Important Small Business Eligibility Rules Go into Effect on May 25, 2018The U.S. Small Business Administration (SBA) recently issued a very important, but under-the-radar, “technical correction” to its regulations pertaining to recertification of a federal contractor’s status for Multiple Award Contracts. In particular, the SBA is amending its regulations to provide that where a “concern grows to be other than small” or no longer qualifies for a given socio-economic status (e.g., HUBZone, woman-owned, economically-disadvantaged woman-owned, service-disabled veteran-owned, etc.) as a result of a novation, merger/sale/acquisition, or “negative status determination,” the company is ineligible to compete for set-aside task orders under the company’s Multiple Award Contracts. Importantly, this new rule applies regardless of whether or not “the contracting officer requests a new [status] certification in connection with a specific order.”

Previously, the SBA’s rules in this area were widely interpreted to mean that where a “concern grows to be other than small” or no longer qualifies for a given socio-economic status as a result of a novation, merger/sale/acquisition, or “negative status determination,” the company was eligible to compete for set-aside task orders under the company’s Multiple Award Contracts, unless “the contracting officer requests a new [status] certification in connection with a specific order.” See Analytic Strategies, Inc., SBA No. VET-268 (Jan. 29, 2018).

The SBA’s “technical correction” to its regulations becomes effective on May 25, 2018. If you have any questions about the SBA’s new rules, or any other related issues, please do not hesitate to contact Aron Beezley.

GAO Clarifies Rules Re: OCI Waiver ProtestsAron Beezley, a partner in Bradley’s Government Contracts Practice Group, recently published a Law360 Expert Analysis article on the Government Accountability Office’s (GAO) decision in ARES Technical Services Corporation, B-415082.2, et al. (May 8, 2018). As discussed in the article, the GAO’s decision in ARES Technical Services Corporation provides a useful guide to GAO protesters in that it makes clear where they should (and should not) focus their “OCI waiver” challenges. As the article also discusses, the GAO’s decision is useful to agencies and intervenors in GAO protests, as it reinforces the reality that, in the OCI waiver context, agencies have a fairly low bar to clear before the GAO. Further, the GAO’s decision in this case is noteworthy in that it indirectly highlights the comparative lack of guidance by the U.S. Court of Federal Claims on OCI waiver protests.

A complete copy of the article is available on the Law360 website. If you have any questions about any of the topics discussed in the article, or about any other related issues, please feel free to contact Aron Beezley.

Lien on Me (When Your Priority’s Gone)Imagine this scenario. You are the developer for a new mixed-used facility. Months went into clearing all of the zoning and financing hurdles, but now everything is in place. All that remains is for the lender to finish the loan paperwork and record a security deed. However, upon visiting the site, you notice that materials and equipment are already there. Some clearing has been completed and grading work begun. There appears to have been a miscommunication with the contractor, which directed its subcontractors to commence with project preparation. What is the effect, if any, on the priority of lien rights?

When construction work begins before a mortgage or deed securing the construction loan is finalized and recorded, the situation is sometimes referred to as “broken priority.” Broken priority can occur in jurisdictions that have adopted a “relation back” approach to materialman/mechanic’s liens. As an example, in California, “A lien under this chapter . . . has priority over a lien, mortgage, deed of trust, or other encumbrance on the work of improvement or the real property on which the work of improvement is situated, that (1) attaches after commencement of the work of improvement or (2) was unrecorded at the commencement of the work of improvement and of which the claimant had no notice” (Cal. Civ. Code § 8450). Under the “relation back” approach, a contractor or materialman may not have actually recorded a lien, but its lien rights could trump a security deed that the lender recorded after construction work began. Thus, even though there is no recorded lien or encumbrance that pre-dates the lender’s mortgage or deed, a contractor or materialman could record its lien months later and have superior lien rights to the lender.

Depending on what side of the table you are on, broken priority can be a significant issue. For owners or developers, broken priority can make it difficult to actually close the construction loan. The bank may not lend the funds, and the title company may not insure the loan because there is no longer certainty that the construction loan will be the senior lien on the property. A materialman or mechanic’s lien could cut in front of the lender in the priority line. Until lien waivers are obtained from each contractor that has performed work and each supplier that has provided materials, project financing may be cancelled or delayed.

For contractors, subcontractors, or material suppliers, the “relation back” doctrine can actually boost lien priority. A contractor considering recording a lien should check the land records to see when the security deed for the construction loan was actually recorded. If work began before that date, the contractor’s lien may trump the lender’s lien and allow the contractor to be paid first from the proceeds of a foreclosure.

Other jurisdictions, such as Missouri, employ a “first spade” rule. This rule is unique in that “a deed of trust recorded after the commencement of work on a project is inferior to any mechanic’s liens arising on the land from that work.” Thus, even contractors or material suppliers that got involved later in the project can take advantage of the “first spade” rule if any work commenced before the recordation of the deed or mortgage securing the construction loan. Under this rule, all mechanic’s lien claimants are on equal footing.

Due to the potential consequences of broken priority, construction lenders and title underwriters should (1) try to confirm that no work has commenced before lending funds or issuing a policy, or (2) obtain lien subordination agreements from any contractor or materialman that has already begun work or provided supplies, or (3) do both. Conversely, contractors, subcontractors, or material suppliers, should never assume that a security deed for a construction loan is automatically superior, except where they have signed a subordination agreement. In short, construction loan closing and the beginning of construction work are critical dates for determining lien priority that all parties should carefully monitor.