“Payment Defense” to Maryland Mechanics’ Lien Claims

By Nicholas Cowie, Esq. – Maryland Mechanics’ Lien Attorney and Real Estate Construction Lawyer

This article discusses the so-called mechanics’ lien “payment defense” and the circumstances under which the defense can defeat a Maryland mechanics’ lien claims asserted by an unpaid subcontractor. In short, Maryland mechanics’ lien law only recognizes a payment defense for single-family dwelling construction projects. Commercial owners cannot assert the payment defense and are subject to a risk of double payment if they pay a general contractor that has failed to pay its subcontractors.

Background: Construction Projects and The Mechanics’ Lien Payment Defense

Property owners involved in construction projects (“owners”) run the risk of having a Maryland mechanics lien imposed on their property whenever the general contractor fails to timely pay its building subcontractors or material suppliers (“subcontractors”). These unpaid subcontractors may seek to have a court impose a lien on the owner’s property where the construction project is located. Once the lien attaches, it can be used to force a sale of the owner’s real property as a source of funds to satisfy the amount the general contractor owes the unpaid subcontractor. See, Mechanics’ Lien Law in Maryland – by Cowie Law Group, a Maryland construction Law firm.

All private property in Maryland is subject to the imposition of a mechanics’ lien. However, as a prerequisite, an unpaid subcontractor must first provide the owner with written notice of its intent to establish and enforce a Maryland mechanics’ lien claim. This notice must include the unpaid amount owed the subcontractor for work performed at the owner’s property. Thereafter, the owner has an opportunity to dispute the subcontractor’s lien claim and prevent it from attaching to the property.

One defense an owner may seek to assert against a subcontractor’s Maryland mechanics’ lien claim is the so-called “payment defense” – a legal doctrine that protects an owner who has already paid its general contractor in full before receiving the subcontractor’s notice of intent to establish and enforce a mechanics’ lien against the owner’s property.

Payment Defense to Maryland Mechanics’ Lien Claims IS NOT Available to Commercial Property Owners on Commercial Construction Projects

Maryland has no “payment defense” available to owners on commercial construction projects. As such, an owners payment of a general contractor is never a defense to a subcontractor’s mechanics’ lien claim on a commercial construction project. Even if the owner has paid the general contractor in full, the unpaid subcontractor will be able to proceed to establish a mechanics’ lien on the owner’s property, in effect, forcing the owner to pay twice for the same work.

On commercial projects, Maryland places the burden on the commercial property owner to make sure subcontractors are paid by the general contractor. The owner has the duty and a right to withhold from the general contractor amounts due it determines to be due an unpaid subcontractor on the project. To protect themselves, commercial property owners can require their general contractors to provide subcontractor lien releases for work or materials provided. These lien releases can be used as a defense against any Maryland mechanics’ lien claim filed by a subcontractor such that owner will not be required to pay twice for a subcontractor’s work identified in the subcontractor’s mechanics’ lien release.

Also an owner has a right to withhold payment  owed its general contractor once the owner receives an unpaid subcontractor’s notice of its intent to establish and enforce a mechanics lien claim against the owners property. However the amount withheld from the general contractor cannot exceed the amount claimed in the subcontractor’s notice. If a subcontractor is successful in having a court impose a mechanics’ lien against the property, the owner may pay the subcontractor the lien amount monies withheld from the general contractor.

Payment Defense to Maryland Mechanics’ Lien Claims IS Available to Residential Property Owners on Single Family Dwellings Projects.

The Maryland mechanics’ lien statute does provide a statutory payment defense for homeowners constructing a “single family dwelling” or an addition thereto. A homeowner who has made “full payment” to a general contractor before receiving a subcontractor’s notice has an absolute defense to the mechanic lien claim under § 9-104(a)(2) of the Maryland mechanics’ lien statute. If the homeowner has only made partial payment to the general contractor before receiving the subcontractor’s notice, then the subcontractor’s right to obtain a lien against the property is capped by the amount the homeowner still owes the general contractor. § 9-104(f).

The intent of this legislation is to protect homeowners constructing residential homes, or additions thereto, from subcontractor mechanics’ liens in amounts that exceed what the homeowner still owes its general contractor at the time the owner receives a subcontractor’s notice of intent to establish and enforce a mechanics’ lien. However, once that notice is received, the homeowner must withhold the claimed lien amount from its general contractor pending resolution of the mechanics’ lien claim.

Key Maryland Mechanics’ Lien Legal Provisions:

• Md. Code Ann., Real Prop. § 9-104(a): Requires subcontractors to provide written notice of intent to file a mechanics’ lien claim within 120 days after last furnishing labor or materials.
• Md. Code Ann., Real Prop. § 9-104(a)(2): Requires, in the case of a single-family dwelling, that the 120-day notice be received by the owner before full payment has been made to the general contractor.
• Md. Code Ann., Real Prop. § 9-105: Subcontractors must file suit  (a/k/a “petition to establish mechanic’s lien”) within 180 days after last performing work.

Key Maryland Mechanics’ Lien Case Law:

• Diener v. Cubbage, 259 Md. 555, 270 A.2d 471 (1970). Maryland courts rejected the commercial owner’s argument that double payment barred the subcontractor’s lien.
• Ridge Heating, Air Conditioning and Plumbing, Inc. v. Brennen, 783 A.2d 691, 366 Md. 336 (2001) and Winkler Construction Co. v. Jerome, 355 Md. 231, 734 A.2d 212 (1999). Discussing payment defense applicable to single-family dwellings

Key Points for Maryland Mechanics’ Lien Law:

• Strict compliance with statutory notice deadlines is required (notice of intent to file petition to establish mechanic lien must be given within 120 days of last work and lawsuit filed within 180 days).
• Subcontractors do not need to have a direct contractual relationship with the owner.
• Commercial Owners are not protected by statute from liens by simply proving payment to the general contractor (i.e., no statutory payment defense on commercial projects).
• Maryland courts have held that equitable (non-statutory) defenses like double payment are not recognized when a lien claimant complies with the Maryland mechanics’ lien statute.
• However, Maryland does have a statutory payment defense applicable to single family dwellings to prevent double payment for homeowners.

Risk Management Tips from Mechanics’ Lien Attorneys

In summary, Maryland mechanics’ lien law only recognizes a payment defense for single-family dwelling construction projects, thereby reducing the risk of double payment for homeowners building their own home or adding an addition. Commercial owners, on the other hand, cannot avail themselves of the payment defense, and are subject to a risk of double payment if they pay a general contractor that has failed to pay its subcontractors. Thus, the burden is on the owner in a commercial project to ensure subcontractors have been paid.

Owners:

Because of this framework, property owners should work with an experienced Maryland mechanics lien attorney to implement lien risk management strategies, such as general contractor retainage connected to receipt of subcontractor lien releases (a/k/a “lien waivers”) and other construction escrow procedures. Owners can require a contractor to obtain signed mechanic’s lien releases from all subcontractors on a project for work performed and materials provided, acknowledging that they have been paid in full or for a specified portion of the work. The general contractor can be contractually obligated to provide subcontractor lien releases to the owner upon completion of the subcontractor’s work or a portion thereof, and, in either case, this will provide some assurance that payment was made and protect owners from subcontractor mechanic’s lien claims.

Subcontractors:

Likewise, subcontractors who have not received payment from the general contractor, should consult with an experienced Maryland mechanics’ lien attorney to discuss strategies for ensuring payment, especially on financially challenged projects. One of the best strategies to ensure payment is for the subcontractor to assert a valid mechanics lien claim against the owner’s property. In the case of a single-family dwelling construction project, subcontractors who have not been timely paid must consider serving notice of intent to file mechanics lien on the owner as soon as possible so that notice is received before the owner pays the general contractor in full.

MARYLAND MECHANICS’ LIEN ATTORNEYS

&

REAL ESTATE CONSTRUCTION LAWYERS

Washington, D.C. and Maryland

Cowie Law Group, P.C. Law is a construction law firm, practicing construction and real estate law throughout the State of Maryland and Washington, D.C. We assist clients in developing and redeveloping real property, and we handle construction industry performance and payment disputes, including Maryland mechanics’ lien claims and Washington, D.C. mechanic’s lien claims for owners, general contractors, design, professionals, subcontractors, and material suppliers. Law Partner George A. Bealefeld III is the Author of the Lexis Maryland Mechanics’ Lien Law Practical Guidance® Practice Note.

The post “Payment Defense” to Maryland Mechanics’ Lien Claims appeared first on Maryland & DC Construction Lawyers and Construction Litigation Attorneys.

“Payment Defense” to Washington DC Mechanic’s Lien Claims

By Nicholas Cowie, Esq. –  Washington, D.C. Mechanic’s Lien Attorney

This article discusses the so-called mechanics’ lien “payment defense” and the circumstances under which the defense can defeat a Washington DC mechanic’s lien claims asserted by an unpaid subcontractor.

Background: The Mechanic’s Lien “Payment Defense” in Washington DC 

Property owners engaged in construction projects (“owners”) are subject to Washington DC mechanic’s lien claims whenever the owner’s general contractor fails to pay its subcontractors or material suppliers (“subcontractors”). Unpaid subcontractors, barring a valid defense, have a right to enforce a lien on the owner’s property where the construction project is located. See, Washington DC Mechanic’s Lien Claims – by Cowie Law Group, a Washington, D.C. mechanic’s lien attorney law firm. The subcontractor’s lien can be used to force a sale of the owner’s real property as a source of funds to satisfy the amount the general contractor owes the subcontractor. All private construction projects are potentially subject to Washington DC mechanic’s lien claims.

However, before a subcontractor can enforce a Washington DC mechanic’s lien claims it must first provide the owner with written notice of its intent to enforce a mechanic’s lien claim. This notice must include the unpaid amount owed the subcontractor for work performed at the owner’s property. Thereafter, the owner has an opportunity to dispute the subcontractor’s lien claim and prevent it from being enforced or attaching to the property.

One defense an owner may seek to assert against a subcontractor’s mechanic’s lien claim is the so-called “payment defense” – a legal doctrine that may protect an owner who has already paid the general contractor in full before receiving the subcontractor’s notice of intent to enforce a lien claim.

Washington DC Mechanic’s Lien Claims and the Payment Defense

Washington DC mechanic’s lien law recognizes a payment defense against all subcontractor mechanic’s lien claims. The defense is only applicable to “good faith” owner payments made to the general contractor before receipt of the subcontractor’s notice of intent to enforce mechanic’s lien. Specifically, a subcontractor’s Washington DC mechanic’s lien claim against the owner’s property is capped (i.e., cannot exceed) the amount of the unpaid balance owed by the owner to the general contractor at the time the owner receives the subcontractor’s notice of intent to enforce its Washinton DC mechanic’s lien claim. D.C. Code § 40-303.02(a). This “unpaid balance cap” on liens creates a valid and frequently successful payment defense for property owners against a subcontractor’s Washington DC mechanic’s lien claim.

Until the property owner receives the required written notice from a subcontractor that it has not been paid (i.e., notice of intent to enforce mechanic’s lien), the owner can make payments to its general contractor and rely upon the “payment defense” to defeat or reduce a subcontractor’s mechanic’s lien claim. DC Code §40-303.02. For example, if prior to receiving a subcontractor’s notice of intent, the owner has, in “good faith,” already paid the contractor in full (and the amount of payment is not in dispute), then the subcontractor is not entitled to enforce a Washington DC mechanic’s lien claim against the property. DC Code §40-303.02(b).

Restrictions and Protections for Subcontractors with Washington DC Mechanic’s Lien Claims.

Owner’s Duty to Withhold Payment After Receipt of Subcontractor’s Notice

Once a subcontractor’s notice of intent to enforce a Washington DC mechanic’s lien claim is received, the owner can no longer rely on the payment defense for payments made after receipt of notice. At that point, the owner has a duty to withhold any payments it owes the general contractor in an amount sufficient to satisfy the general contractor’s debts to the subcontractor. DC Code §40-303.04. Thereafter, the property will be subject to a subcontractor’s Washinton DC mechanic’s lien claim, but not to exceed the amount the owner still owes its general contractor at the time the owner received the subcontractor’s notice. DC Code §40-303.04. An owner will not be able to use the payment defense regarding any general contractor payments it makes after receipt of the subcontractor’s notice of intent. DC Code §40-303.03(b).

Subcontractor’s Right to Know Contract Terms

The Washington, D.C. mechanic’s lien statute affords subcontractors the right to information regarding the agreement between the owner and the general contractor. Specifically, Subcontractors have a right to demand that an owner provide a statement of the terms of the contract between the owner and the contractor and the amount due thereunder. DC Code §40-303.05. Failure of the owner to respond to such a demand can result in liability to the owner for payments made to the contractor after receipt of the demand. DC Code §40-303.05. This ability to demand information from the owner better enables a subcontractor to protect its lien rights against the payment defense when asserting a Washington DC mechanic’s lien claim.

Washington DC Mechanic’s Lien Attorneys Recommendations Regarding Payment Defense in Washington DC 

Owners can rely on the payment defense only to the extent of full payment to the general contractor prior to receipt of the subcontractor’s notice of intent to enforce a Washington DC mechanic’s lien claim. So long as there is an unpaid balance, the owner’s property remains subject to a subcontractor’s mechanic’s lien. Therefore, property owners should work with an experienced Washington, D.C. mechanic’s lien attorney to implement lien risk management strategies, such as general contractor payment retainage connected to receipt of subcontractor lien releases for work performed and materials provided, with subcontractor’s acknowledging in writing that they have been paid in full or in part for specified work.

Likewise, subcontractors should work with an experienced Washington, D.C. mechanic’s lien attorney to protect their right to assert a Washington DC mechanic’s lien claim, such as by serving early notice of intent to enforce a mechanic’s lien against an owner’s property while the owner still owes monies to the general contractor, and, when necessary, by demanding information from the owner regarding its agreement with the general contractor so as to anticipate when  general contractor payments are to be made.

WASHINGTON DC MECHANIC’S LIEN ATTORNEYS

&

COSTRUCTION LAWYERS

Washington, D.C. and Maryland

410-327-3800 | 202-670-6289 | 301-830-8315

cowielawgroup.com

Cowie Law Group, P.C. Law is a construction law firm, practicing construction and real estate law throughout the State of Maryland and Washington, D.C. We handle construction industry performance and payment disputes, including Maryland mechanics’ lien claims and Washington, D.C. mechanic’s lien claims for owners, general contractors, design, professionals, subcontractors, and material suppliers. Law Partner George A. Bealefeld III is the Author of the Lexis Maryland Mechanics’ Lien Law Practical Guidance® Practice Note.

The post “Payment Defense” to Washington DC Mechanic’s Lien Claims appeared first on Maryland & DC Construction Lawyers and Construction Litigation Attorneys.

Are Commercial Developers and Subcontractors Protected from Defect Liability Claims Under Maryland’s 10-Year Contractor Statute of Repose?

This article examines Maryland’s 10-year statute of repose, Courts and Judicial Proceedings Article (“CJ”) §5-108(b), including how the statute works and whether it’s protections for “contractors” extend to commercial developers and subcontractors.

FederalCourts interpreting Maryland Law have address the issue of whether developers and subcontractors are protected.  One court has held, in a non-binding opinion, that developers, unlike traditional general contractors, are not protected by the 10 years statute of repose. Another federal court has held that subcontractors are protected by the 10 year statute of repose to the same extent as “contractors.”

Maryland’s 20-Year Statue of Repose Distinguished

For clarity, this article refers to CJ §5-108(b) as the “10-year Contractor Statute of Repose” to distinguish it from Maryland’s broader 20-year statute of repose (CJ §5-108(a)) applicable to all construction defect claims, including claims against developers and subcontractors. The 20-year statute of repose applies whenever resulting property damage or personal injury occurs more than 20 years after construction is completed. This article, however, focuses on the Maryland’s 10-year Contractor Statute of Repose.

How Maryland’s 10-Year Contractor Statue of Repose Works in Relation to Construction Defect Claims

The 10-Year Contractor Statute of Repose bars construction defect legal claims (“causes of action”) against “any architect, professional engineer, or contractor” when the resulting injury to person or property for which damage is sought occurred more than 10 years after the completion of an “improvement to real property.”

The “completion” date is defined as “the date the entire improvement first became available for its intended use.” CJ §5-108(b).

An “improvement to real property” generally refers to buildings but may also include any permanent structure that is constructed on or added to real property, such as a parking lot, stormwater management pond or retaining wall. See, Craven v. Hickman, 135 Md. App. 645, 658 (2000).

It’s essence, the 10-Year Contractor Statute of Repose prevents certain claims from “accruing” under Maryland’s general 3-year statue limitations (CJ §5-101). Specifically, if the resulting injury occurs within the 10-year period, a legal cause of action against “any architect, professional engineer, or contractor,” to recover damages for the injury is not barred by the 10-Year Contractor Statute of Repose. As such, that cause of action can “accrue” and a lawsuit must be filed within 3 of the accrual date. On the other hand, if the resulting injury occurs after the 10-Year Period, a cause of action against “any architect, professional engineer, or contractor,” to recover damages for the injury does not accrue, and the claim is barred by the 10-Year Contractor Statute of Repose.

