Georgia Lien Law Amendment Fixes Some Problems But Opens the Door to Other Ambiguities

This week Governor Nathan Deal signed Georgia HB 434 which amended the Georgia Lien Law to allow lien claimants to include overhead costs and interest in amounts claimed in mechanic’s and materialman’s liens.

As I discussed in my last post, the changes were sought by contractor groups to overcome a 2012 decision of the Georgia Court of Appeals that specifically held that overhead and administrative costs were not lienable. See 182 Tenth, LLC v. Manhattan Construction Company.

 

Problem solved, right?!  Not exactly.

Unfortunately, the new language potentially causes new problems and case-by-case litigation over whether certain costs are lienable.  This is because the standard now for determining the amount of the lien is “the amount due and owing the lien claimant under the terms of its express or implied contract, subcontract or purchase order.” O.C.G.A. §44-14-361(c).

This change appears to make the lien claimant’s contract the controlling authority on what amounts are lienable rather than looking to statutory definitions or references for that answer.  This would be a significant departure from how the Georgia Lien Law has been interpreted in the past. And, more importantly, it will turn the issue of “what is lienable” into a case-by-case determination.

 

What is “due and owing?”

Here are a few situations that I think will arise as a result of the new statutory language:

• We now know that interest can be included in the amount of the lien, but at what rate?  The new Lien Law is not clear on that issue.  If the contract contains an interest clause, then presumably the contract rate would apply, but often contracts do not provide for interest on unpaid amounts.  If that is the case, should the general pre-judgment interest rate apply, the rate for commercial accounts, or should the interest rate of the Georgia Prompt Pay Act apply?

• Another issue that will almost certainly be raised by this new language is whether attorneys’ fees can be included in a lien if the lien claimant’s contract allows recovery of attorneys’ fees.  But, what if the contract allows for recovery of attorneys’ fees only if the lien claimant prevails?

• Historically, delay damages for extended overhead and idle equipment have not been lienable because these were not labor and materials that were actually incorporated into the project.  However, it is at least arguable now that a lien claimant can include delay damages if its contract allows recovery of delay damages.  However, what if the lien claimant is a subcontractor whose contract provides that the sub recovers delay damages only to the extent that the prime contractor recovers from the owner, but it has not yet been determined that the delay was caused by the owner or that the prime will recover delay damages from the owner?

There is a potential here for contractors to use this new and untested language to inflate or exaggerate the liens by including significant amounts for items that are actually in dispute.  For example, claims for delay damages and attorneys’ fees can outsize contract balances and change orders by exponential amounts.  If this starts to happen, expect owners to take action—either by seeking relief from the courts in the form of penalties or damages for overstated liens, or by lobbying the Georgia Legislature for further amendments to the Georgia Lien Law that provides better guidance as to what items are lienable.

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Important Changes to Georgia and North Carolina Lien Laws

Georgia Lien Law Changes

Last year, the Georgia Court of Appeals issued a decision in a case called 182 Tenth, LLC v. Manhattan Construction Company, in which it narrowly defined the scope of costs that could be included in the amounts claimed in a lien.  For contractors, especially prime contractors and construction managers, it was a horrible decision because it effectively eliminated a substantial portion of the amounts that could be included in a lien against an owner.

More specifically, the Court held that various overhead and administrative costs contained in Manhattan’s pay applications, which were part of the contract price, were “unlienable” because they were not labor or materials that actually went into the property.  Those “unlienable” costs included:

staff mobilization power safety office supplies small tools temporary road job site copier progress photos job site communications job signage dumpster rentals/pulls unit certifications general liability insurance	preconstruction phone/water job site trailer job toilets computers fuel and oil blueprints record drawings postage/courier temporary fence cleanup crew final clean builder’s risk insurance

This year, Georgia contractors lobbied the legislature to change the lien law in order to overcome the limitations imposed by the narrow interpretation of the Court in the Manhattan case.  HB 434 was passed on the last day of the legislative session.  A copy of the version that passed and is on its way to the Governor can be found here.

Georgia HB 434 modifies O.C.G.A. §44-14-361 to include the following language:

 (c) Each special lien specified in subsection (a) of this Code section shall include the amount due and owing the lien claimant under the terms of its express or implied contract, subcontract, or purchase order subject to subsection (e) of Code Section 44-14-361.1.

 (d) Each special lien specified in subsection (a) of this Code section shall include interest on the principal amount due in accordance with Code Section 7-4-2 or 7-4-16.

 Under the new law (after it is signed and goes into effect), contractors should be able to include in lien amounts the costs found “lienable” in the Manhattan case as long as those amounts are due under the terms of the contract.  But, I think the new language will not add clarity or guidance in a situation where the parties dispute whether an amount is “due and owing” under the terms of the contract.

