Nevada Construction Law Developments in 2014

This is an off year for Nevada’s biennium legislative session; but even though the Legislature was quiet, Nevada’s electorate was not. Nevadans approved State Question No. 1 at the ballot box. This measure amends the Nevada Constitution to create an intermediate Court of Appeals. Currently all appeals must go directly to the Nevada Supreme Court, which is experiencing a significant backlog. The creation of this new intermediate court should correspond to a significant increase in the number of binding decisions in all areas of litigation, including construction law.

Also, in a victory for the mining industry, Nevadans narrowly rejected State Question No. 2. This legislatively referred constitutional amendment would have removed the current five percent taxation cap on the mining industry and would have allowed the Legislature to raise taxes on mining activities and profits.

Additionally, the Nevada Supreme Court handed down some notable decisions this year.

In Byrd Underground, LLC v. Angaur, LLC, 332 P.3d 273 (2014) the United States Bankruptcy Court for the District of Nevada certified three questions to the Nevada Supreme Court. The questions focused on whether placement of fill materials and grading constituted “construction of a work of improvement” for purposes of a lien priority determination under NRS 108.225. The question, for purposes of priority, is whether the improvements are visible upon a reasonable inspection.

The Court held that the question of whether improvements are visible upon a reasonable inspection is a question of fact for the trial courts. The preparatory work could constitute a “work of improvement” and that the trier of fact needs to “look to the entire structure or scheme of improvement as a whole...rather than solely evaluating the activities based on whether they are preparatory or structural or vertical construction, in determining whether construction on a work of improvement has commenced.” The Court also found that the construction contract dates and permit issuance dates were irrelevant to the question of whether a “work of improvement” had commenced. The Court did point out, though, that the permits or contracts can help determine the scope of the work of improvement, which would assist in the determination of when visible work began. As a result, we can expect more battles in the trial court regarding the priority of liens. Accordingly, construction lenders should take additional precautions and obtain additional protections from property owners and title insurance.

In DTJ Design, Inc. v. First Republic Bank, 317 P.3d 814 (2014), the Nevada Supreme Court considered whether a foreign architectural firm can bring or maintain an action in Nevada to foreclose a mechanic’s lien, when the firm has not complied with the registration requirements of Nevada Revised Statute (NRS) 623.349(2). This statute requires any form of business organization or association to demonstrate compliance with all provisions of the statute, obtain and pay for a certificate of registration, and be qualified to conduct business in Nevada. The Court noted that the statute applies to individuals and business entities alike. Here, plaintiff DTJ Design, Inc. failed to comply with NRS 623.349(2), and the Supreme Court affirmed the lower court’s ruling that DTJ Design, Inc. was thus barred from bringing and maintaining its action for recovery of compensation for its architectural services performed in Nevada.

It is important for individuals or entities desiring to perform or provide services in Nevada to be aware of and comply with all of the various requirements to conduct business in the State, in order to ensure the opportunity to seek protection and redress from the court system if necessary.

In Oxbow Construction, LLC v. Eighth Judicial District Court, 335 P.3d 1234 (2014), the Nevada Supreme Court looked at the available remedies under Chapter 40, Nevada’s residential construction defect statutes in the context of a mixed-use development. As is common with large projects, construction was completed in several stages. Upon completion of each phase, the developer leased many of the units as apartments. Once the entire project was completed, the owner sold all the units to Regent Group II, LLC (Regent). Regent then sold all of the units to individuals. After the units were sold, Regent at Town Centre Homeowners’ Association (the HOA) served Oxbow with notice to pursue NRS Chapter 40 construction defect claims. Ruling on several motions, the district court, among other things, found that the previously leased units were not considered “new residences” for the purpose of construction defect claims and that the HOA could only pursue claims for construction defects in limited common areas assigned to multiple units where at least one unit was a new residence.

The Nevada Supreme Court upheld the district court’s rulings. In doing so, the Court reaffirmed a prior ruling that previously leased units become “residences” under NRS 40.630 once title to a dwelling is transferred to a home purchaser. Here, Regent filed CC&Rs converting the apartment complex into a common interest community. Therefore, the developer’s transfer of title to all individual units to Regent transformed those previously leased units into “residences.”The Court then separately analyzed what it means to be “new” under Chapter 40. The HOA argued that a “sliding scale” analysis should be used to define the meaning of “new.” The Court declined to adopt this approach and stuck with its precedent of rejecting “amorphous, sliding-scale tests” in favor of defining “new” in terms of original construction, lack of occupancy and the point of original sale. A residence is “new” for construction defect purposes “if it is a product of original construction that has been unoccupied as a dwelling from the completion of its construction until the point of its original sale.” So any unit that was previously occupied as a leased apartment before the original sale cannot be classified as new and could not pursue claims under Chapter 40.

This reaffirmed the Court’s previous holding which defined a “new residence” under the same objective criteria. The Court has been reluctant to add any subjective criteria to this definition for fear of widening the flood gates for construction defect litigation.