Example: If a commercial building sustained a severe water damage injury 15 years after it’s completion due to the installation of a defective sprinkler system, a construction defect or products liability claim against seeking compensation for the water damages against the contractor who installed the sprinkler system would be barred by the 10-Year Contractor Statute of Repose. On the other hand, if the water damage injury occurred within the 10 year period, the building owner would have 3 years to file a lawsuit.

Are Subcontractors Protected from Construction Defect Claims Under Maryland’s 10-Year Contractor Statue of Repose?

Subcontractors are protected from liability for construction defect claims under Maryland’s 10-year Contractor Statue of Repose. Although “subcontractors” are not specifically referenced in the statute, the Court of Appeals for the Fourth Circuit, interpreting Maryland law, has held that the term “contractors” is intended to include “subcontractors” who are hired by contractors to construct improvements to real property. Hartford Ins. Co. v. American Automatic Sprinkler, 201 F.3d 538 (4th Cir. 2000).

The Statute of Repose serves as a Cap on Delayed “Accrual of a Cause of Action” Under the Discovery Rule

To understand how the 10-year Contractor Statute of Repose applies to any given construction defect claim, it is essential to understand the concept of “accrual” of a cause of action under Maryland’s general 3-year statute of limitations (CJ §5–101). Maryland follows the “discovery rule” first adopted in the case of Poffenberger v. Risser, 290 Md. 631 (1981), under which a cause of action “accrues,” when plaintiff knew or should reasonably have known it has suffered an injury and its likely cause (“discovery”). Once accrual occurs, a plaintiff has three (3) years to bring a lawsuit under the general statute of limitations (CJ §5–101) and the Statute of Repose CJ §5–108(c).

In construction defect cases, delayed “accrual” of a latent defect is common. Construction defects in the structure of the building may remain hidden and undiscovered behind exterior walls or beneath floors. The effects of the defect may not to become known until resulting damage occurs many years after construction is complete. Maryland’s adoption of the discovery rule means that claims for construction defects can be brought well into the future, creating uncertainty for contractors. Maryland’s 10-year Contractor Statue of Repose (CJ §5–108(b)) is designed to protect contractors, architects, and engineers from extended liability by placing an outside limit on how long a cause of action against them is permitted to “accrue” under the discovery rule. Namely, there can be no accrual of a cause of action for damages against a contractor, architect or engineer when the property damage or personal injury caused by the construction defect occurs more than 10-years after completion of the buildings or other “improvement to real property” they design or construct:

“… a cause of action for damages does not accrue [against an] … architect, professional engineer, or contractor … when wrongful death, personal injury, or injury to real or personal property, resulting from the defective … condition of an improvement to real property… occurs more than 10 years after the date the entire improvement first became available for its intended use [emphasis added].”

CJ 5-108(b).

The date on which the resulting injury to person or property occurs is the crucial date for determining whether a construction defect cause of action will be permitted to accrue under the 10-year Contractor Statue of Repose. If the injury caused by a construction defect first occurs after the 10-year period, there can be no delayed accrual of a cause of action under the discovery rule.

On the other hand, if the injury caused by a construction defect first occurs within the 10-year period, a cause of action for damages against the responsible contractor can “accrue” under the discovery rule. In such a case, Maryland’s Statute of Repose specifies that the plaintiff has three (3) years to file suit from the date of accrual:

“Upon accrual of a cause of action referred to in subsections (a) and (b) of this section, an action shall be filed within 3 years.”

CJ §5-108(c). This statutory language confirms that claims for damage or injury occurring within the 10-year period, are subject to the general 3-year statute of limitations (CJ §5-101), which also provides 3 years to file suit from the date of accrual.

Filing Suit More Than After 10 Years After Completion of Construction

There is a common misconception that the 10-Year Contractor Statue of Repose prevents the filing of a construction defect lawsuit against a contractor more than 10 years after completion of a building. However, it is the date of the resulting injury, not the date a suit is filed, that is determinative. If the resulting injury to person or property occurs within the 10-year period, a plaintiff  has 3-Years from accrual to file suit for damages against a contractor for construction defects under CJ § 5-108(b) and (c), even if the actual filing of that suit occurs more than 10 years after the completion of the building or other improvement.

Example: An overhead walkway in a hotel lobby collapse and injures a hotel guest on the last day of the 10-year period following completion of construction of the hotel. At this point, the injured hotel guest has three years to file suit against the contractor that constructed the defected defective walkway, meaning that suit could be filed up to 13 years after construction was completed (i.e., the 10-year statute of repose + 3-year statute of limitations = 13 years).

Are Developers Protected from Construction Defect Claims Under Maryland’s 10-Year Contractor Statue of Repose?

No Maryland appellate court has ruled on the issue of whether a developer is protected under the 10-year Contractor Statute of Repose. However, the U.S. District Court for the District of Maryland has ruled in an unreported opinion that the Maryland’s 10-Year Statute of Repose (CJ§ 5-108(b)) does not shield condominium developers from liability for condominium construction defect claims unless they act solely as contractors performing the construction work. See Council of Unit Owners of Milestone Townhouse Condos. v. Beazer Homes, LLC, No. GJH-18-1572, 2019 U.S. Dist. LEXIS 45914 (D. Md. Mar. 20, 2019) (the “Milestone”). Milestone is non-binding on Maryland courts; however, it may foreshadow how Maryland courts would rule on the issue.

In Milestone the Court found that developers’ ongoing responsibilities — selling homes and associated disclosure duties — make them fundamentally different from contractors. While a developer can also function as its own general contractor, the court held that this does not necessarily mean it is entitled to the statute of repose protections granted to “contractors.” The court noted that the developer Beazer not only supervised the construction of the condominium but also marketed and sold units to purchasers. Unlike a general contractor whose obligations typically end when construction is complete, a developer’s involvement often extends into post-construction sales and disclosures.

This rationale could be applied to a commercial developer who constructs a commercial building for itself and then continues to own the building period of time following construction before selling it to a third-party.

Exception to the Maryland’s Statue of Repose (both 10 and 20 year) for construction defect claims against Developers who Retain Possession and Control of an Improvement

There is an exception to Maryland’s 10-Year Contractor Statue of Repose for any person or entity, including developers and subcontractors, who are in possession and control of an improvement at the time,an injury to person or property occurs:

“ This section [i.e., the Statue of Repose] does not apply if …. [t]he defendant was in actual possession and control of the property as owner, tenant, or otherwise when the injury occurred;

CJ §5-108(d)(2)(i) This exception also applies to the broader 20-year statute of repose under CJ §5-108(a). In short, the Statue of Repose does not protect developers from construction defect claims or other dangerous conditions on property they are in possession and control of at the time an injury occurs:

The rationale for this exception is obvious. One who is in possession and control of a property has an ongoing duty for the maintenance, repair and upkeep the property. This duty includes exercising reasonable care to ensure that the property is not dangerous to those persons who foreseeably will be using the property, including tenants, guests, and other invitees. Developers who retained possession and control of properties they construct cannot rely on the 10-year or 20-year statue of repose as a defense to damages claim occurring more than 10 or 20 years after completion of construction. They remain subject to liability, just like any other property owner, for their own negligent construction or failure to maintain the property which results in a dangerous condition. The fact that they may have been a contractor for the property does not protect them.

Example: A developer plans and constructs a mobile home park, which involves installing plumbing to each of the mobile home lots with multiple underground compartments containing valves that control water supply. If a metal plate covering one of the underground compartments collapses due to a construction defect, injuring a Park resident, the Statute of repose would not bar a claim against the Park Owner for defective construction of the underground, plumbing compartments or for negligent failure to maintain the property.

Example: A developer who constructs a strip mall and retains ownership, leasing out spaces for retail purposes, would remain liable under the CJ §5-108(d)(2)(i) possession and control exception if a plaintiff injured on the property as a result of a construction defect roof collapse, no matter when the building was completed. The fact that the developer was also the contractor that built the strip mall for 20 years ago is irrelevant.

Conclusion

Maryland’s 10-Year Contractor Statute of Repose was designed to protect contractors, architects, and engineers from extended liability for delayed accrual of construction defect claims under the “discovery rule.” This includes protection for subcontractors, whose role in a construction project is like a contractor retained to perform a specific task with little or no involvement thereafter. However, the 10-year contractor statue of repose is not intended to protect developers who retain control of, sell, and market commercial properties. Such Developers’ ongoing responsibilities and relationship to the property, continuing beyond construction, arguably make many developers different from contractors and design professionals hired to perform a specific task on a developer property, after which their relationship to the property ends.

While Maryland appellate courts have not definitively ruled on this issue, the Milestone decision and the statutory language suggest that many developers should not receive protection under the 10-year Contractor Statute of Repose unless they can show their role was purely that of a contractor.

410-327-3800 | 301-830-8315

cowielawgroup.com

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Protecting Your Construction Contracts Against Tariff Risks:

Material Escalation Clauses and Other Strategies 

Cowie Law Group, P.C. – Maryland and Washington DC Construction Law Attorneys

The construction industry is particularly vulnerable to market fluctuations, especially regarding material costs. One of the most unpredictable factors impacting construction projects in Maryland and Washington, DC, is the actual and threatened imposition of tariffs on essential building materials such as steel, aluminum, and lumber. These tariffs can drive up costs significantly, leading to budget overruns and financial strain for contractors, suppliers, and project owners.

Given the risks associated with potential tariff increases and broader economic instability, it is crucial for contractors, suppliers, and owners to implement strong contractual protections. One of the most effective tools available to Maryland and Washington DC construction law attorneys is the inclusion of escalation clauses in construction contracts. These provisions help mitigate the financial risks posed by unexpected material price increases.

What is a Construction Contract Escalation Clause?

An escalation clause is a contractual provision that adjusts the contract price based on changes in the cost of specified materials. It helps protect contractors and suppliers from unexpected price surges, ensuring that unforeseen tariff hikes do not jeopardize project profitability or completion timelines.

However, given the current political climate, tariff increases and material cost fluctuations are no longer “unforeseen” events. Therefore, construction law contracts in Maryland and Washington, DC, should be drafted accordingly to anticipate and address these risks.

It is highly recommended that Maryland and Washington DC construction law attorneys review all construction contracts—whether for owners, general contractors, subcontractors, equipment and material suppliers, architects, engineers, or other professionals—to ensure that tariff-related risks are adequately addressed. A proactive legal review can prevent significant financial losses and contractual disputes.

Key Elements of an Effective Escalation Clause

A well-drafted escalation clause in a Maryland or Washington DC construction contract should include:

1. Triggering Events – Clearly define the conditions that activate the clause, such as a percentage increase in material costs or the imposition of new tariffs.
2. Covered Materials – Specify the materials subject to price adjustments, such as steel, aluminum, copper, petroleum-based products, and lumber.
3. Verification Methodology – Detail how cost increases will be measured and verified, using sources like the Producer Price Index (PPI) or supplier pricing data.
4. Adjustment Mechanism – Establish how cost increases will be allocated, whether through direct pass-through pricing, lump-sum adjustments, or a cost-sharing formula.
5. Notice and Documentation Requirements – Set clear guidelines for notifying parties of construction cost increases and documenting price fluctuations.
6. Dispute Resolution Mechanisms – Owners may require a process to verify construction cost increases, including an opportunity to investigate and, if necessary, challenge a notice of cost increase. This could include an owner’s opportunity to source materials from alternative suppliers or right to utilize alternative available construction materials as permitted by Maryland and Washington DC construction law.

Additional Strategies to Manage Tariff Risks

While escalation clauses are crucial, Maryland and Washington DC construction law attorneys recommend incorporating additional risk mitigation strategies, such as:

1. Material Substitution Provisions – Allowing for alternative, non-tariffed materials that meet development and construction project specifications.
2. Advance Procurement & Bulk Purchasing – Secure materials in advance or lock in prices with suppliers before tariffs take effect.
3. Expanded Force Majeure Clauses – Including tariff-related disruptions, whether or not deemed “unforseen,” to serve as legal justifications for contract modifications or extensions.
4. Contingency Budgeting – Allocating reserve funds to cover unexpected material cost increases as well as material cost associated the imposition of new tariffs, whether or not deemed “unexpected” or “unforeseen.”
5. Supplier Agreements – Negotiating long-term supplier contracts to stabilize prices.

Negotiating Escalation Clauses and Risk Allocation

Escalation clauses in Maryland and Washington DC construction contracts often require careful negotiation. While contractors seek cost protections, project owners generally prefer fixed-price contracts to maintain budget certainty. A balanced approach may involve cost-sharing arrangements, escalation caps, or limiting adjustments to high-volatility materials.

For public construction projects in Maryland and Washington, DC, additional regulatory compliance may apply, making it essential to consult with experienced Maryland and Washington DC construction law attorneys to ensure contractual alignment with government procurement regulations.

Conclusion

Tariffs on construction materials continue to pose significant risks to projects in Maryland and Washington, DC. However, by incorporating well-drafted escalation clauses and adopting proactive risk management strategies, construction professionals can mitigate these risks effectively. Given that tariffs are now a foreseeable economic factor, construction law contracts should be structured accordingly.

To ensure that your construction contracts comply with Maryland and Washington DC construction laws, consulting with experienced Maryland and Washington DC construction law attorneys is critical. Proper legal guidance can help prevent costly disputes and protect financial interests in an unpredictable economic landscape.

By implementing these strategies, construction firms, developers, and project owners can maintain financial stability and keep projects on schedule despite external economic pressures.

REAL ESTATE & CONSTRUCTION LAW ATTORNEYS

Maryland & Washington DC

410-327-3800 | 202-670-6289 | 301-830-8315

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Introduction:

As construction projects in Washington DC and Maryland become increasingly complex, the potential for disputes arising from construction defects, delays, and payment issues is ever-present. For owners, developers, general contractors, subcontractors, and design professionals, the need to protect their legal claims while seeking resolution is paramount. Washington DC and Maryland construction law attorneys can play a crucial role in helping the parties navigate these complex issues. In this article, we will explore the concept of tolling agreements and how they can serve as a powerful tool in preserving legal claims while parties seek to resolve construction disputes during the dispute resolution process.

Understanding Tolling Agreements:

A tolling agreement is a legal contract entered into between parties involved in a legal dispute that suspends or “tolls” the running of the applicable statute of limitations or other time limitations for filing legal claims. In construction projects, tolling agreements allow parties involved in a dispute over a construction project to extend the deadline for filing a legal claim, giving them more time to negotiate and resolve the dispute before resorting to litigation or arbitration.

In some cases, a party to a construction contract may be up against a deadline to file a lawsuit, even though the parties are involved in negotiations. Tolling agreements allowing them to continue negotiating, without having to incur the expense of litigation.

Tolling agreements are private contracts that parties enter before the statute of limitations expires. Courts will enforce these contracts to extend the time for filing suit if a lawsuit is ever filed. However, tolling agreement only suspend the statute of limitations as to claims against parties to the tolling agreement.

Understanding Statute of Limitations and Construction Projects:

The statute of limitations refers to the period of time within which a legal claim must be brought in a court of law, or it is forever barred. Generally, the length of time for the statute of limitations is established by applicable state or federal statutes.

Applying the statute of limitations to a given case can be a complex, filled with legal exceptions and required factual determinations. Moreover, there may be several legal claims involved each having different statute of limitation’s periods, and some statutory claims have time periods that cannot be altered by private tolling agreements. For example, in Washington DC and Maryland there is a three-year statute of limitations on negligent construction and breach of construction contract claims arising out of defective construction or design, or failure to complete the contracted work. See Code of the District of Columbia § 12-301 and in Maryland Courts & Judicial Proceedings Article § 5-101. The time for bringing these claims can be extended by a tolling agreement.

On the other hand, statutory payment claims (claims against the property or a source of funds), such as mechanics lien claim or a Miller Act payment bond claim, must be brought within much shorter period specified in the statute, which arguably cannot be extended by a private tolling agreement. This is because some courts hold that the prescribed deadline for filing these statutory payment claims is not an “ordinary” statute of limitations, but rather a “jurisdictional element of the cause of action” or “condition precedent” that must be met to maintain a viable mechanics lien or Miller Act claim. However, as an alternative to a tolling agreement, these type statutory payment claims, if applicable, can be stayed with court permission, affording the parties an opportunity to resolve the payment claim.

Construction Contracts that shorten the Statute of Limitations:

It is important to understand that the statute of limitation may be shortened by construction contract documents. There may be a clause buried in a contract that shortens the statute of limitations on future claims that may arise out of the construction project. Thus, it is important to have a Washington, D.C. or Maryland construction attorney review construction related contracts both prior to entering them, and immediately after a construction project dispute arises.

Preserving Legal Claims for Construction Defects, Delays and Payment Disputes

Construction defects can range from design flaws to faulty workmanship or materials, potentially resulting in substantial damages. Delays are a common issue in construction projects and can lead to significant financial losses. Payment disputes can create severe financial strain on contractors and subcontractors. In such cases, a tolling agreement might make legal sense, and be the answer to reaching a resolution without the expense of litigation by allowing the parties to thoroughly investigate and evaluate the claims, engage in negotiations, and explore potential resolutions while ensuring their rights are protected. Aggrieved parties to a construction project dispute should consult with one of our Washington, DC or Maryland construction law attorneys to discuss their options and determine whether a tolling agreement would be appropriate.

