May 17, 2004

Pad Delivery Pitfalls

Holland & Knight Newsletter
Tara A. Scanlon

A part of most retail development involves delivery of a graded pad to anchors or out-lot users, who will then build their own buildings under the terms of a site development agreement or ground lease. A number of legal and practical considerations come into play that, if addressed in advance, will provide for a less adversarial transaction. Avoiding miscommunication, which could result in a loss of good will between the parties, is a key strategic goal to expedite closing or rent commencement.

Controlling Plans/Criteria

Perhaps the most fundamental concept – which should be clear but is often ambiguous – is establishing which specific plan or criteria will control the construction process. Many retailers’ forms provide that in the event of a dispute, the retailer’s criteria or specifications will control, regardless of the specifications set forth in the retailer approved, site-specific plans. These forms may not provide dates or attach copies in order to easily identify which version of the criteria is applicable. In addition, if the reference to the criteria is not dated, the developer could be forced to update work as the retailer changes its criteria. The retailer, of course, is trying to avoid a situation where an oversight in reviewing plans causes a departure from their prototype. From the developer’s prospective, however, it is preferable that the approved, site-specific plan control. At a minimum, the developer needs to modify the retailer’s criteria to address site-specific conditions. If the retailer’s criteria are to control, any amendments or deletions to the criteria, based upon the specific project, must be documented. It is never safe to assume that merely because the criteria, or a portion thereof, is not applicable to a particular site, it would not necessarily apply.

Pad Certifications

The terminology used for pad certification has recently become a point of contention. Retailers’ pad certification forms often require an engineer to “certify to” all of the information in the certificate. Engineers who certify to judgment or opinions can find themselves operating outside the coverage of their professional liability insurance. The ASFE, in its Contract Reference Guide, states that:

“there is no problem insofar as certifying facts is concerned … However there is a problem when it comes to certifying any event or condition based on engineering judgment or opinion … It is not within the scope of acceptable engineering practice to expressly or impliedly guarantee that certain conditions exist when, in fact it is impossible to know for certain they exist. Certifying such conditions therefore creates a contractual liability that makes an engineer responsible for the fallibility of his judgment, even though that judgment was prudent and based on work performed without error. This liability goes beyond that established through the professional negligence standard, and thus is tacitly or expressly excluded from professional liability insurance policies.”

Prudent owners prefer a certificate that is covered by the geotechnical engineer’s insurance policy, rather than relying on the engineering company’s assets. This issue can be avoided by careful negotiation of the pad certification form at the time the applicable lease or site development agreement is negotiated. Obtaining pre-approval of the pad certification form from the applicable contractor can also save a lot of time and aggravation.

Coordinate Delivery/Construction Blackout Periods

Any retailer blackout periods should be specified in the construction schedule. Certain retailers will not accept their pad or begin construction during certain set periods. These periods, based on inclement weather or holiday seasons, need to be taken into consideration when calculating deadlines for site work. Some large retailers may only open-up stores on a few predetermined dates each year in order to maximize their national marketing campaigns. These periods need to be identified early in the development process so construction schedules, co-tenancies and opening plans may be taken into account. Contract provisions regarding delivery deadlines and failure to meet construction schedule dates should be read carefully, and drafted to acknowledge the developer’s satisfaction of completion obligations during “dark periods,” even if the retailer is not required to perform until the expiration of the applicable dark period.

Staging Areas

If several contractors will be coordinating work on a project it is important to define staging areas and access routes, while at the same time preserving flexibility to relocate staging areas to accommodate site-work as it progresses.

Liquidated Damages

Carefully examine carve-outs for force majeure and delays caused by the other party. The events constituting force majeure and delays should be clearly defined and tied to each party’s performance of its own obligations. For example, a party’s failure to inspect or approve work at one stage could result in delays or missed deadlines in the next phase of work. Developers can seek a “cap” on exposure if a force majeure carve-out is not permitted, and request that liquidated damages be tolled during any blackout periods.

Construction Contract/SDA or Lease

Coordinate retailer requirements (for warranties, contractor’s insurance, bond requirements and other construction contract items) with the construction contracts for the site work. Gaps could leave a developer exposed to self-insurance. For example, if a site development agreement provides for a warranty period that extends for 1 year after the retailer opens for business, and the contractor’s warranty runs for 1 year after the work is completed, there could be a period of time between the expiration of the contractor’s warranty and the expiration of the warranty granted to the retailer. Retailers should request an acknowledgement from the general contractor that the site work contract is assignable to them if they exercise self-help rights, and should further confirm that any warranties are also assignable.

Draw Requests

To ease administering the project, draw requirements for retailer contributions should match the construction loan draw requirements.

The above drafting tips can go a long way toward a smooth construction process between retailers and developers. Many of these issues can be resolved in a mutually satisfactory way so long as the parties have sufficient advance notice to plan their scheduling priorities and timing requirements around each other.

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