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Landlords May Face Unexpected Costs When Leasing to Public Entities

By Terri Molinaro, Esq.

Most Landlords know that prevailing wages must be paid when improvement work is done to space leased to a public entity. What they might not know is that if the public entity occupies more than 50% of the building then work outside of the entity-occupied space may also be subject to prevailing wages. The California Court of Appeal recently held just that in Plumbers and Steamfitters, Local 290, v John Duncan and Kramer Properties, Inc.(2007) (Plumbers v Kramer), 157 Cal.App.4th 1083.

In Plumbers v. Kramer, Kramer owned a professional building and leased 63% of the building to a public entity ("County"). The lease with the County required Kramer to construct (i)certain plumbing improvements to the County-occupied space, and (ii)certain plumbing improvements to the shell building outside of the County-occupied space. Aware of the prevailing wage law requirements, Kramer was careful to enter into two contracts: one for the improvements to the County-occupied space, and one for the improvements to the building shell. Kramer did not pay prevailing wages to Plumbers for the building shell improvements. Plumbers argued that the plumbing work performed in the building shell was a public work, and that Kramer was required to pay prevailing wages for those improvements. The Court of Appeals held that because more than 50% of the privately owned building was to be occupied by the County (a public entity) that any construction work done to the building qualifies as a public works project under Labor Code 1720 and was subject to prevailing wage law. Kramer argued that work to the building shell had no functional relationship to the County-occupied space, and thus should not be considered a public works project. While the Court acknowledged that the statute may plausibly be read to exclude construction work with no functional relationship to the space leased to the public entity, in the case at hand, the Court found that the plumbing in the building shell is essential to the operation of the plumbing in the County-occupied space and thus qualifies as a public work. Notably, the Court left undecided whether or not work with no functional relationship to the space leased to a public entity – e.g., installation of a coffee shop in the building – could be excluded from the definition of a public work under Labor Code 1720.

If you or your client leases (or is considering leasing) more than 50% of a building to a public entity, before concluding lease negotiations and/or commencing any construction work at the building, the impact of prevailing wage law should be carefully considered or the Landlord could ultimately bear unexpected costs.

The above article is provided for informational purposes only. It is not legal advice, nor does it create an attorney-client or any other relationship. You should always contact an attorney for legal advice applicable to your particular situation.