Benefits of Tolling Agreements:

By utilizing tolling agreements, parties involved in construction project disputes can enjoy several key benefits:

1. Preservation of Legal Rights: Tolling agreements provide parties with extended timeframes to resolve disputes, preserving their right to seek legal remedies if needed.
2. Enhanced Negotiation Opportunities: Parties can engage in negotiations or alternative dispute resolution methods without the pressure of an impending statute of limitations expiration.
3. Cost and Time Savings: Tolling agreements can lead to cost and time savings by encouraging parties to seek resolution outside of the courtroom.
4. Preservation of Professional Relationships: By utilizing tolling agreements, parties can maintain a working relationship throughout the dispute resolution process, mitigating the potential strain on future collaborations.

Conclusion:

Tolling agreements can play a crucial role in construction law, enabling owners, developers, general contractors, subcontractors, and design professionals to preserve their legal claims in Washington, D.C. and Maryland construction projects. By temporarily suspending the statute of limitations, parties gain valuable time to explore options for resolution, negotiate settlements, and, if necessary, pursue litigation. Our Washington, DC and Maryland construction law attorney attorneys are committed to providing our clients with the expertise and support they need to protect their interests and successfully navigate the legal aspects of construction disputes. Contact us today to discuss your legal needs and preserve your rights in construction projects.

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Washington DC and Maryland Construction Law Attorneys

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This article discusses the circumstances under which a purchaser of a new home, including condominium unit, may be entitled to recover treble damages, attorney’s fees and litigation expenses incurred in pursuing a DC construction defect case against a developer or builder.

The DC Consumer Protection Procedures Act Allows for the Recovery of Attorney’s Fees, Treble Damages and Litigation Costs in Construction Defect Claims Involving Misrepresentation, Omission and other Unfair or Deceptive Trade Practices

The District of Columbia (“DC”) Consumer Protection Procedures Act (“DC CPPA”) § 28-3905(k)(1)(A) creates a private legal claim (a/k/a “cause of action”) which can be asserted by a home purchaser who is misled by a developer or builder regarding the condition of a defectively constructed home. A successful construction defect plaintiff in DC may be entitled to “treble damages” (i.e., three times the amount of damages it proves), plus recovery of “reasonable attorney’s fees” incurred in prosecuting the DC construction defect claim and “[a]ny other relief the court determines proper,” including non-attorney fee litigation expenses. DC CPPA § 28-3905(k)(2)(A), (B) and (F).

The DC CPPA is a consumer-oriented statute designed to, among other things, protect consumers in DC who are misled in connection with the purchase of consumer “real estate,” including transactions involving the purchase of a single family home or condominium unit. Typically, these cases involve the sale of a newly constructed home containing latent construction defects or an older building that has been renovated and offered for sale to the pubic.

The DC CPPA is a “remedial statute,” intended to be “applied liberally” by the courts protect purchasers of consumer real estate in DC by establishing “an enforceable right to truthful information.” DC CPPA § 28-3901(c). One way in which the DC CPPA protects DC consumers is by allowing for the recovery of treble damages, reasonable attorney’s fees and litigation costs so as to encourage private attorneys to take on consumer misrepresentation cases that otherwise might go unprosecuted, including misleading consumers about the existence of construction defects in newly constructed or renovated homes . District Cablevision Limited Partnership v. Bassin, 828 A.2d 714, 728 (D.C.2003). Another way in which the DC CPPA protects DC consumers is by creating a statutory claim for misrepresentation and omission in the sale of consumer real estate that does not require proof of “intent to deceive” or “duty to disclose” on the part of the selling developer or builder. Saucier v. Countrywide Home Loans, 64 A3d. 428, 442 (D.C.2012); Wetzel v. Capital City Real Estate, LLC, 73 A.3d 1000, 1004-05 (D.C.2013); Grayson v AT&T, 15 A.2d 129, 251 (D.C.2011). For example, to prevail on a claim under the DC CPPA, a consumer need only allege and prove that they suffered damages as a result of being misled by an untruthful or misleading representation of, or failure to state, a material fact. See, e.g., DC CPPA § 28-3904(e) and (f). Thus, there can be liability for misleading a unit owner in the sale of consumer realty, even if the misrepresentation or omission by the developer, builder or their representatives was unintentional.

Factual Scenarios Giving Rise to Consumer Protection Procedures Act Claims in DC Condominium Construction Defect Cases

When a newly constructed residential home contains latent construction defects and other undiscovered conditions that are at odds with what the developer/builder represented about the condition and quality of the home and an unsuspecting home purchaser suffers damage as a result, such as repair costs and property damage, there exists a potential DC CPPA claim against a developer / builder and other responsible parties who made untrue or misleading statements (misrepresentations), or who failed to disclose material facts (omissions), about the true condition of the home. Significantly, is not necessary for a DC CPPA claimant to be in a contractual relationship with the person or entity who made the misrepresentation or omission of material fact in order to bring a claim for violation of the CCPA. Wetzel v. Capital City Real Estate, LLC, 73 A.3d 1000, 1004-06 (D.C.2013).

The representations or omissions of fact must be “material,” such that it would have would be expected to impact the decision of an average consumer in their decision to purchase. See, Saucier v. Countrywide Home Loans, 64 A3d. 428, 440-446 (D.C.2012) (discussing “materiality” under the DC CPPA). For example, if it was represented that a home was constructed in accordance with plans approved by the Department of Consumer and Regulatory Affairs, that representation would be a material representation because it would reasonably be expected to impact a consumer purchasing decision. Likewise, if a developer failed to disclose that the home was not constructed in accordance with the plans approved by the Department of Consumer and Regulatory Affairs, as required by law, that would be a material omission likely to impact a consumer purchasing decision.

Misrepresentations and omissions are examples of “unfair or deceptive trade practices” (discussed below) which are prohibited by the DC CPPA and give rise to a private cause of action or legal claim under DC Code § 28-3905(k)(1)(A). Other forms of conduct which deceive consumers in connection with the purchase of a residential home containing latent construction defects can also constitute “unfair or deceptive trade practices” under the DC CPPA.

Claimants in DC who prove that they were damaged as a result of an “unfair or deceptive trade practice” in connection with the purchase of a defectively constructed or renovated home can seek damages consisting of three times the cost of repairing the construction defects and property damage caused thereby (treble damages), plus reasonable attorney’s fees and litigation costs in a DC construction defect case.. 

Unfair or Deceptive Trade Practices that Violate the DC Consumer Protection Procedures Act in Construction Defect Cases

A violation of the DC CPPA occurs when a person engages in an “unfair or deceptive trade practice.” The DC CPPA contains a non-exclusive list of conduct that constitutes an “unfair or deceptive trade practice.” This conduct includes making a misrepresentation about the condition, or quality of construction or other features of a of a residential home or failing to disclose material facts regarding problems with the home. For example, if a builder or developer represents that it is offering a home for sale that is built according to applicable building codes, and it is not, that is an “unfair or deceptive trade practice.” Likewise, if a builder or developer represents that it has made certain repairs or replacements in connection with a home renovation which it does not make, that is also an unfair or deceptive trade practice.” If a home purchaser suffers actual damages as a result of relying upon such misrepresentations or omissions about the true condition of the property, they may bring a private cause of action under DC CPPA § 28-3905(k)(1)(A) of the DC CPPA. Grayson v. AT&T, 15 A.3d 219, 244 (D.C.2011) (claimant asserting a private cause of action under the DC CPPA must shows an “injury-in-fact” to themselves resulting from the unfair trade practice).

Quoted below are some of the specified unfair or deceptive trade practices under the DC CPPA that experienced construction defect attorneys utilize as a legal basis for asserting a claim for treble damages, attorney’s fees and litigation costs under the DC CPPA in cases where builders or developers have misled home purchasers about the condition of a newly constructed or renovated residential home that contains latent construction defects: 

It shall be a violation of this chapter for any person to engage in an unfair or deceptive trade practice, …including to:

(a) represent that [newly constructed or renovated home or portions thereof] … have … approval, certification, accessories, characteristics, ingredients, uses, benefits, or quantities that they do not have;

* * * * * *

c) represent that [newly constructed or renovated home or portions thereof] are … new if in fact they are deteriorated, altered, reconditioned, reclaimed, or second hand, or have been used;

(d) represent that [newly constructed or renovated home or portions thereof] are of particular standard, quality, grade, style, or model, if in fact they are of another;

(e) misrepresent … a material fact [concerning a newly constructed or renovated home] which has a tendency to mislead;

(e-1) [r]epresent that a transaction [to purchase a newly constructed or renovated home] confers or involves rights … which it does not have or involve… ;

(f) fail to state a material fact [concerning newly constructed or renovated home] if such failure tends to mislead;

(f-1) [u]se innuendo or ambiguity as to a material fact [concerning newly constructed or renovated home], which has a tendency to mislead;

(h) advertise or offer [newly constructed or renovated home] without intent to… sell [them] as advertised or offered;

* * * * * *

(p) falsely state or represent that repairs, alterations, modifications, or servicing have been made [in connection with the renovation / rehabilitation of an existing residential home] and receiving remuneration therefor when they have not been made….”

DC CPPA § 28-3904

Note that some of the above quoted unfair or deceptive trade practices do require proof of intent, while others do not. Compare DC CPPA §28-3904(h) with DC CPPA§28-3904(e) and (f). Note also that the use of the term “including” means that the list of “unfair or deceptive trade practice” enumerated in DC CPPA § 28-3904 (quoted in part above) are examples only and not exclusive. Therefore, other conduct that misleads consumers, not specifically described in the statute, may constitute an “unfair or deceptive trade practice” in violation of the CPPA, including any practices prohibited by other DC statutes and common law. Atwater v. District of Columbia Dep’t of Consumer Regulatory Affairs, 566 A.2d 462, 465-467 (D.C.1989); Osbourne v. Capital City Mortgage Corp., 727 A.2d 322, 325 (D.C.1999); District Cablevision Limited partnership v. Bassin, 828 A.2d 714, 722-23 (D.C.2003). In determining what non specified conduct may constitute an “unfair or deceptive trade practice,” the statute requires DC Courts to give “due consideration and weight … to … interpretation by the Federal Trade Commission and the federal courts.” CCPA § 28-3901(d).

Proving Treble Damages Under the DC Consumer Protection Procedures Act

Treble damages are recoverable in order to encourage private attorneys to take consumer protection act cases. Williams v. First Gov’t Mortgage & Investors Corp., 255 F.3d 738, 745 (D.C. Cir. 2000); District Cablevision Limited partnership v. Bassin, 828 A.2d 714, 728(D.C.2003). As such, treble damages under the CPPA have a remedial purpose and are not designed to punish. Id., at 725-729., Therefore, unlike punitive damages, a claimant is entitled to an award treble damages without having to make a showing of egregious conduct. District Cablevision Limited partnership v. Bassin, 828 A.2d 714, 728 (D.C.2003). Once it is established that a consumer has suffered any monetary damage, such as the cost of repairing defective construction and property damage caused thereby, the DC CPPA authorizes courts to treble those damages without any further findings. Williams v. First Gov’t Mortgage & Investors Corp., 255 F.3d 738, 745 (D.C. Cir. 2000); Byrd v. Jackson, 902 A.2d 778, 782 (D.C.2006); District Cablevision Limited partnership v. Bassin, 828 A.2d 714, 729 (D.C.2003).

Proving Attorney’s Fees and Litigation Costs under the DC Consumer Protection Procedures

Generally, parties are not entitled to recover their attorney’s fees and other litigation expenses in a DC construction defect case absent a contractual agreement or statute which specifically allows for the recovery of attorneys fees and expenses. The DC CPPA is a statute that permits a person seeking relief from an unfair or deceptive trade practice to recover their “reasonable attorney’s fees” and “any other relief which the court deems proper.” DC CPPA § 28-3905(k)(2)(B) and (F). To the extent that a person seeking redress under the DC CPPA has litigation expenses, other than attorney’s fees (e.g., court filing fees, expert witness fees, process server fees, deposition expenses), the court may award such expenses under the provision of the DC CPPA that permits a claimant to recover “[a]ny other relief which the court determines proper.” CPPA § 28-3905(k)(2) (F) ; In Re Inphonic, Inc., Wireless Phone Rebate Litigation, United States District Court for the District of Columbia, No. 06-0507 (ESH), Memorandum Opinion and Order, 5-6 (MDL docket number 1792).

Allowing for the recovery of reasonable attorney’s fees is designed to encourage private attorneys to take consumer protection act cases. Williams v. First Gov’t Mortgage & Investors Corp., 255 F.3d 738, 745 (D.C. Cir. 2000). Therefore, to ensure that this purpose is not defeated, DC Courts have rejected the argument that the amount of a claimant’s “reasonable attorneys fee” claim can be attacked as unreasonable solely because the attorney fee in question is disproportionate to, or even far greater than, the amount of compensatory damages actually awarded. Williams v. First Gov’t Mortgage & Investors Corp., 255 F.3d 738, 747 (D.C. Cir. 2000) (rejecting the “rule of proportionality” with regard to attorney’s fees awarded under the DC CPPA). Allowing attorney fees awards to be defeated or reduced on grounds that they are disproportionate to the damages recovered, would discourage, not encourage, private attorneys from taking consumer protection cases, making it “‘difficult, if not impossible for individuals with meritorious … claims but relatively small potential damages to obtain redress from the courts.’” Id.; In Re Inphonic, Inc., Wireless Phone Rebate Litigation, United States District Court for the District of Columbia, No. 06-0507 (ESH), Memorandum Opinion and Order, 15-16 (MDL docket number 1792).

It is also not a ground for reducing the amount of reasonable attorney’s that a claimant’s attorney’s fees are attributable to proving other, non-DC CPPA claims in a DC construction defect case, such as negligent misrepresentation, breach of contract, negligent construction, breach of implied warranty, breach of the statutory condominium warranty against structural defects. Rather, all reasonable attorney’s fees pursuing a case are recoverable so long as the other claims sufficiently overlap the DC CPPA claim and arise out of a common core of facts such as the defective construction or renovation of a condominium. Williams v. First Gov’t Mortgage & Investors Corp., 255 F.3d 738, 746-747 (D.C. Cir. 2000); In Re Inphonic, Inc., Wireless Phone Rebate Litigation, United States District Court for the District of Columbia, No. 06-0507 (ESH), Memorandum Opinion and Order, 15-16 (MDL docket number 1792). This applies even if the claimant is not successful on the other, non-DC CPPA claims. Williams v. First Gov’t Mortgage & Investors Corp., 255 F.3d 738, 746 (D.C. Cir. 2000) ( “‘fees for time spent on claims that ultimately were unsuccessful should be excluded only when the claims are distinctly different in all respects, both legal and factual from plaintiffs successful claims’”).

Proving Punitive Damages Under the DC Consumer Protection Procedures Act

If it can be proven with “clear and convincing evidence that an unfair or deceptive trade practice was perpetrated on a purchaser of a defectively constructed home, and the conduct involved constituted  “outrageous or egregious” wrongdoing in which a builder or developer or its representatives acted with “evil motive, actual malice or willful disregard for [the home purchaser’s] rights,” then a court may award punitive damages under DC CPPA § 28-3905(k)(2)(C), in addition to treble damages. District Cablevision Limited partnership v. Bassin, 828 A.2d 714, 725 -729 (D.C.2003) (under the CPPA, punitive damages are designed to punish intentional wrongdoers and thus cannot be awarded without the requisite evidentiary showing, whereas treble damages are remedial in nature and require no evidentiary showing).

Statute of Limitations for Violation of the DC Consumer Protection Procedures Act in a Construction Defect Case

The statute of limitations is the time within which a legal claim must be brought in a court of law or it will be forever barred. A claim under the DC CPPA has a 3-year statute of limitations under DC Code §12-301(8), which runs from the date that the claim “accrues.” Under the “discovery rule,” a claim generally “accrues” when the claimant knows or should know that that she/he has suffered injury or damage as a result of an unfair trade practice. Bradford v. George Washington University, 249 F.Supp.3d 325, 334-335 (D.C.2017). Unless an exception to the statue limitations applies, suit for violation of the DC CPPA must be filed within three years of the date the claim accrues or it will be time-barred. Plenzac v. Equity Residential Management, L.L.C., 320 F. Supp.3d 99, 103 (2018). Thus, in the absence of an exception to the statute of limitations, or other facts making non-discovery reasonable, such as purported repairs by the builder, if a purchaser of a new home experiences severe flooding or roof leaks following the first rain event after moving in, it can be argued that the home purchaser has three years from that date to file suite. Parties can enter into tolling agreement to stop the statute of limitations from running while they negotiate. Talking agreemeParties can enter into a tolling agreement to stop the statute of limitations from running while they attempt to negotiate. A resolution of their dispute. Tolling Agreements are private agreements between parties that courts will enforce among those who are signatories.

