or she has assumed a large degree of “general contractor risk”–the risk that the contractor does not work efficiently to minimize time and expenses, which ultimately may cost the owner money. The owner may try to push for a cap on the total cost of the project (the Maximum Guaranteed Price discussed above), and will negotiate to keep that cap as low as possible. The contractor, conversely, will try to push that cap as high as possible, and will attempt to maximize the “plus” portion of his payment (the percentage or fixed amount that the contractor receives above cost).
Because construction projects tie-up funds for an extended period of time, and due to the high degree of uncertainty regarding costs and completion time, the type of payment terms discussed above are fiercely negotiated. Particularly with large projects in which contractors must depend on subcontractors and other third parties, it is extremely important that both owner and contractor are represented by a high quality legal expert; at Neek Law Firm, we can help our clients to maximize profit and minimize liability over the course of the project.
A subcontractor agreement is the contract between a general contractor and a trade contractor (a “subcontractor”), generally after the general contractor has entered into a prime construction agreement with an owner (or contingent upon that agreement being completed). As discussed above, the general contractor is usually responsible for the entirety of the construction process, whereas a subcontractor usually has a more specific skillset and is hired to complete a portion of the overall project. The subcontractors work under the management of the general contractor, and often many subcontractors will be working with or near one another.
Though the subcontractors are not a party to the prime construction agreement, they are often bound by many of that contract’s terms of payment, termination, and coordination with other parties on the job. From a general contractor’s standpoint, it is very important that subcontractors are reliable and complete projects in the manner they agreed to do so; the general contractor’s business and livelihood depend on it. The best way to encourage this type of behavior is to have a skilled attorney draft a subcontractor agreement that not only binds subcontractors to the terms of the prime construction agreement but that provides the general contractor with adequate remedies in the case that a subcontractor fails to perform.
For a subcontractor, hiring an expert attorney to negotiate a subcontractor agreement can be very beneficial. Doing so will help to maximize the subcontractor’s income from the project, and can also become very valuable in the case that the project is not completed within budget or the in the allotted time frame. A general contractor’s business is based on being able to deliver the results it promises, and when it cannot do so, subcontractors need to be sure to be adequately protected so as not to be used as a scapegoat. A subcontractor in that position may not be paid for work done, and will almost certainly suffer damage to his or her reputation. Particularly in that the subcontractor “industry” revolves around word-of-mouth and reputation, the implications of a single project can extend far beyond the completion of that project. A properly structured subcontractor agreement not only helps to ensure the contractor is adequately compensated, it also helps to protect the future of the subcontractor’s business.
Whether our client is an owner, general contractor, subcontractor, sub-subcontractor, or sub-sub-subcontractor, we at Neek Law Firm have the experience, insight, and diligence to ensure he or she is adequately protected and to maximize terms in his or her favor.
Design Service Agreements:
A Design Service Agreement is the contract with architects and/or engineers (known collectively as “design professionals”) when making improvements to a property. This agreement is most often made between the owner and the design professionals directly; thus, the design professionals are not actual parties to the prime construction agreement. However, like subcontractors, they are often bound by certain terms within the prime construction agreement (payment, termination, etc.). Generally, these agreements contain terms specifying the work to be done, how the parties will be compensated, and several other important provisions including:
- Description of Project
- Scope of Work to be performed by Architect/Engineer
- Design Professional’s Standard of Care
- Schedule for Work
- Limitation of Design Professional Liability
The design professionals, as well as the owners and general contractors that hire them, need to take particular care when structuring their design service agreements. Due to the nature of the services provided by architects and engineers, who design the plans and schematics that dictate exactly how construction is carried out, there can be a large amount of liability associated with these professionals if the property ends up being structurally unsound for any reason. Moreover, depending on the relative sizes of the parties involved, it may be the case that one party has more “bargaining strength” in drafting the contract, and may even have a standardized agreement used repeatedly for each project. In these cases, we assist clients in reviewing and modifying proposed documents, and our expert negotiators will waiver until terms are as favorable for our clients as possible.
Construction Management Agreements:
Generally speaking, once an owner enters into a prime construction contract with a general contractor, that owner largely hands over control of that project to the contractor. The management of the project and all subcontractors is generally out of the owner’s hands. However, especially where the contractor is compensated on a cost-plus basis, many owners do not feel this structure provides for enough protection of their personal interests. Subcontractors may be underperforming; the contractor may not be taking care to minimize expenses or time required for the project; or individual craftsman may be cutting corners.
Regardless of the case, we often recommend that our clients hire a construction manager to oversee the project. A construction manager is a third party that is present on the job site to monitor the contractor and subcontractors, and is hired by and reports directly to the owner. A well-structured construction management agreement can provide the correct incentives to help ensure objective analysis and performance by a construction manager. The whole purpose of the arrangement is to make sure that the owner’s interests are best protected at all times–that he or she is not being taken advantage of. At Neek Law Firm, we never lose sight of this fact, and have the know-how to structure construction management agreements so that managers’ and owners’ interests are aligned.