In my next post, I’ll give at least two examples of how this new statutory language will lead to continued uncertainty and further litigation over what can be included in a lien.

North Carolina Lien Law Changes

North Carolina’s legislature made big changes to the state’s lien laws that went into effect this year.  One of the most critical changes—the “Mechanic’s Lien Agent” requirement—became effect on April 1, 2013.

The new law requires project owners or prime contractors to designate a Mechanic’s Lien Agent at the time of contracting and to post the information relating to the Lien Agent at the project site.  Any contractor or supplier that may potentially be a lien claimant must provide the Lien Agent with a preliminary notice of its involvement of the project within 15 days after first beginning work or supplying labor or materials.

To support these new requirements, North Carolina has created an online clearinghouse/filing system called the NC Online Lien Agent System at www.liensnc.com, which became active on April 1^st.

My friend and fellow construction lawyer Bryan Scott, who practices with Spilman Thomas & Battle in Winston-Salem, North Carolina, has written two very detailed and practical articles about the new requirements of the North Carolina lien law [click here] and the new NC Online Lien Agent System at www.liensnc.com [click here].

 

Georgia Legislators Consider Bills that Will Impact the State Construction Industry

It’s that time of year again when Georgia legislators work to pass the laws that will take effect for 2013-2014.  This year, there are a couple of bills working their way through the chambers that will directly affect construction contractors and construction projects in this State.

HB434

Introduced by Representatives Tom Weldon, Wendall Willard, and Mike Jacobs, HB 434 adds language to the Georgia mechanic’s lien law (O.C.G.A. §14-44-361) that specifically allows a lien holder to include in the lien amount “the amount due and owing…under the terms of its contract, subcontract, or purchase order.”

It also provides that in the absence of a contract, the lien may include amounts for “the unpaid value of the labor, materials, and services provided by the lien claimant for the improvement of real estate.”

HB 434 is currently before the Judiciary Committee.

SB70

Senate Bill 70 allows the Georgia Department of Transportation greater flexibility in using the design-build delivery method for procuring construction related services and expands the use of design-build projects.  The bill allows the DOT to skip over the Request for Qualifications step, and procure a design-build contract simply through a Request for Proposals.  The bill also eliminates some of the restrictions and requirements relating to design-build procurements.

SB 70 passed the Senate unanimously on February 25, 2013 and is now making its way through the House.

Check back for updates on these bills in the final weeks of the legislative session.

Do you know of any other bills pending in the Georgia Legislature that might be of interest to the construction industry?  If so, tell us about it.

 

Georgia Solar Policy Forum—A Discussion about PPAs, Utility Rates, and Economic Development

The Georgia Solar Energy Solar Association (“GSEA”) hosted its 2013 Policy Forum last week at the Georgia Tech Research Institute.  The program focused on the status of solar markets nationwide and in Georgia, as well as discussions about current Georgia laws and regulations governing energy policy and future changes that would open the markets for solar in the state.

2012 Solar Policy Initiatives

In 2012, GSEA conducted a major campaign with Georgia legislators to pass a bill that would have expressly permitted the use of power purchase agreements (PPAs), solar equipment leases and other types of third-party financing for solar projects.  According to the presenters at the Policy Forum, the solar market will never really open up in Georgia until those financing arrangements are permitted.

The 2012 bill met with steep opposition from Georgia Power and local EMCs because, they claimed, that such transactions violated the state’s Territorial Act, which regulates the utility industry and provides that only registered utility companies can sell power, and assigns territories to those utility companies. (see my 2012 blog post about this issue).  While the 2012 bill ultimately did not pass, it certainly caught the attention of Georgia Power and made the utility companies realize that the Georgia solar industry and its advocates were gaining momentum and support.

2013 Solar Policy Initiatives

GSEA appears to be continuing its course to pursue legislation that will allow PPAs and third-party financing.  A revised version of the 2012 bill has been introduced this year by Senator Buddy Carter as SB 51 2013.   GSEA will also continue to push to raise the cap on the state tax incentives for renewable energy projects.

What stands in the way of these solar policy initiatives? 

According to several panelists, including State Representative Chuck Martin and Georgia Public Service Commissioner Tim Echols, the biggest hurdle to solar-friendly legislation is Georgia’s low power rates.  Georgia and the southeastern states have the lowest electric rates in the country (by a lot in comparison to areas like the northeast).

Here’s why that is important (or at least why legislators and regulators think it’s important):  low power rates are apparently one of Georgia’s competitive advantages in attracting businesses to move to this state—and no one in elected office wants to take any action that could be seen as anti-economic development. 