Note about CPPA Definition of “Goods and Services” 

Where the statutory language quoted above refers “goods and services,” I have inserted in brackets, the terms “newly constructed or renovated home” which is the subject matter of this article. The definition of “goods and services,” under DC CPPA §28-3901(a)(7), includes “real estate transactions, and consumer services of all types,” thereby including the sale of newly constructed or renovated residential homes, including residential condominiums. See Saucier v. Countrywide Home Loans, 64 A3d. 428, 442 (D.C.2012) (suit by condominium association for violation of DC CPPA arising out of construction defects); Wetzel v. Capital City Real Estate, LLC, 73 A.3d 1000, 1004-05 (D.C.2013) (suit by condominium unit owner for violation of CPPA arising out of construction defects).

Note about 2018 Amendment to the District of Columbia Consumer Protection Procedures Act: New terminology (“Unfair and Deceptive Trade Practices”) and Federal Trade Commission Precedent

Effective July 17, 2018, the DC CPPA was amended to make it consistent with similar statutes in other states and federal trade commission law. Under the amendment phrase “unlawful trade practices” was replaced with “unfair and deceptive trade practices.” This amendment was intended to make the CPP a consistent with similar statutes in other jurisdictions, such as Maryland, and federal trade commission law. The amendment also provides that that courts should consider interpretations by the Federal Trade Commission and federal courts when interpreting or deciding what action to take with regard to “unfair or deceptive act or practice.” DC CPPA §28-3901(d).

This is the terminology and interpretation guidance used in many state consumer protection acts, including Maryland’s Consumer Protection Act, Maryland Commercial Law Article §§ 13-105 and 13-301. For example, The Maryland Court of Appeals, relying upon “the interpretations of the Federal Trade Commission Act by the Federal Trade Commission and the federal courts,” held that  “[i]mplicit in any advertisement and rental of an apartment is the representation that the leasing of the apartment is lawful” and in compliance with licensing laws. Golt v. Phillips, 308 Md. 1, 9-10, fn. 3 and accompanying text (Md. 1986) (“[f]or consumer protection purposes, the meaning of any statement or representation is determined not only by what is explicitly stated, but also by what is reasonably implied”). Likewise, it is implicit in the sale of a newly constructed home in the District of Columbia that the condominium complies with applicable building codes and laws requiring compliance with approved plans and specifications submitted to the Department of Consumer and Regulatory Affairs. For an article discussing the Maryland Consumer Protection Act, See “Condominium Association’s Right to Recover Attorney’s Fees in Construction Defect Cases,” by Nicholas D. Cowie.

Note About Author

Nicholas D. Cowie is a construction lawyer and construction defect litigation attorney practicing law throughout Washington DC and the State of Maryland. Mr. Cowie established the “Construction Law” course at the University of Baltimore School of Law where he served as an adjunct professor of construction law. Mr. Cowie is highly regarded for his knowledge and practice of construction law and construction defect litigation. The law firm of Cowie Law Group, P.C. is known for handling construction law and construction litigation matters as well as complex commercial litigation, products liability claims and complex commercial / business law and litigation matters. 

Contact Construction Defect Attorney Nicholas D. Cowie:

For more information about the DC Consumer Protection Procedures Act, construction defect claims and recovering treble damages, reasonable attorney’s fees and litigation costs in DC construction defect claims, use our contact form or contact Nicholas D. Cowie directly at ndcowie@cowielawgroup.com

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District of Columbia Mechanic’s Lien Law in A Nutshell 

The District of Columbia Mechanic’s Lien statute provides general contractors and some subcontractors with a powerful statutory remedy to recover monies owed for work or material supplied in the construction, improvement or repair of a building located in the District of Columbia.

A District of Columbia mechanic’s lien claim, if properly enforced pursuant to the statute, results in the establishment of a lien against the owner’s real property where the unpaid construction work and materials were provided. The lien attaches to the land and buildings thereon and can be used to force a sale of the owner’s interest therein as a source of monetary funds to satisfy the amount due. Subject to exceptions discussed below, the lien amount equals the unpaid amount owed under the contract, or if no written contract, the reasonable value of the unpaid portion of the project at issue.

A mechanic’s lien claim against an owner’s property is not the sole remedy for non-payment of construction services and/or materials provided in the District of Columbia. General contractors and subcontractors may simultaneously pursue any other legal claims they may have such as breach of contract against the owner or other contractors on the project. 

The advantage of a District of Columbia mechanic’s lien claim is the immediate legal establishment of a lien by the mere filing of the appropriate papers. The lien encumbers the owner’s property which acts as powerful leverage motiving expedient payment as a precondition to having the lien removed. A breach of contract claim, on the other hand, results only in a legal judgement against a defendant (not its property) after pursuing legal proceedings and ultimately succeeding at trial or arbitration. The resulting judgement must then be enforced against the defendant’s property through and entirely new legal process

The History and Rationale for the District of Columbia Mechanic’s Lien Law 

The original rationale in this country for adopting a mechanic’s lien law was to encourage builders in the 1790’s to become involved in the construction of the new capital of the United States (later called “Washington” after President George Washington) located within the newly created “the District of Columbia”, now generally referred to as “Washington DC”. 

On July 9, 1790, the first United States Congress passed the so called “Residence Act” approving the creation of a capital along the Potomac River  within a “district of territory” to be selected by then President George Washington. The Act was officially titled “An Act for Establishing the Temporary and Permanent Seat of the Government of the United States.” Shortly thereafter, in 1791, the State of Maryland, which, at that time, included the area where Washington DC is now located, passed the first Mechanics’ Lien Act in this country. The legislation was introduced in the Maryland Legislature by Thomas Jefferson and would apply in the District of Columbia on the Marland side of the Potomac because the Residence Act specified that the law of Maryland would remain in effect within the portions of newly created portion District of Columbia carved out of Maryland, “until Congress shall otherwise by law provide.” See “Mechanics’ Liens in Maryland” by Nicholas D. Cowie For an article discussing current mechanics’ lien law in the state of Maryland.

At the time Thomas Jefferson introduced the mechanic’s lien legislation there were no automobiles and the term “mechanic” generally referred to builders and skilled tradesmen such as masons and carpenters. The federal government’s credit was not as good back then as it is today. Therefore, creating a law that would allow for the establishment of a lien on a building under construction was, and still is, a means of offering security to the contractors and subcontractors who provide labor and materials prior to payment.

Who Can Assert a District of Columbia Mechanic’s Lien Claim: “Contractors”, “Subcontractors” and “Sub-subcontractors”?

Under the District of Columbia mechanic’s lien law, the term “contractor” means the contractor who has a direct contract with the property owner to perform or supply the construction work, materials, repairs or other improvements in question. DC Code §40–301.01. This is the entity who would in common parlance be referred to as the “general contractor” who, in turn, may enter into subcontracts with other trades (e.g., masons, electricians, HVAC contractors, etc.) as necessary to complete to work. The term “subcontractor,” as used herein, refers to any person “directly employed by” the owner’s contractor, such as a subcontractor, material supplier, or laborer. DC Code §40–303.01.

Only contractors (those who contract directly with the owner) and subcontractors (those who contract directly with an owners’ contractor) are entitled to seek a mechanic’s lien under the District of Columbia mechanic’s lien law. DC Code §§40–301.01 and 40–303.01. Sub-subcontractors (those subcontractors who are not in direct contractual privity with the owner’s contractor) do not have lien rights under the Washington DC mechanic’s lien law. DC Code §40–303.01.

Attachment and Preservation of a District of Columbia Mechanic’s Lien 

A District of Columbia mechanic’s lien attaches at the time of the commencement of the construction of the building. This early commencement date gives a District of Columbia mechanic’s lien priority in time over many types of subsequently created liens that attached to the property. DC Code §40-301.01. For example, a lien arising out of the recording of a judgment or a second mortgage occurring after construction or renovation of the building was commenced would not have priority over a properly enforced a District of Columbia mechanic’s lien. However, the mechanic’s lien will terminate unless there is timely compliance with the requirements of the District of Columbia mechanic’s lien law discussed below, including filing of a notice of intent to enforce a mechanic’s lien followed by the filing of a lawsuit to enforce the mechanic’s lien, if necessary. In many cases, the mere filing of a timely notice of intent to enforce a mechanic’s lien will result in a settlement of the payment dispute without the contractor or subcontractor ever having to file of a lawsuit to enforce the mechanic’s lien.

Notice of Intent to Enforce a District of Columbia Mechanic’s Lien – 90 days

Requirements for contractors and subcontractors

A notice of intent to enforce mechanic’s lien must be filed and recorded with the Recorder of Deeds of the District of Columbia no later than 90 days after the completion or termination of the project, whichever occurs earlier. DC Code §40-301.02(a)(1). The notice must identify the property subject to the lien and the amount due as well as contain the specified information and documentation required by the Washington DC mechanics’ lien law as set forth in Section 40-301.02(b) of the District of Columbia Code. The Recorder of Deeds office publishes a form for this purpose called “Notice of Mechanic’s Lien.” Failure to timely record the notice will result in the termination of lien rights. DC Code §40-301.02(a)(1). 

Additionally, within five (5) business days after recording the notice of intent, a copy must be sent by certified mail to the owner of the property. DC Code §40-301.02(a)(2). If the certified mail is returned unclaimed or undelivered, a copy of the recorded notice of mechanic’s lien must be posted on the property in a location generally visible from an entry point. DC Code §40-301.02(a)(2).

Additional Delivery Requirement for subcontractors

In addition to certified mail delivery discussed above, subcontractors must also serve an additional notice of intent to enforce mechanic’s lien on the owner by leaving a copy thereof with said owner or his agent, if said owner or agent is a resident of the District, or if neither can be found, by posting the [notice] on the premises.” DC Code §40-303.03. An owner typically has no communication with subcontractors; so presumably, this additional form of delivery is to ensure the owner gets notice of its contractor’s failure to pay a subcontractor.

Be Specific in Notice of Intent to File Mechanics’ Lien Documentation

The notice of intent to enforce mechanic’s lien must contain specific information and documentation as specified in the District of Columbia Mechanic’s Lien Law. A notice of intent is “void” if it does not contain the information specified by the Washington DC Mechanic’s Lien Act. DC Code §40-301.02(a)(1).  Failure to timely include all the require information and documentation can prevent a contractor or subcontractor from obtaining a lien. DC Code §40-301.02(a)(1).  

Owner’s Defense of Payment Before Receipt of Subcontractor Notice

Until the property owner receives the required written notice that a subcontractor has not been paid (i.e., the subcontractor’s notice of intent to enforce mechanic’s lien), the owner can make payments to its contractor and rely upon the “defense of payment” to defeat a subcontractor’s mechanic’s lien claim. DC Code §40-303.02. For example, if prior to receiving a subcontractor’s notice of intent, the owner has already paid the contractor in full (and the amount of payment is not disputed), then the subcontractor is not  entitled to a mechanic’s lien on the property. DC Code §40-303.02(b). Therefore, an unpaid subcontractor will typically want to provide the owner with the required notice as soon as possible while monies are still owed to the contractor.

Owner’s Duty to Withhold Payment After Receipt of Subcontractor’s Notice

Once the subcontractor provides the owner with required notice of intent to file mechanic’s lien, the owner has a duty to withhold payments owed the contractor in an amount sufficient to satisfy the contractor’s debts to the subcontractor. DC Code §40-303.04. Thereafter, the property will be subject to a subcontractor mechanic’s lien up to the amount still owed the contractor at the time the owner received the subcontractor’s notice. DC Code §40-303.04. Payments made to the contractor by the owner after its receipt of the subcontractor’s notice of intent may be deemed to have been made in bad faith. DC Code §40-303.03(b).

 Suit to Enforce Mechanic’s Lien (180 days) and Notice of Pendency (190 days)

In order to enforce a District of Columbia mechanic’s lien, a contractor or subcontractor must also file a lawsuit seeking to enforce the mechanic’s lien in court within 180 days after the date that the Notice of Intent to Enforce Mechanic’s Lien was recorded in the office of the Recorder of Deeds. DC Code §40-303.08 and 40-303.13(a)(1)(A). Additionally, a notice of pendency of the lawsuit (in latin: “lis pendens”) must be recorded in the land records office within 10 days of filing suit in order to put third parties on constructive notice that the property is the subject of a lawsuit to enforce a mechanic’s lien. DC Code §40-303.13(a)(1)(B). A lis pendens will show up in a title search, thereby notifying perspective purchasers prior to settling on the property. Requirements for filing a Notice of Pendency of Action are set forth DC Code §42-1207. The failure to timely file the lawsuit and record a notice of pendency of action will cause the lien to terminate. DC Code §40-303.13(a)(2). The lawsuit, also referred to as a “bill in equity,” must contain specific allegations as set forth in the Washington DC Mechanic’s Lien law. DC Code §40-303.08.

Subcontractors take Subject to Contractual Defenses in the Owner-Contractor Agreement

A subcontractor’s District of Columbia mechanic’s lien claim is subject to defenses that the owner has against the contractor under the terms and conditions of the owners contract with the contractor. DC Code §40-303.02(a). As such, a subcontractor’s mechanic’s lien claim against an owner’s property is generally only as strong as the rights of the contractor against the owner. For example, if the contractor has breached its contract with the owner such that a lesser amount is due the contractor than originally agreed upon, this owner defense against the contractor carries over to reduce the allowed maximum amount of a a subcontractor’s mechanics lien claim. DC Code §40-303.02(a). A contractor, however, cannot agree with the owner to waive a subcontractor’s right to make a mechanic’s lien claim. DC Code §40-303.02(a). Thus, in defending against a subcontractor’s mechanic’s lien claim, an owner cannot defend the claim by relying on a contractual provision whereby the contractor agrees to waive its subcontractor’s right to bring a mechanic’s lien claim. Likewise, an owner cannot rely upon a “pay if paid” or “pay when paid” clause as a defense to a mechanics lien claim. See article by Nicholas D Cowie on “Pay if Paid” and “Pay when Paid” clauses and how they affect subcontractor payment claims in Maryland and Washington DC: https://cowielawgroup.com/subcontractor-%EF%BB%BFpay-if-paid-pay-when-paid-clauses-maryland-washington-dc-prevention-doctrine-mechanics-liens-payment-bonds-little-miller-act-claims/   

Subcontractor’s Right to Know Contract Terms

Subcontractors have a right to demand that an owner provide a statement of the terms of the contract between the owner and the contractor and the amount due thereunder. DC Code §40-303.05. This demand can be made by the subcontractor at the same time it provides the owner with the notice of intent to file mechanic’s lien. Failure of the owner to respond to such a demand can result in liability to the owner for payments made to the contractor after receipt of the demand. DC Code §40-303.05.

Mechanic’s Lien Waivers Following Completion of Work

A contractor may waive its mechanic’s lien rights in a construction contract with the owner. However, under the Washington DC mechanic’s lien law, a waiver of liens in the contract between the owner and the contractor is not effective against a subcontractor. DC Code §40-303.02(a).

An owner can, however, require a contractor to obtain signed mechanic’s lien releases from all subcontractors and material suppliers on a project for work performed and materials provided. These releases can be made part of the contract or obtained upon completion of the subcontractor’s work or provision of materials, or a portion thereof, and, in either case, will provide some assurance that payment was made and protect owners and contractors from subcontractor mechanic’s lien claims. 

Decree of Sale

If the lawsuit establishes that the contractor or subcontractor is entitled to enforce a mechanic’s lien, the court will issue a decree of sale of the land and premises of the owner to satisfy the lien. DC Code §40-303.09.

Deficiency Judgment

If the proceeds from the sale of the property subject to the lien is insufficient to satisfy the lien amount, the court may enter a personal judgment against the owner or general contractor for the balance of the lien amount. The personal judgment in favor of the mechanics’ lien claimant will be against the party who contracted for labor and materials furnished, either the owner and/or owner’s contractor as the case may be. §40-303.20.

Mechanic’s Lien Undertaking “Bonding Off the Lien”

Before or after the filing of a suit to enforce a mechanic’s lien in the District of Columbia, an owner may have the lien released pending outcome of the suit by paying into the court the lien amount claimed plus interest and costs, or filing a mechanic’s lien “undertaking”, which involves having a surety or sureties undertake an obligation to pay any judgment that may be recovered in the suit to enforce the mechanics’ lien, including interests and costs, which is typically done by posting a bond. DC Code §§40–303.16. and 40–303.17. The Recorder of Deeds Office publishes a form entitled “Mechanic’s Lien Undertaking.” Owners will sometimes file a Mechanics Lien Undertaking so that they can convey good tile to the property, despite the existence of a pending mechanics’ lien claim.

Release of Mechanic’s Lien

If the mechanics lien dispute is resolved, the mechanic’s lien on the property can be released by the mechanics’ lien claimant by filing a Mechanics Lien Release. The Recorder of Deeds Office publishes a form entitled “Release of Mechanic’s Lien” that can be utilized for this purpose. 

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Note about spelling of term “Mechanic’s Lien” 

The District of Columbia Mechanic’s Lien Act and Maryland Mechanics’ Lien Acts spell the term “mechanics lien” differently by placement of an apostrophe. “Mechanics’ Lien” is the spelling used in the Annotated Code of Maryland and “Mechanic’s Lien” is the spelling used in the Code of the District of Columbia (emphasis added). Thus, the placement of the apostrophe in this article has been adjusted depending on whether reference is to the Maryland or DC Act.

