Editor’s note: The article below is the second of five installments of an article from the March 2017 issue of The Practical Real Estate Lawyer discussing issues and concerns in design and construction contracts, from an owner’s perspective. Due to the length of the original article, it has been broken into five parts. The third through fifth installments will appear in upcoming issues of the NRTA Quarterly Newsletter.
Owner as Tenant. Both the AIA and ConsensusDocs, as well as most architects’ custom-drafted agreements, are set up with the architect’s client designated as the “owner.” However, many businesses do not own the property they occupy and instead are tenants under commercial leases. The insert below can be used to address this situation by removing any type of implied representation that the client owns the property involved, notifying the architect of the existence of the lease and incorporating by reference, as applicable, the provisions of the lease pertaining to alterations, modifications and other construction.
Sample Insert: Notwithstanding the use of the term “Owner” in this Agreement, Architect acknowledges that Owner does not own the Project Site. Instead, Owner leases the Project Site from _________________ (“Landlord”) pursuant to a lease between Owner (as tenant) and Landlord (as landlord) dated _______________ (the “Lease”). Architect has been provided with a redacted copy of the Lease, and Architect acknowledges that all of the provisions within the Lease that pertain to the design of alterations and improvements shall apply to Architect and be deemed to be incorporated into this Agreement by this reference. Wherever Architect is required under this Agreement to indemnify Owner or to name Owner as an additional insured, in that context the word “Owner” shall be deemed to include Landlord, Landlord’s property manager, Landlord’s mortgagee and other parties reasonably designated by Landlord, as permitted under the Lease.
Applicable Restrictions. Similar to the situation discussed above where the “owner” is a tenant, the project site (commercial or residential) may be part of a common development and subject to recorded covenants, conditions and restrictions that may include design controls, design review boards or other pertinent parameters that may affect the design of the project. In these situations, it is prudent to disclose these requirements to the architect (and provide the architect with copies of the relevant documents) so the architect can properly take those requirements into account in both the design and approval process for the project.
Sample Insert: Architect acknowledges that the Project Site is subject to certain recorded covenants, conditions and restrictions including ________________(the “Restrictions”). Architect has been provided with a copy of the Restrictions and Architect will take into account and abide by the requirements set forth in the Restrictions that pertain to the services of the Architect under this Agreement.
Architect Representations. An owner will typically assume that an architect is qualified and able to perform the required services under a contract, otherwise the architect would not take on the work. However, it still is prudent to include some basic express representations from the architect in the addendum.
Sample Insert: Architect represents and warrants to Owner that Architect: (a) is financially solvent, able to pay its debts as they mature and possessed of sufficient working capital to complete the services required under this Agreement; (b) is able to furnish any of the plant, tools, materials, supplies, equipment and labor required to complete the services required hereunder and perform all of its obligations hereunder and has sufficient experience and competence to do so; (c) is authorized to do business in the State of _____ and properly licensed by all necessary governmental and public and quasi-public authorities having jurisdiction over it and the services required hereunder and the Project itself; and (d) has visited the Project site, familiarized itself with the local conditions under which the services required under this Agreement are to be performed and will correlate such services with its observations of site conditions.
Nondisclosure Requirements. In connection with some projects, an owner may have privacy issues and/or need to protect certain proprietary information. In those situations, it is prudent to include either a nondisclosure provision or a requirement that the architect and its engineers and consultants execute separate nondisclosure agreements satisfactory to the owner. Another approach, which should eliminate future discussions as to what constitutes a reasonable nondisclosure agreement, is to include a sample form nondisclosure agreement as an exhibit to the addendum and have the parties agree to use that form.
Sample Insert: Where Architect’s services require Owner to disclose to Architect or Architect’s engineers or consultants information of a proprietary or confidential nature, Owner shall have the right to require Architect and/or such engineer(s) or consultant(s) to execute a commercially reasonable nondisclosure agreement for the benefit of Owner, prior to Owner’s release of such proprietary or confidential information.