Commissioner Echols and Representative Martin believe that legislation that opens the market to solar PPAs could create conditions that “run off companies and manufacturers with higher utility rates.”  No elected official wants to be positioned as “anti-business” or “anti-economic development” if the debate is framed in those terms.  But….

Does adding solar power to Georgia mean higher rates?

Georgia Power doesn’t think so.  Georgia Power sought approval to increase its purchase of solar power from independent producers from the current 55MW to 210MW over the next two years.  The program is called the Advanced Solar Initiative Program.

According to Ervan Hancock, a manager of renewable and green strategies for Georgia Power, the reason that Georgia Power is voluntarily seeking to increase its solar purchases is that “it is now economically feasible to add solar to [Georgia Power’s] portfolio.”  Hancock went on to explain that Georgia Power has considered solar and other renewable energy sources for a long time but has never believed—until now—that it could include solar in its portfolio without causing a rate increase to its customers.  The reason Georgia Power believes that solar power can now be added without rate increases is because the costs of equipment have significantly decreased in the last 12-18 months, making the cost of solar power much less expensive.

So, if Georgia Power can add solar power without increasing rates, why do legislators believe that PPAs or solar leases will cause utility rates to go up?

 

How Bright Is the Future for Georgia’s Solar Energy Tax Credit?

The Green Building Chronicle reported yesterday that a bill restoring the solar energy tax credit has hit a dead-end in the Georgia legislature. The bill—HB 146—would have restored funding for the credits through 2014 and would have increased the total funds available for the credits from $2.5 million per year to $10 million per year for 2012, 2013, and 2014.

Last year, it seemed like Georgia was turning a corner on its conservative approach to energy policies. First, there was the decision of the Public Service Commission announced that it approved an increase in the amount of solar energy purchased by Georgia Power—effectively doubling the amounts that had been allowed previously. Then, the citizens of Georgia voted for a constitutional amendment to allow state agencies to enter into energy savings performance contracts. It looked like Georgia was serious about reducing energy demands and increasing alternative energy production. So, what happened?

Some believe that the solar tax credits were re-prioritized because the legislature has been focused on proposals to make sweeping changes to the Georgia tax code in an effort to make Georgia more competitive in attracting businesses to move here while maintaining revenue needed for the budget.

Granted, that is a compelling issue for policy makers. But, if we believe that we must reform the tax code to entice businesses to come to Georgia, then isn’t it equally important to include tax credits that support and promote the businesses that are already here?

Georgia has a budding solar industry that includes solar manufacturers, installers and vendors. These businesses are here now—employing Georgians and paying taxes. As alternative energy becomes more prevalent, these companies will continue to grow and become an even more important part of our state economy. We want them to stay here and grow here. One way to support these businesses is by funding tax credits that promote their industry.

There is another good reason for the solar tax credits. Georgia has some of the greatest solar capacity of any state in the U.S. We should be a leader in solar energy production and a model for states trying to reduce energy costs and reliance upon fossil fuels. Instead, we lag behind states like Pennsylvania, which has used energy policies and tax credits to develop a highly successful solar energy program despite the fact that its solar capacity is significantly less than Georgia.

Does anyone see a downside to increasing solar energy production in Georgia?

 

Amendment 4 is a Good One – Vote Yes

I am a skeptic when it comes to constitutional amendments.  I don’t think I have ever voted “yes” for any proposed amendment to the Georgia Constitution.  This year is different. I will be voting “yes” for Amendment 4 on the November 2^nd ballot, and you should too.  Here’s why:

Here’s the thing—constitution amendments are usually so poorly worded that even those that merit passing often do not because no one understands what they say or what the proposed amendment is meant to achieve.  I’m afraid that this is true for Amendment 4 as well.

On the ballot, it will read like this:

“Allows the State to execute multiyear contracts for projects to improve energy efficiency and conservation.

Senate Resolution No. 1231

Ga. L. 2010, p. 1264

Shall the Constitution be amended so as to provide for guaranteed cost savings for the state by authorizing a state entity to enter into multiyear contracts which obligate state funds for energy efficiency or conservation improvement projects?

(   )  YES

(   )  NO”

The actual amendment will be to add a new paragraph to Article VII, Section IV to read as follows:

Paragraph XII.  Multiyear contracts for energy efficiency or conservation improvement.

The General Assembly may by general law authorize state governmental entities to incur debt for the purpose of entering into multiyear contracts for governmental energy efficiency or conservation improvement projects in which payments are guaranteed over the term of the contract by vendors based on the realization of specified savings or revenue gains attributable solely to the improvements; provided, however, that any such contract shall not exceed ten years unless otherwise provided by general law.

In an earlier post, I explain how performance contracts work and address the most obvious benefit of these contracts, which is the ability of cash-strapped governments to obtain badly needed renovations and infrastructure improvements without having to have a large annual capital budget.  But there are several other good reasons to vote for this amendment.