DISCLAIMER REGARDING LEGAL ADVICE APPLICABLE TO A PARTICULAR CASE: This article should not be considered a legal opinion that can be relied upon for purposes of taking or not taking action in any particular situation. If you are seeking to rely upon legal advice regarding mechanic’s lien claims, you should consult with and retain a qualified attorney to analyze the specific facts of your case and provide legal opinions and legal advice applicable to your particular situation.

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Newly constructed and newly converted condominiums in Maryland often contain concealed or “latent” construction defects. This is often a consequence of lack of proper construction coordination and sequencing of subcontactors and trades, lack of supervision, unskilled labor, faulty materials and poor design or specification. Left undetected and unrepaired, latent defects stemming from the original construction of a condominium can cause extensive damage over time, requiring condominium associations to assess their members for unanticipated repair costs that could have been avoided by making timely developer warranty claims.  

This article provides a general overview of how Maryland condominium associations transitioning from developer control can proactively identify and resolve construction defect claims with condominium developers and builders before warranties and other legal rights expire. This proactive approach typically results in an amicable resolution without the need for litigation.

A. Condominium Association Responsibility for Timely Evaluation of Common Element Construction Following Period of Developer Control

Condominium associations are responsible for overseeing and maintaining condominium common element facilities (e.g., roofs, exterior walls, foundations, lobbies, common hallways, elevators, surrounding grounds, and common mechanical, electrical, and plumbing systems). Following the period of developer control, it is incumbent upon a condominium association’s first unit owner elected board of directors to evaluate the construction of the condominium common element facilities to identify construction deficiencies so they can be brought to the developer’s attention for repair while warranties and other legal rights are still in effect.

An early identification of construction defects also assists the condominium association in determining whether the original budgeted reserve fund established by the condominium during the period of developer control is adequate to cover the future cost of maintaining, repairing, and ultimately replacing the common element facilities. A reserve fund is based on an underlying assumption that the common element facilities of the condominium are constructed properly and will have a normal life expectancy (e.g., a 30 roof, 45-year exterior siding, etc.). An evaluation of construction allows a transitioning condominium association to independently verify these assumptions in the original reserve budget created by the developer. For example, if the roof of a newly constructed condominium is found to be leaking and in need of immediate replacement due to a defect in the original construction, then a budget based on a projected roof replacement in thirty (30) years is grossly insufficient.

B.  The Transition Deficiency Study – Evaluating Construction and Identifying Construction Defects

Following transition from developer control, condominium associations should hire an engineering or architectural firm to perform a “transition deficiency study” (also known in the community association industry as a “transition study,” “transition report,” “deficiency report,” “warranty analysis,” “construction analysis,” or “construction defect report”). The purpose of the transition deficiency study is to evaluate the construction of the common elements, identify construction defects, and set forth the findings in a written report.

The transition deficiency study is intended to provide a useful and comprehensive list of construction defects prepared by a construction expert, citing specific violations of building codes, approved plans and specifications, and other applicable industry standards. The condominium association’s attorney can then use the study to put the developer on notice of the defects and request repairs under applicable warranties. When construction defects are identified early in this manner, before they can cause serious damage to the building, the repair expense is typically substantially less, making it easier to negotiate an amicable resolution with the developer. Ideally, at the end of the transition process, all construction defects will be identified and properly corrected by the condominium developer so that the condominium association can then establish an accurate reserve fund based on common element facilities that have a normal life expectancy.

Retaining the services of a qualified consultant to inspect construction of common element facilities is important because some construction defects that occur during the original construction or conversion of a condominium are concealed behind a building’s exterior facade or may simply not be recognized as a problem to average homeowner purchasers when they acquire their units. Left undiscovered and unrepaired, latent construction defects can result in extensive hidden building damage over time, resulting in unanticipated repair expenses that can wreak havoc on an Association’s financial condition, requiring it to borrow money and assess unit owners. For example, the failure to properly flash windows, balcony beam penetrations, and other openings in a building envelope can cause extensive and insidious water damage within the exterior building walls of a condominium causing rotting of wood sheathing and structural framing. The damage may only come to light when mold or water stains begin to appear years later within the interior living space of units. A properly performed and utilized transition deficiency study greatly reduces the risk that a condominium association’s unit owner members will be assessed significant amounts for unexpected repairs caused by hidden or “latent” construction defects caused during construction.

For more information about transition deficiency studies, see article: “Transition Studies – Condos & HOAS Should Identify Construction Defects Before Warranties Expire.”

C. Meeting Notice Deadlines and Preserving Warranty Claims – The Importance of Early Consultation with an Experienced Condominium Construction Defect Attorney

In addition to seeking proposals for conducting a transition deficiency study, the first unit owner-elected board following transition from developer control should also obtain a complimentary consultation with an experienced condominium transition attorney with substantial experience representing condominiums in construction defect matters. Such an attorney can advise the board of applicable deadlines necessary to avoid waiving warranty rights and other legal claims and will provide a timeline for the association to follow that will ensure that the transition deficiency study is obtained in a timely manner, well within applicable notice, warranty, and statute of limitations time periods, so that any serious construction defects identified in the study can be brought to the developer for repair within the applicable warranty periods.

D. Condominium Association Standing to Bring Representative Claims on Behalf of Unit Owners

A condominium association in Maryland has the legal authority to assert warranty and other construction defect legal claims in its own name and in a representative capacity on behalf of two or more of its unit owner members with regard to construction defects affecting the condominium. Maryland Condominium Act (“MD Condo Act’) § 11-109(d)(4) and (19). Developers often insert language into governing documents that purport to deprive the association of its ability to pursue common element defect claims on behalf of unit owner members. As a practical matter, it is the continuing ability of a condominium association to assert these legal claims that motivates condominium developers and builders to repair construction defects. Therefore it is important to have experienced construction defect legal counsel review governing documents to identify such issues early in the transition process and to take necessary counter-measures to preserving the legal claims.

E. Legal Claims for Construction Defects That Can Be Asserted by a Condominium Association

Below is an overview of some construction defect legal claims that can be asserted in Maryland by a condominium association in its own name or on behalf of its unit owner members against condominium developers and/or other responsible parties. In the event it should ever become necessary to litigate, each of these legal claims will have its own legal strengths and weaknesses. Some legal claims may cover certain construction defects or afford monetary damages that others claims do not. It is the ability to assert claims that enables an association to bargain from a position of strength, thereby increasing the likelihood of a favorable resolution without litigation Therefore, it behooves the association to make sure it does not waive any viable legal claims while negotiating with a developer by allowing the statute of limitations to run or by failing to give proper notice.

• The Statutory Implied Warranty on the Common Elements

In Maryland, there is an implied warranty created by the Maryland Condominium Act that runs from the developer to a condominium association. MD Condo Act § 11-131(d). The common element warranty applies to the roofs, foundations, external and supporting walls, mechanical, electrical, and plumbing systems, and other structural elements. MD Condo Act § 11-131(d)(1). The warranty is implied by statute and need not be in writing. The statute requires that the developer be responsible for correcting any defect in materials or workmanship, and that the specified common elements are within acceptable industry standards in effect when the building was constructed. MD Condo Act § 11-131(d)(2). The Maryland Condominium Act expressly gives a condominium association authority to assert the warranty on the common elements in its own name. MD Condo Act § 11-109(d)(19). A suit for enforcement of the warranty on the “general” common element warranty can be brought only by the council of unit owners. MD Condo Act § 11-131(d)(4). A suit for enforcement of the warranty on the “limited” common elements may be brought by the condominium association or any unit owner to whose use it is reserved. MD Condo Act § 11-131(d)(4).

Notice of common element construction defects must be given to the condominium developer within the warranty period. MD Condo Act § 11-131(e). The warranty period extends for three years and in some cases longer (discussed below) There is a one year statute of limitations such that a lawsuit for enforcement of the warranty on the common elements must be brought within one year of the expiration of the warranty period if the developer fails to correct the defects. MD Condo Act § 11-131(e). In order to determine the deadline for giving notice and when the one year statute of limitations commences, one must first determine when the warranty period expires. As a general rule, the warranty period expires on the latest of the following three alternatives:

(i) Three years from the first transfer of title to a unit at the condominium;

(ii) As to common elements that are not completed at the transfer of title, three years from the completion of the common element in question and/or its availability for use by all unit owners, whichever occurs later; or

(iii) Two years from the date on which unit owners, other than the developer, take majority control over the association board of directors.

The statute is designed so that the warranty period can never expire shorter than two years after the developer turns over control of the association to non-developer unit owners.

• Title 10 Implied and Express Warranties in the Sale of New Homes

In Maryland there is an implied and an express warranty in the sale of a newly constructed home that is created by Title 10 of the Maryland Real Property Article (“RP”) (a/k/a “Title 10 Implied Warranties”). See RP § 10-203 (implied warranty) and RP § 10-202 (express warranty). These warranties apply to condominium developers and are applicable to both units and common elements, also apply to newly converted condominiums (i.e., older buildings that have been renovated and converted into condominiums.) MD Condo Act § 11-131(b).. Title 10 Implied and Express warranty claims belong to each unit owner individually (as do the rest of the claims discussed below), but can be asserted on behalf of two or more unit owners by the condominium association if the claim involves “matters affecting the condominium.”

Under the Title 10 Implied warranty, the builder/seller of a condominium unit warrants that the unit and its common element improvements are free from faulty materials, constructed in accordance with sound engineering standards, constructed in a workmanlike manner, and fit for habitation. RP § 10-203(a). The warranty is implied by statute and need not be stated in writing.

The Title 10 Express Warranties are not implied and must be based on written statements about the condominium or a sample or model that is made as part of the basis of the bargain to purchase a condominium unit. Typically, these express warranties refer to written promises contained in a contract, but also can arise from written statements in sales brochures, public offering statements, advertisements, model home depictions, drawings, and other written or pictorial descriptions of the condominium. A typical express on warranty might be a promise to construct a condominium in accordance with applicable building codes or a promise to build a clubhouse with swimming pool, or some other important part of the decision to purchase a unit at the condominium. The express warranty is breached if the unit or common elements fail to conform to the written promise or description, or fail to sufficiently conform to a model or sample. RP § 10-202(a).

The Title 10 Implied and Express warranties do not expire on the subsequent sale of a condominium unit by the original purchaser to a subsequent purchaser. Instead, these warranties continue to protect the subsequent purchaser until the warranty for the original purchaser would have otherwise expired had the original purchaser not sold their unit. RP § 10-204(c).

Determining when the warranty period for each unit owner commences and the statute of limitations expires can be an extremely complex and requires a fact-based analysis. In very general terms, however, the time for asserting Title 10 Implied or Express Warranty Claims in a court of law (including calculation of both warranty period and statute of limitations) can be as short as two years and as long as four years from the date of a unit owner settlement, depending on a number of factors, such as the date on which the defects were discovered, whether they are structural defects or non-structural defects, and when the unit owner took possession of the unit. RP § 10-204. The warranty period for a Title 10 Express warranty can be longer than a Title 10 Implied warranty if the express warranty specifies a longer period of time (e.g., a “five-year roof”).

• Negligent Construction

Condominium developers, building contractors and subcontractors, and, in some cases, their officers, members and employees, can be held liable for negligently constructing or converting a condominium building. A negligent construction claim usually arises out of the use of improper construction methods that deviate from applicable building codes, approved plans and specifications, manufacturer’s instructions and other industry standards. Use of faulty or defective materials, failure to supervise, failure to inspect and defective design can also be a basis for a negligent construction claim. Maryland’s version of the so-called “economic loss rule” bars many negligent construction defect claims where a party seeks only the cost of repairing a construction defect. However, there are exceptions. In general terms, the rule does not apply in the following situations: (1) where both parties are in a close business or transactional relationship or other “special relationship” akin to a contractual privity (a/k/a “an intimate nexus between the parties”); (2) where the defect in question creates “a serious risk of death or personal injury;” or (3) where the damages resulting from the negligence do not fall within “the defined definition of economic loss.”

The statute of limitations for a negligent construction claim in Maryland is three years. Maryland Courts & Judicial Proceedings Article (“CJ”) § 5-101. Under the discovery rule adopted by Maryland Courts, the three-year statute of limitations on a negligent claim runs from the date when a claimant actually knows, or by the exercise of reasonable diligence should know, of the injury, or damage giving rise to their legal claim (hereinafter referred to as “discovery”).

• Breach of Contract and Common Law Implied Warranties

Maryland recognizes a legal claim for breach of express contractual promises, such as a promise in a contract of sale to repair construction defects brought to the developer’s attention. Maryland also recognizes a legal claim for breach of implied common law contractual warranties, such as the “implied warranty of good faith and fair dealing.” A party may be liable for breach of the implied covenant of good faith and fair dealing when it evades or defeats the spirit of the contract in connection with its performance or enforcement, such as where one party fails to perform unfinished work or promised repairs. It is also implied in a contract for the construction and sale of a condominium unit and appurtenant common elements that the construction will conform to applicable law, including building codes. This failure to construct substantially in accordance with applicable building codes can be a breach of contract even if such compliance is not expressly set forth in writing within the contract. The statute of limitations for a breach of contract claim is three years, CJ § 5-101, and runs from the date of discovery of the breach under the “discovery rule.”

• Violation of the Maryland Consumer Protection Act

The Maryland Consumer Protection Act (“MCPA”) creates a private cause of action which can be asserted by a condominium association on behalf of its unit owner members who are deceived or otherwise misled by “unlawful trade practices” in connection with the sale and purchase of a condominium. MCPA § 13-408(a) and 13-303. The MCPA defines various unlawful trade practices that include misrepresentations about the characteristics and quality of construction, a failure to state material facts regarding problems with the condominium common elements, and other conduct which is misleading to consumers of condominiums. MCPA § 13-303. For example, if it is represented that a condominium will be built in accordance with the county-approved plans and specifications, it is a violation of the MCPA if there is substantial deviation from the applicable plans and specifications that results in defective conditions.

A condominium developer who engages in such unlawful trade practices can be held liable for an Association’s reasonable attorney’s fees in pursuing construction defect claims. MCPA § 13-408(b). In one Maryland construction defect case, a condominium association was awarded $500,000 in attorney’s fees under the MCPA following a $6.6 million verdict against the developer and builder of the condominium, as well as against its president personally. See Milton Company v. Council of Unit Owners of Bentley Place Condominium, 121 Md App. 100, 121 (1998), aff’d 354 Md 264 (1999). See also article entitled: “Condominium Entitled to Attorneys Fees in Addition to Construction Defect Damages.” A claim under the MCPA has a 3-year statute of limitations under CJ § 5-101, which runs from the date of discovery under the “discovery rule.”

• Negligent Misrepresentation and Fraud

Negligent misrepresentation and fraud are common law legal claims that provide a remedy when a defendant, including a condominium developer, makes a false representation or omits a fact when there is a duty to disclose. The difference between negligent misrepresentation and fraud is that negligent misrepresentation does not require an intent to deceive on the part of the defendant in making the representation. Rather, the representation can be based on careless/reckless behavior, such as making untrue statements to unit owners about the condominium without knowledge as to whether or not they are true or not.

In the case of both fraud and negligent misrepresentation, the untrue statements or misleading omission must be material and reasonably relied upon by the Association and/or its members to their detriment, such as entering into a contract of sale and obtaining long-term financing based on a misrepresentation that the building was constructed in accordance with the plans and specifications approved by local County or City building authorities. The statute of limitations for a negligent misrepresentation or fraud claim related to the quality or condition of construction is generally three years under CJ § 5-101, running from the date of discovery under the discovery rule. In the case of fraud, the statute of limitations can be extended if the construction defect legal claim is intentionally concealed.

• Misleading Statement in Public Offering Statement

The Maryland Condominium Act creates a private cause of action against a condominium developer who makes a false or misleading statement in a Public Offering Statement (“POS”) or omits material facts in a manner that is misleading. MD Condo Act § 11-126(f). A claim under § 11-126(f) of the MD Condo Act has a one year statute of limitations for misleading representations in a POS from the date of discovery under MD Condo Act § 11-126(f).

F. Note on Statute of Limitations

Although the statute of limitations period for some typical construction defect claims are set forth above, a condominium association should not make any decisions based on its own determination of when the statute of limitations expires without consulting with an experienced construction defect attorney. Determining when the statute of limitations expires as to any construction defect claims is fact-based analysis and will always be different for every condominium depending on many factors, including the specific legal terms of documents pertaining to the condominium (e.g., governing documents and sales contracts), the nature of construction defects at issue and when they were discovered, the dates of common element completion, the dates of original unit owner settlements, the date control over the association is transferred from the developer to non-developer unit owners, etc. The statute of limitations analysis must also take into account the numerous unit owner members, each of whom has legal claims relative to the common elements that can often be asserted on their behalf by the condominium association. In each case, different legal claims will have different statute of limitations periods that commence at different times, and those periods can vary as to the defect in question, the unit owner involved, and the time of discovery. Condominium associations should consult with an attorney before taking or not taking action in reliance on the information set forth in this article.

G. Tolling Agreements – Preserving Condominium Association Legal Claims

The legal claims discussed above are of limited duration and will expire if not brought in a court of law by filing a lawsuit within the applicable “statute of limitations.” The statute of limitations is the time period within which a legal claim must be brought in a court of law or it shall be forever barred. In general, there are two ways to stop the statute of limitations from running on a party’s legal claims: (1) file a lawsuit asserting those legal claims in court before the statute of limitations expires; or (2) have the responsible parties sign a tolling agreement before the statute of limitations expires.