Scope of Services. One common dispute that arises in connection with owner-architect contracts is whether a particular task falls within the scope of services required of the architect under the agreement (often referred to as “basic services”). Tasks falling outside that scope are “additional services” that are not mandatory and/or may entitle the architect to additional compensation. Negotiating which tasks to include and exclude from the scope of basic services presents a classic Venn diagram problem. Architects would like the scope of services to include only the items specifically enumerated in the contract. On the other side, the owner wants the architect to be responsible for all tasks necessary to accomplish the work, except for the specifically enumerated exclusions. Each party prefers to have the other party responsible for coming up with a specific list and assuming the risks for any tasks not specified on that list. The challenge is assigning responsibility for those items that were not specifically listed by the parties. The insert below is intended to make clear that basic services include “normal and customary” components typical of basic services, even if those specific components are not expressly mentioned in the form agreement.
Sample Insert: Architect will provide all services, whether specifically delineated in this Agreement or not, which are part of the normal or customary practice of the profession and which are done in order to accomplish the Basic Services set forth in this Agreement.
Retroactive Coverage. Architects often begin providing services on a project before the parties can execute a formal agreement. At times, the parties may not finalize and sign the architectural contract until after significant portions of the services have been completed. One way to handle this issue is to retroactively date the architectural agreement effective as of the date when the architect first started to perform services on the project. The other approach is to date the agreement for architectural services as of the date it is executed but include a provision that retrospectively wraps the services the architect performed prior to execution of the formal agreement into the contract.
Sample Insert: Any services provided by Architect on the Project prior to the date of this Agreement shall be deemed to have been performed by Architect pursuant to this Agreement, and this Agreement shall supersede any preliminary services or similar agreements that may have been previously executed by the parties with respect to such services.
Engineers & Consultants. Projects often require the input of one or more engineers and consultants in the design process. For example, many commercial projects will involve work by structural, mechanical and civil engineers. Other projects may also require specialized services such as AV consultants and acoustic engineers. Most owners prefer to consolidate as many of the engineers and consultants as possible under the architect’s umbrella. This consolidation provides the owner with a single point of contact and reduces issues related to having separate contracts with each engineer or consultant. Because the architect will use the engineers’ and consultants’ expertise and work product in completing the design and construction documents, the architect is typically in the best position to coordinate the project engineers and consultants. For this reason, the architect is often the logical party to have control over and responsibility for those experts. In most instances, it is easier for the architect to sort out design and coordination problems between itself and the supporting engineers and consultants than for the owner to try to referee the interplay between the architect, engineers and consultants. In addition, if there is a problem on the project, from an owner’s perspective it is better to only have to look to the architect (who in turn can look to the engineers and consultants under its umbrella) rather than the owner trying to sort out liability among the architect, engineers and consultants. The owner may incur incremental additional costs by having the engineers and consultants under the architect’s umbrella (e.g., architect’s mark-up of the cost of such engineers and consultants), but the owner can limit the mark-up (if any) by the architect of the costs of the engineers and consultants in the agreement in the same way it can limit the architect’s mark-up on reimbursable expenses. Note that there are situations where the owner may want certain engineers or consultants to not come under the architect’s umbrella so that the owner has more control over that aspect of the project. Those situations often arise in connection with design-build specialty items such as computer infrastructure, clean room construction, warehouse shelving systems, specialty AV equipment, pools/landscaping and other similar items.
Sample Insert: Architect shall also be responsible for retaining any engineering and consulting services necessary to produce a complete and accurate set of construction documents to complete the Project. Architect shall be responsible for ensuring that all of its contracts and agreements with third parties related to the Project conform with the requirements of this Agreement. While nothing contained in this Agreement shall create a contractual relationship between Owner and any third party, it is understood and agreed that Owner is to be an intended third-party beneficiary of all contracts for engineering and consulting services between Architect and third parties pertaining to the Project. Architect shall incorporate the obligations of this Agreement, as appropriate and applicable, into its respective agreements with engineers and consultants retained by Architect for the Project.
Andy Jacobson, Esq.’s practice covers a broad range of commercial real estate issues, with particular focus on commercial and retail leasing, land use and telecommunications, as well as design- and construction-related agreements. Andy is a member of both the Minnesota and California bars and can be reached at [email protected].