• It’s good for the environment. The improvements implemented through performance contracts will mean that the state is consuming significantly less energy and water.  In Georgia, anything that reduces demand on the electric grid during peak times and/or conserves the use of water are good things.

• It will save money. State and local governments will immediately save money on electricity, natural gas and water bills upon completion of the improvements.  I have seen some projections of savings between $30 million and $50 million per year.  In times like these when governments are looking for every way to cut budgets and decrease spending, this is an innovative and painless way to do it.

• It will restore construction jobs. Georgia sustained greater than average unemployment rates during this recession and one of the sectors that lost the most jobs was construction.  If state and local governments start entering into performance contracts, Georgia will have a greater demand for construction workers again.  In fact, the National Association of Energy Services Companies (NAESCO) has performed an estimate of the potential employment growth that could come from performance contracting.  Click here to read it.

• It has a history of success. The federal government and many of our border states have been using performance contracting for decades to fund renovations, retrofits and infrastructure improvements with great success.  Georgia does not have to invent the wheel with respect to performance contracting legislation, and can benefit from the lessons learned by these other government entities.

• It will NOT increase taxes. State and local governments will not need to raise taxes in order to build annual capital budgets for these projects.  The projects are paid for by the savings in the energy bills created by the improvements.  If the energy savings are less than what was promised, then the ESCO, not the government is responsible for the shortfall.

The vote on Amendment 4 is well timed.  It comes at a time when we need it most.  Let’s not let this opportunity slip by.

 

Performance Contracting Amendment Is Now In The Hands of Georgia Voters

photo by Robert S. Donovan

This November when Georgia voters go to the polls to cast their ballots for mid-term elections, they will also have the opportunity to vote on an amendment to the Georgia Constitution to allow public entities to enter into Energy Savings Performance Contracts (ESPCs).

Most people have never heard of ESPCs or “performance contracting” and may not be able to fully understand the implications of this amendment simply by reading the proposed language on the ballot.  However, this amendment (designated as Amendment #4 on the November 2, 2010 ballot) is an important one because it is a step forward for Georgia in embracing legislation that promotes progressive energy policies and green building initiatives.

Under an ESPC, a state agency enters into a contract with an energy services company (ESCO) to perform a detailed energy and water use audit of a particular facility or campus to identify energy and/or water-saving improvements that can be made to reduce the agency’s operation costs going forward.  The ESCO then designs a retrofit project and builds or installs the energy/water saving measures identified in its audit.

Here’s how ESPCs differ from other contracts:

The Performance Guarantee

• The ESCO “guarantees” that the state agency will incur a specified amount of savings in energy and/or water consumption for a period of years (usually 10 years). “Savings” are generally tracked by ongoing various measurement and verification protocols that are written into the contract.

• If the savings do not meet the amount of guaranteed savings specified in the contract, the ESCO pays the agency the difference between the guaranteed savings and the actual savings.

Payment for the Project Costs

• Unlike traditional retrofit projects that are paid for from capital improvement budgets, with ESPCs the ESCO pays for or arranges financing for the project upfront so that the state agency does not have to come up with a substantial lump-sum payment at the time the project is performed.

• Instead, the project is paid for over the “guarantee” period from the “savings” that are generated by the improvements.  During that period, the ESCO is usually under contract with the state agency to operate and maintain the equipment and improvements for a separate fee.

Many states and the federal government have been using ESPCs for over a decade as a means to obtain badly-needed infrastructure improvements when shrinking budgets have not otherwise allowed for capital improvements.

The reason that ESPCs have not historically been used in Georgia is because Georgia’s Constitution prohibits the state or any of its agencies from entering into multi-year contracts.  This year, the Georgia legislature passed a constitutional amendment which would allow state agencies to pay over multiple years for “energy efficiency or conservation improvement projects.”  In order to take effect, the amendment must be approved by a majority of the voters casting ballots on the amendment.

If the amendment passes, it will be a significant victory for green building and energy-efficiency companies and advocates.  This change could potentially open the door to hundreds of millions of dollars of state projects, and could substantially reduce overall the energy and/or water consumption of the State of Georgia and its agencies.

So, I encourage everyone to check out these websites for more information about energy savings performance contracts and the proposed Amendment #4:

Energy Services Coalition

Georgia Environmental Finance Authority

Taxpayers for Energy Efficiency

U.S. Department of Energy, Federal Energy Management Program

I will also be posting more discussion points about energy saving performance contracts in the next few weeks in order to aid voters in their research about this important constitutional amendment.

In the meantime, do you think voters should vote “yes” to the amendment and bring energy savings performance contracts to Georgia?