A tolling agreement is a private contract that courts will enforce under which the parties (for example, a condominium association and a developer) agree that the statute of limitations time period will stop running, or be “tolled,” while they attempt to negotiate a resolution of their construction dispute. However, the statute of limitations will only stop as to those parties who agree to “toll” the running of the statute of limitations. A tolling agreement does not affect claims against any person or entity who does not agree to toll the statute of limitations. Likewise, when filing a lawsuit, the statute of limitations is only tolled as to the persons or entities against whom the suit is filed. For a more detailed explanation of tolling agreements, see article by condominium construction defect attorney Nicholas D. Cowie entitled: “Tolling Agreements: Use Them to Preserve Association Claims During Length Construction Defect Negotiations.”

Before negotiating serious construction defects claims with developers, builders, and other responsible parties, an association should first obtain a tolling agreement from them in order to preserve legal claims and prevent them from becoming time-barred by the statute of limitations while attempting to reach an amicable resolution. A tolling agreement allows a condominium association to focus on negotiations without having to be concerned about filing a law suit in order to prevent those claims from becoming time-barred by the expiration of the statute of limitations. A tolling agreement preserves the condominium’s bargaining power and benefits both the developer and the association by giving them a “time-out” so that they can resolve their claims without litigation.

It is important to retain experienced legal counsel to draft a tolling agreement. In our law firm’s review of cases, we find that many attorneys representing condominiums enter into tolling agreements fail to include important construction defect legal claims and responsible parties. As a result, the statute of limitations continues to run and even expires on these important legal rights during negotiations. Although a condominium association can agree to enter into a limited tolling agreement, attorneys unfamiliar with construction defect litigation on behalf of condominiums often do not understand and thus do not explain to their association clients what legal rights they are giving up and what the alternatives are. As a result, associations are unable to make informed decisions about excluding legal rights in a tolling agreement until it is too late.

For more information about tolling agreements, see article entitled: “Tolling Agreements: Attorneys Using Tolling Agreements to Preserve Construction Defect Legal Claims During Developer Negotiations.”

H. Negotiating Proper Repair of Construction Defects

Once a condominium association has notified the developer of construction defects and obtained a tolling agreement, it should work with its transition engineering consultant to ensure that the developer performs repairs that properly address the underlying construction deficiency. In many cases, developer repairs prove ineffective and fail to address pervasive problems. This typically occurs when condominium associations simply accept whatever repairs are offered by the developer without involving their construction consultants to ensure that a proper repair is being offered and without documenting repair agreements to ensure accountability as to the method and scope of repair.

Condominium associations should be careful about accepting verbal offers from developers and builders to make unspecified “repairs” in response to complaints about construction problems. The informal nature of such an agreement may be appropriate in some circumstances, however, in most cases, problems will arise when the developer’s definition of “repair” differs from that required by code, contract, or industry standard. For example, when a developer agrees, informally, to repair a window or roof leak, the “repair” as far as the developer is concerned may consist of merely sending out a worker with a caulk gun to seal gaps that should have been protected with a solid flashing material during the original construction. Caulk is generally not an appropriate substitute for flashing. In this example, caulk is a temporary and inappropriate fix that may actually conceal the underlying absence of flashing until the caulking seal breaks or is bypassed by water infiltration at another location and the leak reappears six months later. This example demonstrates the need for written clarity, as well as the necessity of seeking the assistance of the association’s construction expert to review and approve the offered repairs.

A condominium association does not have to accept whatever undefined repair the developer is offering. Instead, it should request a detailed description, preferably in writing, of the proposed repair being offered by the developer. The developer’s proposed repair can then be evaluated by a construction consultant working for the condominium. The consultant can review the applicable construction drawings and field conditions and advise the association whether the offered repair is reasonable and appropriate to address the underlying construction defect. If not, the consultant can suggest alternative repair approaches, request additional information, or suggest modifications to the developer’s repair proposal. In some cases, additional joint invasive inspections may be proposed to determine the appropriate repair and/or the extent, or “scope,” of repairs needed throughout the community. In this manner, the association can make informed decisions based on its construction consultant’s expertise rather than accepting whatever the developer is offering without understanding the appropriateness and effectiveness of the repair being offered.

All repairs negotiated in this manner should be documented so as to avoid misunderstanding and create an objective standard by which the repair can be judged. If the repair should fail the association has a written reference by which to judge whether the repair was performed properly as agreed.

This framework for negotiating the method and scope of repair promotes accountability and finality. It can be employed on a larger scale when a condominium association is negotiating repair of multiple defects discovered during a transition deficiency study. Each repair agreed upon by the parties can be specified in writing and become part of an agreement under which the developer agrees to perform specified repairs pursuant to a specific method and at all the specific locations where the defect exists in accordance with applicable construction standards. In some cases, it is appropriate to incorporate these agreed-upon repairs into a larger repair agreement that can also provide for future repair related activities and contingencies, such as resolution of disputes over repairs that arise during the repair work, unforeseen conditions discovered during repairs, provisions for having the association’s consultant inspect and approve the developer’s repair work, reimbursement of construction defect related expenses incurred by the condominium association, including consultant inspection fees, attorney’s fees, and defect evaluation and defect-related repair costs previously incurred by the condominium association.

I. Legal Obligation to Pursue Timely Construction Defect Claims

A Maryland appellate court has held that a condominium association can be sued by its unit owner members for failing to timely investigate and bring a lawsuit against the condominium developer for construction and design defects causing water leaks into the condominium buildings. See, Greenstein v. Council of Unit Owners of Avalon Court Six Condominium, 201 Md. App 186 (2011) (“Greenstein”).

In Greenstein, the condominium association complained about building water leak problems for many years. Ultimately, the association filed a lawsuit against the developer of the condominium when it failed to make effective repairs to stop the leaking. The court dismissed the condominium association’s suit because it was filed after the statute of limitations had expired. The association then assessed the unit owners for the cost of repairing the developer’s construction defects that cause the water leaks. In response to the assessment, some unit owners sued the association for negligence in failing to bring a timely lawsuit. The Maryland Court of Special Appeals held that the unit owners’ lawsuit against the condominium association could go forward because the association had a duty to timely pursue recovery from the developer on behalf of unit owners for damage to the common elements caused by the developer’s negligence, breach of contract, and other applicable law. Greenstein 201 MD App at 205.

It is important to note that the condominium association in Greenstein could have avoided these legal problems and liability had it consulted with an experienced condominium construction defect attorney and been advised of the pending expiration of the statute of limitations and filed a timely lawsuit, or, alternatively, entered into a tolling agreement when it first began negotiating with the developer.

J. Conclusion – Early Consultation with Qualified Legal Counsel that Understands Applicable Legal Claims and Statute of Limitations is Key to Condominium Association Making Informed Decisions Relative to Construction Defect Resolution

The most important step a transitioning association can take toward successfully identifying and amicably resolving construction defect claims is to seek an early, complementary consultation from an attorney with substantial experience in representing condominiums in construction defect matters. Such a consultation, tailored to the community in question, will provide an association with a road map and a timeline for proceeding each step of the way so that it can protect its warranties and other legal rights before they expire, thereby giving it the opportunity to negotiate proper repairs to be performed by the developer.

NOTE ABOUT TERMINOLOGY:

The term “condominium association” is used in this article to describe the organization or entity that governs the affairs of the condominium in accordance with the condominium bylaws and declaration, and whose members consist of all condominium unit owners. Although “condominium association” is the terminology commonly used for this purpose, the Maryland Condominium Act refers to a condominium association as a “council of unit owners.”

NOTE ABOUT AUTHOR:

Nicholas D Cowie is a partner in the law firm of Cowie Law Group, P.C. and is licensed to practice law in Maryland and Washington DC (District of Columbia). Mr. Cowie has been resolving construction defect disputes on behalf of condominium associations for over 29 years. He has been involved in some of the major litigation that has shaped the condominium construction defect law in Maryland. Mr. Cowie has served as adjunct law school professor of construction law and drafted legislation enacted into law that protects and preserves the rights of condominium associations, homeowners associations, and their members in construction defect disputes by extending time periods for bringing common element condominium warranty claims and preventing condominium developers from shortening statute of limitations on warranty and other legal claims that condominium associations and their members can assert for construction defects. The law firm of Cowie Law Group, P.C. consists of attorneys who are versed and experienced in both construction law and condominium law, and who are known for representing condominiums in construction defect claims, financial disputes, developer collection and allocation of unit owner assessments and fees, and other developer contractual and legal obligations occurring prior to transition.

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This article discusses strategies of construction law attorneys for dealing with a “pay-if-paid” clauses in payment disputes between subcontractors and contractors on Maryland and Washington DC construction projects.

Background: “Pay-if-Paid” and “Pay-when-Paid” Clauses

In a typical construction project, a general contractor relies on payment from the construction project owner as a source of funds to pay its subcontractors, who, in turn, pay sub-subcontractors and material suppliers down the line. With everything riding on the general contractor getting paid, it only makes sense that general contractors would include contractual provisions in their subcontracts that condition subcontractor payment on the general contractor first receiving payment from the project owner. These contractual provisions are known as “conditional payment clauses” and they fall into two categories: (1) “pay-when-paid” clauses; and (2) “pay-if-paid” clauses. These clauses attempt to condition a subcontractor’s right to receive payment on “when” or “if” the general contractor receives payment from the construction project owner.

“Pay-When-Paid” Clauses

“Pay-when-paid” clauses in a construction subcontract “concern the timing of payment by the general contractor, but do not relieve the general contractor of its contractual liability to [pay for work performed by] the subcontractor under the subcontract.” Young Electrical Contractors, Inc. v. Dustin Construction, Inc., 459 Md. 356, 363, 185 A.3d 170, 174 (2018) (hereinafter “Young Electrical”). The general contractor’s payment obligation is merely suspended until after it receives payment from the project owner. An example of a “pay-when paid” clause would be:

“General contractor shall pay subcontractor within five business days of general contractor’s receipt of payment from project owner.”

Courts interpret these provisions as requiring payment either within the time specified following receipt of payment from the project owner, or within a reasonable time if it turns out that payment from the project owner is delayed or never made at all. For example, a prolonged delay in payment could result from an on-going breach of contract dispute between general contractor and project owner. Alternatively, the project owner may seek bankruptcy protection and never pay. In either case, the general contractor’s receipt of payment from the project owner is not a condition precedent to paying subcontractor under a “pay-when paid” clause. Payment at some point is contemplated by the parties and courts will not allow the general contractor to indefinitely withhold payment.  The subcontractor must be paid “within a reasonable period of time” whether or not the general contractor is ultimately paid:

 “a “pay-when-paid” clause ‘is … construed as an unconditional promise to pay with the time of payment being postponed until the happening of a certain event, or for a reasonable period of time if it develops that such an event does not take place.’ ”

Young Electrical, 459 Md. at 365, 185 A.3d at 175 (citing the “leading case,” Thos. J. Dryer Co v. Bishop International Engineering Co., 303 F.2d 655, 659 (1962)).

“Pay-If-Paid“ Clauses

Unlike “pay-when-paid” clauses, “pay-if-paid” clauses do “make the project owner’s payment of the general contractor a condition precedent to the general contractor’s obligation to pay the subcontractor, and, thus, a “pay-if-paid” clause can relieve the general contractor of liability to pay the subcontractor, even if the subcontractor has fully performed its obligations under the subcontract.” Young Electrical, 459 Md. at 363, 185 A.3d at 174. A typical “pay-if-paid” clause reads as follows: 

“The general contractor will pay the subcontractor only if the general contractor is paid by the project owner for the subcontractor’s work. General contractor’s receipt of payment from the project owner is a condition precedent to general contractor’s obligation to make payment to the subcontractor.”

These pay-if-paid clauses require the subcontractor to assume the risk that the general contractor might not receive payment from the project owner. In some subcontracts, “pay-if-paid” clauses specifically state that the subcontractor “expressly assumes the risk of the project owner’s non-payment and the subcontract price includes that risk.”

From a general contractor’s perspective, a “pay-if-paid” clause is preferable in a payment dispute because it does not have to worry about paying its subcontractors if for some reason the owner refuses to pay for reasons beyond its control. From a subcontractor’s perspective, any clause conditioning payment other than on completion of subcontractor’s work, or portions thereof, is to be avoided. However, if payment is to be conditioned on the general contractor’s receipt of payment from the project owner, then a subcontractor is better off in a payment dispute if the clause is interpreted as a “pay-when paid” clause because it does not risk forfeiting its right to payment under the subcontract if  the owner fails to pays the general contractor.

general contractor’s receipt of payment from the project owner, then a subcontractor’s is better off in a payment dispute having the clause interpreted as a “pay-when paid” clause because it does not risk forfeiting its right to payment under the subcontract if  the owner fails to pays the general contractor.

Contract Negotiation

One way to avoid a “pay-if-paid” clause is simply to negotiate the terms of a subcontract that does not contain such a clause. Often, however, subcontractors lack bargaining power to negotiate the terms of a subcontract and are presented with a “take it or leave it” subcontract document. When a subcontractor agrees to conditional payment clause, it should consider/analyze the financial stability of the owner and the skill of the general contractor in order to assess the risk it is assuming. Additionally, the subcontractor should consider passing the clause down to its sub-subcontractors in its sub-subcontracts so they also assume the risk of the general contractor not being paid by the project owner.

Contract Interpretation

Another way to avoid the effects of a “pay-if-paid” clause in a payment dispute is to argue that the conditional payment clause should be construed as a “pay-when-paid” clause. The law of contract interpretation favors the “pay-when-paid” clause over the “pay-if-paid” clauses because the latter can result in a complete forfeiture of payment for work completed by a subcontractor. Young Electrical, 459 Md. at 366, 185 A.3d at 176. Courts are therefore reluctant to interpret a conditional payment clause as a “paid-if-paid” clause unless the contract language clearly indicates an intent that the subcontractor is to forfeit it’s right to be paid if the project owner fails to pay the general contractor:

“[conditional payment] provisions [in a subcontract] … are to be construed as timing provisions — pay-when-paid clauses — unless the contract language clearly indicates that the parties intend otherwise.” 

Young Electrical, 459 Md. at 368, 185 A.2d at 177.

If the language of the subcontract agreement contemplates that the subcontractor will ultimately be paid, it can be argued that a conditional payment provisions should be construed as a “pay-when-paid” clause. Any ambiguity or vagueness in the contractual language about parties’ intent that the subcontractor should forfeit its right to payment will also likely lead the court to interpret the provision as a “pay-when-paid” clause. The court may interpret against the drafting party or even look to parole evidence of the party’s intentions to determine the language used in the contract should be interpreted as a “pay-when-paid” clause as opposed to a “pay-if-paid” clause.

On the other hand, if payment by the owner is expressly stated to be a “condition precedent” to the contractor’s obligation to pay the subcontractor, then the contractual provision will likely be interpreted as a “pay-if-paid” clause. Young Electrical, 459 Md. 356, 185 A.3d at 177. (citing Gilbane Bldg. Co. v. Brisk Waterproofing Co., 86 Md. App. 21 (1991)). The Maryland Court of Special Appeals determined that the following contract language was to be interpreted as a “pay-if-paid” clause:

“[i]t is specifically understood that the payment to the [subcontractor] is dependent, as a condition precedent, upon the [general contractor] receiving contract payments… from the owner….”

Gilbane Bldg. Co. v. Brisk Waterproofing Co., 86 Md. App. 21, 25 (1991) (“ Gilbane”).

The Court in Gilbane concluded that reference to owner payment as a “condition precedent” was sufficient terminology to shift the risk of owner insolvency to the subcontractor as a matter of objective contract interpretation. Gilbane, 86 Md. App. at 28. 

The Prevention Doctrine

The prevention doctrine is a recognized principle of contract law under which a condition precedent to another party’s performance [payment by the project owner] may be waived or excused if that party has wrongfully prevented or hindered fulfillment of the condition precedent [payment by the project owner] . Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d 717, 725 (4th Cir. 2000)(“Moore Brothers”). Thus, if the general contractor takes actions that cause or materially contribute to the project owner’s delayed payment or failure to pay, then the condition of payment may be waived or excused under the prevention doctrine.  In such a case, the general contractor cannot relying on a “pay-if-paid” or “paid-when-paid” clause as a defense to the subcontractor’s payment claim. For example, the Fourth Circuit Court of Appeals held that under the prevention doctrine, a general contractor could not rely on a “pay-when-paid” clause as a defense to a subcontractor’s payment claim because the general contractor had hindered the fulfillment of payment when it intentionally failed to disclose to the owner’s lender, as contractually required, that additional work had to be performed by the subcontractor. As a result, the lender did not provide additional financing and the owner did not have the funds to pay the general contractor for the additional work. Moore Brothers, 207 F.3d at 725.

Both Maryland and the District of Columbia recognize the prevention doctrine, WSC/2005 LLC v. Trio Ventures Assoc., Maryland Court of Special Appeals, No. 75, September Term 2017 (decided July 30, 2018), cert. granted on other grounds, and Shear v. Nat’l Rifle Ass’n of Am., 606 F.2d 1251 (D.C. Cir. 1979)(“ Shear’). The doctrine it is generally considered to be one aspect of the “covenant of good faith and fair dealing” implied in every contract in Maryland and the District of Columbia. The rational being that if a general contractor is the cause of the project owner’s failure to make payment, it cannot fairly take advantage of that failure as an excuse not to pay a subcontractor. See, In re Estate of Drake, 4 A.3d 450, 454 (D.C. 2010); Aronoff v. Lenkin Co., 618 A.2d 669, 682-83 (D.C. 1992); Reiman v. International Hospitality Group, 558 A.2d 1128, 1132-34 (D.C. 1989); Shear, 606 F.2d at 1255.

In order for the prevention doctrine to apply, the owners refusal to pay must be the result of “wrongful” conduct on the part of the general contractor, “as opposed to some less culpable form of fault.” Mendoza v. COMSAT Corp., 201 F.3d 626, 631 (5th Cir. 2000) (applying DC law and citing Reiman v. International Hospitality Group, 558 A.2d 1128, 1132 (D.C.1989) and Dale Denton Real Estate, Inc. v. Fitzgerald, 635 A.2d 925, 928 (D.C.1993) ); District-Realty Title Ins. Corp. v. Ensmann, 767 F.2d 1018, 1023 (D.C. Cir. 1985). Additionally, the conduct in question must not be expressly authorized or implicitly permissible under the terms of the contract between the general contractor and the project owner. Shear,606 F.2d at 1256. If the contract explicitly or implicitly permits a general contractor to take some action, and that action, in turn, prevents or hinders the project owner’s payment, the prevention doctrine will not prevent the general contractor from enforcing a “pay-if-paid” and “paid-when-paid” clause in a payment dispute. King King, Chtd v. Harbert Intern., Inc., 436 F. Supp 2d 3, 11 (D.D.C. 2006). In other words, if the contract authorizes the conduct, it is difficult to argue that it is wrongful.

The wrongful conduct preventing payment need not be a deliberate act in order to invoke the prevention doctrine. For example, a recent case, decided under Pennsylvania law, delays in the completion of a construction project on the part of a general contractor persisted over 2 years . Connelly Constr. Corp. v. Travelers Cas. & Surety Co. of Am., 2018 WL 3549281 (E.D. Pa. July 24, 2018).  The project owner expressed “serious concerns” regarding these delays and “unacceptable performance” on the general contractor’s part and withheld final payment. The general contractor, in turn, refused to pay a subcontractor for completed work on grounds that there was a “pay-if-paid” clause in the subcontract. The general contractor argued that the prevention doctrine did not apply to its delays in completing the project being the cause of the owner’s refusal to pay because the delays were not “deliberate”, but rather merely “inadvertent.” The court rejected this argument, holding that the general contractor was barred by the prevention doctrine from relying on the pay-if-paid clause, whether or not its delays were deliberate or inadvertent. In reaching this conclusion, the court noted that he general contractor had “complete control” over the work such that one could reasonably conclude it contributed to delays and, therefore, to its own non-payment.

The prevention doctrine does not require a subcontractor prove that payment by the owner would have occurred “but for” the wrongful conduct of the promisor; instead it only requires that the general contractors conduct have “contributed materially” to the non-occurrence of payment. Moore Brothers, 207 F.3d at 725; In re Estate of Drake, 4 A.3d 450, 454 (D.C. 2010) (“The prevention doctrine only requires the non-occurrence to be ‘fairly of attributable to the [general contractor’s] own conduct’”).

Mechanics’ Lien and Payment Bond Claims on Private Construction Projects

In the event of a payment dispute, conditional payment clauses do not prevent subcontractors from pursuing mechanics’ lien or payment bond claims arising out of private construction contracts. Thus, even if a subcontractor’s contractual claim for payment against the general contractor is barred by a conditional “pay-if-paid” or a “pay-when-paid” clause, an unpaid subcontractor can still pursue a mechanics’ lien claim against the project owner’s property. Likewise, these conditional payment clauses do not prevent an unpaid subcontractor from bringing a claim against the surety of any payment bond that the general contractor was required to purchase in connection with being awarded the construction project. A mechanics’ lien allows a subcontractor to establish and/or enforce a lien (in the amount it is owed) on the property where the construction project is located. See articles: Mechanics’ liens in Maryland and Mechanic’s liens in the District of Columbia. On some larger private projects, owners require general contractors to provide a payment bond, purchased from a surety company who agrees to pay subcontractors that are rightfully owed if the general contractor fails to do so. The bond creates a source of funds so that, in a payment dispute, the unpaid subcontractors can bypass the general contractor and asserted a payment bond claim directly against the general contractor’s surety.

Both mechanics’ lien and bond claims have strict timelines that must be met for giving notice and/or filing a claim. In many cases, those claims would be time barred if the subcontractors were required to wait to bring them under a “paid-if-paid” or “pay-when-paid” conditional payment clause. In some states, it has been argued that a subcontractor should be barred from pursuing monies owed by means of a mechanics’ lien or payment bond claim if payment is not yet contractually due under by reason of a “paid-if-paid” clause its contract. This argument is not available in Maryland or the District of Columbia because both jurisdictions have similar “Prompt Payment” statutes that protect a subcontractor’s right to bring a mechanics’ lien or payment bond claim, even if a claim directly against the general contractor cannot be made by reason of a “paid-if-paid” or “pay-when-paid” conditional payment clause.

Maryland’s Prompt Payment statute reads, in pertinent part, as follows:

“(b)      A provision in … [a] contract between a [general] contractor and a subcontractor that is related to construction, alteration, or repair of a building, structure, or improvement and that conditions payment to the subcontractor on receipt by the [general] contractor of payment from the owner or any other third party [e.g., “paid-if-paid” clause] may not abrogate or waive the right of the subcontractor to:
            (1)      Claim a mechanics’ lien; or
            (2)      Sue on a contractor’s bond.
      (c)      Any provision of a contract made in violation of this section is void as against the public policy of this State.”

Maryland Real Property Article, § 9–113 (b) (c).

The District of Columbia’s Prompt Payment statute reads in part as follows:

“(b) … conditions of payment to the subcontractor on receipt by the [general] contractor of payment from the owner [e.g., “paid-if-paid” clause] may not abrogate or waive the right of the subcontractor to:
 
(1) Claim a mechanics’ lien; or
 
(2) Sue on a contractor’s bond.
 
(c) Any provision of a contract made in violation of subsection (b) of this section is void as against the public policy of the District.”

DC Code § 27-134 (b)(c).

Thus, while “paid-if-paid” or “pay-when-paid” conditional payment clauses may be enforceable to defend against a subcontractor ‘s contractual claim for payment against the general contractor, those clauses do not provide a defense to a subcontractor’s mechanics’ lien or payment bond claim against the owner of the construction project or the general contractor’s surety. Even if the general contractor were to include a provision in the subcontract that makes payment by the owner a condition precedent to the subcontractor’s right to bring a mechanics’ lien or payment bond claim, such a provision would be “void” and  unenforceable in Maryland and Washington DC under these “prompt payment” statutes.

Federal Miller Act Claims on Federal Construction Projects

On federal projects, “paid-if-paid” and “pay-when-paid” conditional payment clauses cannot be relied upon to prevent a subcontractor on a federal construction project from pursuing a federal Miller Act claim against a payment bond.

The Miller Act creates a statutory procedure designed to protect subcontractors and suppliers on certain federal construction projects by requiring general contractors to provide a payment bond, typically purchased from a surety company, as security so that a subcontractor on the federally funded project has an additional source of payment if the general contractor fails or is unable to pay. The federal payment bond claim procedure afforded by the Miller Act is important for subcontractors because, in contrast to a private construction project, public property belonging to the federal government is not subject to a mechanics’ lien as an alternative means of securing payment if the general contractor defaults. To fill this gap, the Miller Act is intended to provide aggrieved subcontractors with a mechanism for promptly recovering compensation when the general contractor fails or refuses to pay for completed work. See United States v. Zurich Am. Ins. Co., 99 F. Supp. 3d 543, 548 (E.D. Pa. 2015).

There is a short time frame within which a subcontractor must take action to seek recovery on a Miller Act payment bond if it does not receive payment from the general contractor, commencing ninety days after the subcontractor has completed its work and extending for a period one-year. 40 U.S.C. § 3133(b)(1),(4). If a conditional payment clause could be used by a general contractor’s surety as grounds for delaying a subcontractor’s federal miller act payment bond claim, the subcontractor’s rights to prompt payment under the under the Miller Act would be defeated and possibly time barred. “[F]ederal courts that have addressed the issue have unanimously held that a surety is not entitled to the benefits of [the general contractor’s] pay-when-paid or pay-if-paid clause” because delaying a subcontractor’s right to seek prompt payment under the Miller Act based on a private subcontract agreement would defeat the purpose of the statute.  U.S. ex. rel. Tusco, Inc. v. Clark Construction Group, LLC, 152885, 2016 WL 4269078 (D. Md. Aug. 15, 2016) (citing U.S. ex. rel. Walton Tech., Inc. v. Weststar Eng’g, Inc., 290 F.3d 1199 (9th Cir. 2002)(“Walton Tech.”); U.S. ex. rel. T.M.S. Mech. Contractors, Inc. v. Millers Mut. Fire Ins. Co. of Texas, 942 F.2d 946 (5th Cir. 1991); U.S. ex rel. Straightline Corp. v. Am. Cas. Co. of Reading, PA, CIV.A. 5:06-00011, 2007 WL 2050323 (N.D. W. Va. July 12, 2007); U.S. ex. rel. DDC Interiors, Inc. v. Dawson Const. Co., 895 F. Supp. 270 (D. Colo. 1995)(“ DDC Interiors”) ; U.S. ex. rel. Ackerman v. Holloway Co., 126 F. Supp. 347 (D.N.M. 1954)).

On the other hand, if a subcontractor enters into a subcontract in which it voluntarily agrees to waive its right to bring a Miller Act payment bond claim, “federal courts have … held that a surety may … enforce a [“paid-if-paid” or “pay-when-paid”] conditional payment clause … in the subcontract.”  U.S. ex. rel. Tusco, Inc. v. Clark Construction Group, LLC, 152885, 2016 WL 4269078 (D. Md. Aug. 15, 2016) (citing Walton Tech., 290 F.3d at 1208-09; DDC Interiors, 895 F. Supp. at 272). However, the waiver of Miller Act rights in the subcontract must be “clear and explicit.” Id. “At a minimum, an effective waiver of Miller Act rights must include mention of the Miller Act and unambiguously express intention to waive the rights provided by it.” DDC Interiors, 895 F. Supp. at 274. A a typical “paid-if-paid” or “pay-when-paid” clause standing alone does not mention the Miller Act and therefore cannot be interpreted as a clear and explicit waiver of the subcontractor’s Miller Act rights. See e.g., Walton Tech., 290 F.3d 1199 and DDC Interiors, 895 F. Supp. 270 where the courts found that a “pay-if-paid clauses contained in a subcontract did not constitute a waiver of the subcontractor’s Miller Act rights and thus could not be enforced by surety as a defense to a bond claim.

Thus, although conditional payment clauses may allow a general contractor to delay or discharge its obligation to pay a subcontractor, such clauses cannot be relied upon to prevent a subcontractor on a federal construction project from pursuing a federal Miller Act claim against a payment bond, absent a valid waiver of Miller Act rights..

Little Miller Act Claims on State and Local Government Construction Projects

Conditional payment provisions cannot prevent subcontractors from bringing so called “Little Miller Act” claims arising out of public projects in Maryland or the District of Columbia.

Both Maryland and the District of Columbia have their own statutes fashioned closely after the federal Miller Act referred to, respectively, as “Maryland’s Little Miller Act” (Maryland State Finance and Procurement Article §§ 17-101 – 17-111) and “District of Columbia’s Little Miller Act” ( DC Code §§ 2-201.01- § 2-201.03, and § 2-201.11). Like the federal Miller Act, these Little Miller Acts require general contractors on certain public construction projects performed for State and local government in Maryland and the District of Columbia to purchase payment bonds as part of a statutory claim procedure to provide aggrieved subcontractors with “a mechanism for promptly recovering compensation” when a general contractor fails or refuses to pay for completed work. See United States v. Zurich Am. Ins. Co., 99 F. Supp. 3d 543, 548 (E.D. Pa. 2015).

Maryland’s Little Miller Act

Maryland’s Little Miller Act contains a specific provision that protects a subcontractor’s right in a payment dispute to bring a bond claim even it is otherwise barred from pursuing a claim directly against a general contractor by reason of a conditional payment clause, such as a “paid-if-paid” or a “pay-when-paid” clause:

“(d)      (1)      [A subcontract or sub-subcontract]  ….  related to a construction contract may not waive or require [a subcontractor or sub-subcontractor] … to waive the right to sue on  [a] payment security under this section.

            (2)      [A subcontract or sub-subcontract]  … related to a construction contract and that conditions payment to the supplier on receipt of payment by the person from a public body or other third party [e.g.,“paid-if-paid” or a “pay-when-paid” clause] , may not abrogate or waive the right of [a subcontractor or sub-subcontractor]  … to sue on payment security under this subtitle.

            (3)      A provision of a [subcontract or sub-subcontract]  …  made in violation of this subsection is void as against the public policy of the State.”

Maryland State finance and Procurement § 17-108.

Note also, that § 17-108 (d)(1) of the Maryland Little Miller Act prohibits use of a subcontract to waive a subcontractor’s right to make a payment bond claim under the act. Thus, while a conditional payment clause may prevent a subcontractor from suing an unpaid general contractor for non-payment, the subcontractor on a public project in Maryalnd may still recover by bringing a Little Miller Act payment bond claim against the general contractor’s surety . The surety may not rely upon a pay-if-paid clause in the subcontract as a defense to a payment bond claim.

DC’s Little Miller Act

Unlike Maryland’s version, the DC Little Miller Act does not contain an express statutory provision that overrides conditional payment clauses so as to protect a subcontractor’s right to bring a payment bond claim, even if a subcontractor’s agreement contains a conditional payment clause. Nonetheless, current case law makes it fairly certain that, if faced with the issue, Washington DC courts would follow federal case law discussed above  holding that a surety cannot defend against a subcontractor’s Miller Act bond claim on grounds that its subcontract contains a “paid-if-paid” or a “pay-when-paid” clause that permits the general contractor to delay or discharge its payment obligation.

First, DC Courts look to federal case law for guidance when interpreting DC’s Little Miller Act, because the DC Little Miller Act is very closely modeled after the FMA and also their exists little judicial analysis and interpretation of the DC Little Miller Act. Strittmatter Metro, LLC v. Fidelity and Deposit Co. of Md., 15-2114 2016 WL 5108021 (D.DC Sept. 20, 2016) (citing Castro v. Fidelity & Deposit Co. of Md., 39 F. Supp. 3d 1, 4-5 (D.D.C. 2014); Hartford Accident & Indem. Co. v. District of Columbia, 441 A.2d 969, 972 (D.C. 1982); Mariana v. Piracci Constr. Co., Inc., 405 F. Supp. 904 (D.D.C. 1975)).

Second, the United States District Court for the District of Colombia interpreting the DC’s Little Miller Act, cited with approval federal case law holding that “pay-when-paid” and “ay-if paid” clauses could not be used by a surety to foreclose or delay a subcontractor’s right to bring suit for payment under the Federal Miller Act against a general contractor’s surety. Strittmatter Metro, LLC v. Fidelity and Deposit Co. of Md., 15-2114 2016 WL 5108021 (D.DC Sept. 20, 2016). In that case a general contractor and its surety argued that a subcontractor was required to submit to a dispute resolution procedure incorporated into its subcontract before it could make a claim under the DC Little Miller Act. Relying in part on federal case law involving conditional payment clauses, the court rejected that argument and suggested that no provision in a subcontract, dispute resolution procedure or otherwise, could operate to delay a subcontractors right to a prompt payment remedy under the DC little Miller Act. Id.

Thus, while a conditional payment clause may prevent a subcontractor from suing an unpaid general contractor for non-payment, the subcontractor on a public project in the District of Columbia may still recover by bringing a Little Miller Acts payment bond claim against the general contractor’s surety, absent, possibly, a valid waiver of DC Little Miller Act rights in the subcontract.

Note about terminology: The District of Columbia ( Washington DC ) Mechanic’s lien Law uses the spelling “mechanic’s lien,” in the singular with an apostrophe before the “s” as in the lien of a single mechanic. The Maryland Mechanics’ lien law Uses the spelling “mechanics’ lien,” in the plural with an apostrophe after the “s” as in the lien of many mechanics. For purposes of this article, the author has adopted the spelling used in the the Maryland Mechanics Lien Act.

Note about the history of mechanics’ liens And the term “mechanic”: The original rationale in this country for adopting a mechanics’ lien law was to encourage builders to become involved in the construction of the District of Columbia. At that time, there were no automobiles and the term “mechanic” generally referred to builders and skilled tradesmen such as masons and carpenters. See article, Mechanic’s liens in the District of Columbia.

Note about the author: Nicholas D Cowie is a construction law attorney and a partner in the construction law firm of COWIE LAW GROUP P.C. Mr. Cowie practices construction law throughout the state of Maryland and the District of Columbia (Washington DC). Mr. Cowie established the “Construction Law “course at the University of Baltimore School of Law where he served as an adjunct professor of construction law. Mr. Cowie is highly regarded for his knowledge of construction law, and represents clients with legal matters involving payment disputes, breach of contract, mechanics’ liens, payment bonds and other legal issues facing subcontractors, general contractors, project owners, design professionals, architects, engineers, construction managers and others on Maryland and Washington DC construction projects.

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The post Strategies for Dealing with a “Pay-if-Paid” Clauses in Payment Disputes between Subcontractors and Contractors on Maryland and DC Construction Projects appeared first on Maryland & DC Construction Lawyers and Construction Litigation Attorneys.

MECHANICS’ LIENS AND CONDOMINIUMS IN MARYLAND AND WASHINGTON DC

A mechanic’s lien is a legal remedy that allows unpaid building contractors to obtain payment by forcing the sale of the land where their work was performed. Mechanics’ liens arising out of the original construction or subsequent renovation of a condominium can be enforced against the entire condominium, including the individual units.

This article discusses the unit owner notice and party inclusion requirements necessary for establishing and enforcing mechanics’ liens against condominium property in Maryland and the District of Columbia. Failure to comply with these requirements will often result in the dismissal and loss of a contractor’s mechanic’s lien rights against the condominium property.

I.  INTRODUCTION

A mechanic’s lien statutes creates a lien that attaches to the land where contractors and subcontractors perform work and supply materials in the construction, renovation, or repair of a building or other improvement to real property. If the contractors or subcontractors do not receive payment for their work as required under their contracts, the lien can be used to force the sale of the property as a source of funds to pay the amount due.

In order to ensure that this extreme contractor remedy is not unfairly administered, mechanics’ lien laws generally require that: (1) the property owner be given advance notice of the contractor’s or subcontractor’s intention to establish or enforce the lien; and (2) the property owner be made a party to any subsequent legal proceedings seeking to establish or enforce the lien.  Requiring advance notice allows the property owners to withhold payments from a general contractor in order to satisfy claims of unpaid subcontractors thereby preventing a lien claim. Requiring that the property owners be made a party to the suit ensures they are not deprived their property without an opportunity to be heard and defend against the lien claim.

These property owner notice and party inclusion requirements can be difficult to apply when condominiums are involved because they are common ownership communities with multiple property owners (unit owners) and a governing condominium association entity that acts on their behalf with regard to the repair and maintenance of the condominium common elements.

Mechanics’ lien claims involving condominiums typically arise out of: (1) work performed for a condominium developer in the original construction of the condominium or (2) work performed for a condominium association in connection with major common element repair or renovation projects (e.g., replacement of exterior walls, roofs and foundations). Unpaid contractors and subcontractors seeking a “blanket” mechanics’ lien that can be enforced against the entire condominium in connection with these types of projects must determine who should be given advanced notice and made a party to their mechanics’ lien legal action. Additionally, a contractor performing common element repair or renovation work must obtain proper authorization from the condominium association.

II.  MECHANICS’ LIENS ARISING OUT OF THE ORIGINAL CONSTRUCTION OF A CONDOMINIUM

Condominium ownership is a “moving target” for contractors seeking to establish a mechanics’ lien.  Over the course of the construction of a new condominium project property ownership gradually changes from condominium developer to unit owners. When contractors are initially hired, a single condominium developer owns the property privately. However, as construction of each building or portion thereof (referred to as a “phase”) is completed and becomes ready for occupancy, it is made part of a condominium regime by the filing of a condominium declaration and plat.  These documents redefine the boundaries of the property into condominium units and common elements. The condominium developer then begins conveying ownership of the completed condominium units to members of the public while construction continues on the remaining phases that will also be added to the condominium regime at a later date upon completion. In this manner, ownership over the entire property is transferred over the course of construction, in phases, from a single condominium developer to multiple unit owners.

a. Maryland Condominiums – Mechanics’ Liens and New Construction

In Maryland, a “subcontractor” (i.e., a contractor who does not have a contractual relationship directly with the owner of the property over which a lien is sought) must provide the property owner with a “Notice of Intention to Claim a Lien” within 120 days from the last day it performed work or supplied materials on the project. Maryland Mechanic’s Liens Act §9-101(9) and §9-104. This notice is a written document describing the work done or materials provided at the property and the amount due. Maryland Mechanic’s Lien Act §9-104(b).

Contractors and subcontractors sometimes mistakenly assume that the condominium developer is the sole owner and that it is unnecessary to provide anyone else with a Notice of Intent to Claim a Lien. However, by the time a mechanics’ lien claim is pursued, a large portion, if not all of the property, has already been made part of a condominium regime and is owned by multiple different condominium unit owners who have no contractual relationship with the developer’s contractor or any subcontractors.

In Maryland, all contractors and subcontractors involved in the original construction seeking to establish a blanket mechanics’ lien against the entire condominium, including all units and common elements, must serve a “Notice of Intention to Claim a Lien” on all unit owners. It is not sufficient to simply give notice to the condominium developer. Failure to provide timely notice to the unit owners will result in the dismissal and likely termination of lien rights. Additionally, each unit owner must also be served with and be made a party to the lawsuit seeking to establish a lien against the property (known as a “Petition to Establish Mechanic’s Lien”) that must be filed in court within 180 days from the last day work or materials were supplied at the project. Maryland Mechanic’s Lien Act, §9-105. See also, Southern Management Corp. v. Kevin Wiles Co., Inc. (“Southern Management”), 382 Md. 524, 546-48 (2004) (approving the opinion of the Supreme Court of Connecticut that a contractor who constructs a new condominium for a developer cannot seek a lien against the entire condominium unless it gives notice to all unit owners who have acquired ownership interest in the condominium and names them as parties in the subsequent mechanic’s lien legal action).

b. Washington DC Condominiums – Mechanics’ Liens and New Construction

In Washington DC, unit owner notice is not an issue for mechanic’s lien claims arising out of the original construction because the District of Columbia Condominium Act (“DC Condo Act”) mandates that any mechanics’ liens affecting the condominium be “paid and satisfied” by the condominium developer before conveying units to the public. Thus, no mechanics’ lien claims from the original construction can affect unit owners. The difference between Maryland and Washington DC resides in a legal fiction as to the time when the mechanic’s lien attaches to the property.

In Maryland, unlike Washington DC, a mechanic’s lien arising out of the original construction of a condominium can attach after units have been conveyed by the developer to members of the public. This can occur because under Maryland law, a mechanic’s lien does not attach to the property until a court grants a contractor’s “Petition to Establish Mechanics’ Lien” and enters an order establishing the lien. By that time, the contractor’s work has been performed and, some or all of the property has likely been made part of the condominium and conveyed by the developer to multiple unit owners whose property will then become subject to the imposition of a lien relating back to the original construction.

In the District of Columbia, a mechanic’s lien is deemed, by operation of law, to attach to the property at the time the contractor commences the work. Therefore, all mechanics’ liens arising out of the original construction will have already attached to the property while it is still owned by the developer, before it can be made part of the condominium. A condominium developer cannot convey clear title to a unit owner if the property is subject to a mechanics’ lien. The District of Columbia Condominium Act deals with this issue by mandating that mechanics’ liens be removed before transfer of the title: “[a]t the time of the conveyance to the first purchaser of each condominium unit … any mechanic’s … liens … affecting the condominium … shall be paid and satisfied of record,” or the condominium developer “shall forthwith have the … condominium unit released … from all such liens not so paid and satisfied.” DC Condo Act §42-1902.02(a). In this manner, any mechanics’ liens attaching to the property from the original construction will be paid and satisfied before the conveyance of condominium units to members of the public.

III.  MECHANICS’ LIENS ARISING OUT OF COMMON ELEMENT WORK PERFORMED FOR A CONDOMINIUM ASSOCIATION.

Each member of the public who purchases a condominium unit acquires two real property ownership interests: (1) an interest in their individual unit owned solely by them; and (2) an interest in the common elements shared with all other unit owners (referred to as an “undivided percentage interest”). The interest in the unit cannot be separated from the undivided interest in the common elements. Each unit owner takes title to these interests subject to the condominium declaration and bylaws under which they become a member of the condominium association with an obligation to share in the common expense that the association incurs maintaining and repairing the common elements. The common elements typically consist of roofs, exterior walls, foundations, common utility lines, hallways and entranceways, exterior sidewalks, streets, and other grounds that surround the unit living spaces contained within the building(s).

Once a condominium is established and reaches a point where the common elements require major repair or renovation work, it is the condominium association that is responsible for hiring contractors to perform that work. In these circumstances, the Maryland and District of Columbia Condominium Acts sets forth specifics as to manner under which a mechanics’ lien can attach to all of the individual units.

a. Maryland Condominiums – Renovations Performed for an Association

Under the Maryland Condominium Act (“MD Condo Act”), a mechanics’ lien arising out of a common element repair or renovation project, if “authorized in writing” by the condominium association, becomes “a common expense” and, until paid by the association, “shall be a lien against each unit in proportion to its percentage interest in the common elements.” MD Condo Act §11–118(b). A written contract between the association and a contractor to perform the work would satisfy the “authorized in writing” requirement.

Although a condominium association is charged with the authority to maintain and repair the common elements, it does not actually own the common elements or any of the units. Therefore, simply obtaining the association’s written authorization for common element work is not adequate. Maryland’s highest court has held that before a mechanics’ lien arising from unpaid common element work can attach to the entire condominium, including all units as provided in Section 11–118(b) of the Maryland Condominium Act, a contractor must also: (1) provide all unit owners with a copy of its Notice of Intent to Claim a Mechanic’s Lien; and (2) name all unit owners as parties to its Petition to Establish Mechanic’s Lien. Southern Management at 531 and 552-53.

b. Washington DC Condominiums – Renovations Performed for an Association

The District of Columbia Condominium Act also sets forth conditions under which a mechanics’ lien arising out of common element repair or renovation work can become a lien against all condominium units. Specifically, the Act provides that if the “[l]abor performed or materials furnished for the common elements” was “duly authorized” by the condominium association following the “period of developer control,” then: (1) such labor or materials “shall be deemed to be performed or furnished with the express consent of every unit owner,” and; (2) such authorization by the association “shall be the basis for the filing of a lien [under the mechanics’ lien act] against all of the condominium units.” DC Condo Act §42-1902.02(b).

The issue of whether each unit owner must be given actual notice in the form of a copy of the Notice of Intent to Enforce Mechanics’ Lien and subsequently be included as a party to any enforcement action is a more complex and unsettled issue in the District of Columbia.

In Washington DC, a contractor’s “Notice of Intent to Enforce Mechanics’ Lien” is not simply a written document delivered solely to the property owner as in Maryland. Instead, the notice must be “recorded in the land records” (the DC Office of Recorder of Deeds) no later than 90 days after the earlier of the completion or termination of the construction project. DC Mechanics’ Lien Act §40-301.02(a)(1). Failure to meet this recording deadline results in termination of the lien. DC Mechanics’ Lien Act §40-301.02(a)(1). The notice must contain the names of the property owners “against whose interest a lien is claimed” (i.e., all of the unit owners). DC Mechanics’ Lien Act §40-301.02(b)(3). Recording the notice makes it part of the public record affecting title to real property and provides constructive notice to the public, including all unit owners and prospective purchasers, that a contractor is seeking to enforce a mechanics’ lien against the condominium units.

Within five (5) business days after recording the Notice of Intent to Enforce Mechanics’ Lien, a copy must be provided to the “owner” of the property. DC Mechanic’s Lien Act §40-301.02(a)(2) and §40-303.03(b). In the case of a condominium, all unit owners are the “owner” of the property. However, it is unclear whether the DC Condo Act §42-1902.02(b) is intended to create an exception to this provision with respect to common element work by allowing the association to be the sole recipient of this notice on behalf of the unit owners. The uncertainty arises because the District of Columbia Condominium Act provides that: “[n]otice of … [a mechanics’] lien shall be served on the principle officer of the [condominium] association or any member of [its] executive board.” DC Condo Act §42-1902.02(b). Is such notice to a condominium association officer or board member intended to replace or be in addition to giving notice to each of the unit owners? There is no reported case law addressing this issue. Therefore, contractors seeking to enforce a mechanics lien against all condominium units under DC Condo Act §42-1902.02(b), would be wise to timely provide all unit owners with a copy of their Notice of Intent to Enforce Mechanic’s Lien, in addition to providing the association with a copy.

In Washington DC, a lawsuit seeking to enforce a mechanic’s lien must be filed in court “within 180 days after the date that the notice of intent is recorded in the land records,” DC Mechanic’s Lien Act §40-303.13(a)(1)(A), “and a copy thereof served on the owner or his agent.” DC Mechanic’s Lien Act §40-303.08. Thereafter, “within 10 days of filing suit,” a “Notice of Pendency of Action” must be recorded with the Recorder of Deeds. DC Mechanic’s Lien Act §40-303.13(a)(1)(B). The “Notice of Pendency of Action” identifies and describes the mechanics lien lawsuit, including the amount sought, the property to be affected and the name of the person(s) whose property is intended to be affected thereby (i.e., all of the unit owners). Once recorded, the “Notice of Pendency of Action” also becomes a part of the public records affecting title to real property and is deemed constructive notice to the public, including all unit owners and prospective purchasers, of the pending legal action to enforce a lien against the condominium units. Code of the District of Columbia §14-1207.

It is also unclear whether DC Condo Act §42-1902.02(b) allows a suit to enforce a mechanics’ lien arising out of common element to be brought against and served on the condominium association as the agent and representative of the unit owners, or whether each unit owner must be named and served individually in the law suit. There is no reported case law addressing this issue. Therefore, contractors seeking to enforce a mechanics’ lien against all units under DC Condo Act §42-1902.02(b), would be wise to name all unit owners as parties in their law suit and provide each with a copy thereof, in addition to the association.

Despite the broad language of the DC Condo Act §42-1902.02(b), seemingly authorizing the association to be a unit owner representative for mechanics’ liens actions, there are constitutional issues involved with excluding unit owners. To the extent that a mechanics’ lien lawsuit seeks to force the sale of units to satisfy the lien amount, the lack of  prior actual notice and an opportunity to be individually heard in the lawsuit, arguably deprives unit owners of their property without adequate procedural due process. Moreover, each unit owner would also likely be deemed a “required party” under Superior Court Rule of Civil Procedure 19 because their absence from the case may “impair or impede” their ability to protect a claimed interest in their unit. In fact, these are essentially the conclusions reached by the Maryland Court of Appeals when it held that failure to give a unit owner notice and include it as a party in a suit to establish a mechanics’ lien “would … violate the due process rights” of that unit owner, Southern Management at 547-548, and also held that unit owners were “necessary parties” that must be included as a party under Maryland Rule 2-211(similar to Superior Court Rule of Civil Procedure 19). Southern Management at 548 at n.14.

VI.  REMOVING LIENS FROM INDIVIDUAL UNITS

If the condominium association does not pay the mechanics’ lien amount as part of the common expense, or delays in doing so, any individual unit owner can take matters into their own hands to have the lien released from their individual unit by making payment of their unit’s proportionate share of the entire lien amount. MD Condo Act §11–118(b) and DC Condo Act §42-1902.02(c). Thereafter, that unit owner is exempt from having to pay assessments toward payment of the remaining lien amount. MD Condo Act §11–118(b) and DC Condo Act §42-1902.02(c).

Note about Terminology:

Mechanics’ Lien: the Maryland and Washington DC Mechanics Lien Acts spell the term “mechanics lien” differently by placement of an apostrophe. “Mechanics’ Lien” is the spelling used in the Annotated Code of Maryland and “Mechanic’s Lien” is the spelling used in the Code of the District of Columbia (emphasis added). For the sake of consistency, the spelling adopted by Maryland is used herein.

Condominium Association: the term “condominium association” is used in this article to describe the organization or entity that governs the affairs of the condominium in accordance with the condominium bylaws and declaration, and whose members consist of all condominium unit owners. Under the Maryland Condominium Act, a condominium association is referred to as a “council of unit owners. Under the District of Columbia Condominium Act a condominium association is referred to as a “unit owners’ association.” For purposes of simplicity, the terms “condominium association” or “association” have been used for this article.

Developer: the term “developer” is used in this article to describe the person or entity that creates the condominium association. “Developer” is the terminology used by the Maryland Condominium Act. The District of Columbia Condominium Act, however, usually, but not always, refers to a developer as a “declarant” because it is the person or entity that files the condominium declaration and other legal documents that are necessary to create a condominium. The terms “developer” or “condominium developer” have been used throughout for simplicity.

Additional Information about Mechanics’ Liens in Maryland and Washington DC:

For more information and a summary regarding mechanics liens in Maryland and Washington DC, see the following links:
• Mechanics liens in Maryland
• Mechanics liens in Washington DC

DISCLAIMER: This article should not be considered a legal opinion that can be relied upon for purposes of taking or not taking action in any particular situation. If you are seeking to rely upon legal advice regarding mechanics’ lien claims, you should consult with and retain a qualified attorney to analyze the specific facts of your case and provide legal opinions and legal advice applicable to your particular situation.

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