- within Compliance topic(s)
Highlights
- As the government shutdown continues into its second month, the U.S. General Services Administration (GSA) leasing community is feeling the impact of furloughs. Lessors are running into delays in procurement as well as design and construction approvals, and risk delays in GSA rental payments.
- This Holland & Knight alert provides guidance for lessors on how to approach the three stages of lessor involvement in GSA leasing: 1) lease procurement, 2) design and construction, and 3) rental term.
As the government shutdown continues into its second month and takes the record for the longest shutdown in history, the U.S. General Services Administration (GSA) leasing community is feeling the impact of furloughs. Lessors, in particular, are running into delays in procurements as well as design and construction approvals and, for the first time in history, risk delays in GSA rental payments.
This Holland & Knight alert provides guidance for lessors on how to approach the three stages of lessor involvement in GSA leasing: 1) lease procurement, 2) design and construction, and 3) rental term. As noted further below, each stage provides lessors with different considerations and unique entitlements.
Lease Procurement Impacts
Under the Antideficiency Act, federal agencies are prohibited from obligating funds that have not yet been appropriated, which means that many lease procurement efforts, including options and modifications, may be put on pause until the shutdown is over. GSA's recent guidance also explains that the government is unable to award new lease contracts during the shutdown unless the funds come from an excepted funding source, such as a self-funded program or non-appropriated fund. The only exceptions are for those leasehold procurements that have preexisting appropriations and reimbursable work authorizations in place.
Additionally, GSA cannot exercise lease contract options or extensions that increase the government's financial obligation unless it determines that doing so is necessary to support an excepted activity, such as law enforcement or emergency response management. For lessors engaging in lease procurement activities for an agency tenant with an excepted function, it is important to communicate with the assigned contracting officer to determine whether the procurement will continue during the shutdown.
However, even those exceptions may be moot. Based upon conversations with lessors and GSA leasing stakeholders, it appears that most contracting officers have been or will experience at least intermittent furloughs. This means that there will be a substantial delay in all procurement activity that requires contracting officer sign-off, to include – but not limited to – issuance of Requests for Lease Proposals (RLPs) and amendments to the same, establishments of competitive ranges and lease award decisions.
However, while GSA employees continue to be furloughed during the shutdown, brokers under GSA National Broker Contracts (NBCs) will still be active because their work is funded through private sector commissions rather than federal appropriations. Prospective lessors can expect continued communication with these broker teams, although there may be delays to the extent that brokers need to collaborate with GSA staff who have been furloughed.
For lessors currently in the procurement pipeline with GSA, it is important to make sure that all tenant improvement schedules and build-out costs remain current and are adjusted to reflect increased costs, when applicable. It is also possible that any currently active RLPs will undergo revisions to adjust their deadlines or terms once the shutdown is over. Lessors may want to take advantage of extended deadlines to revise their offers to reflect increased costs in labor, materials, utilities or real estate taxes that materialized during the shutdown period. At a minimum, all lessors should expect a delay or pause in communication with lease contracting officers and other GSA personnel during the shutdown.
Design and Construction Impacts
Perhaps the most substantial impacts of the shutdown and furloughs will be felt by lessors still in the design and construction phase of a government lease. Government leases require the government to be an active partner in design approvals and construction reviews, and the non-availability of government personnel will inevitably result in delays.
One potential remedy for lessors who have experienced a delay in design and construction efforts due to the government shutdown is a delay claim or a request for equitable adjustment. The "Changes" paragraph in a standard lease's general clauses recognizes that a government-directed change relating to tenant improvements, security requirements or lease services may result in an increase to the lessor's cost or time required to perform their obligations. Delays in approvals and engagement on design and construction constitute constructive changes, and entitle the lessor to relief. See Kiewit-Turner, a Joint Venture v. Dep't of Veterans Affairs, CBCA 3450, 15-1 BCA ¶35,820 (finding an actionable claim where the government's failure to provide a construction design caused delays in the project schedule).
For example, a delay in a notice to proceed with construction may cause an increase to the price initially quoted for materials or labor. This could entitle the lessor to an equitable adjustment in the lease's rental rate, operating cost base, delivery date or the lump sum payment. Lessors should consider whether the government shutdown and the associated furloughs have affected their costs in terms of property maintenance, property management, utilities, increases to tenant improvement design and construction quotes, and real estate taxes for which GSA would have reimbursed the lessor. Interest payments for funds that the lessor borrowed as a direct result of the government's delay may also be recoverable, but this is less clear from the applicable precedent. See Wickham Contracting Company, Inc. v. Fischer, 12 F.3d 1574, 1582-83 (Fed. Cir. 1994) ("[A] contractor may recover interest actually paid on funds borrowed because of the government's delay in payments and used on the delayed contract.") In general, lessors should carefully review all expenses that they expected to incur between the lease award and the occupancy date, and compare those against the expenses that they actually incurred.
Maintaining adequate documentation of the delay and its impacts is key to obtaining relief in the event of a government delay. Lessors should keep records of all written communication with the government regarding the lease award and execution, any initial work on the design and construction and the delay itself. Additionally, lessors will need documentation showing the increases in cost or time as a result of the delay in occupancy.
Lessors should also put the government on notice of the impacts of any delay. The "Changes" clause requires lessors to assert their right to an equitable adjustment within 30 days of the government's action (or delay), but courts and boards are often lenient with this time frame. In the event that a lessor provides untimely notice to the government, the request is still valid unless the government meets the high burden of proving that it was prejudiced by the late notice. See Big Chief Drilling Co. v. United States, 15 Cl. Ct. 295, 303 (1988). Nevertheless, lessors should notify the government of their delay claims promptly when possible.
Importantly, GSA's shutdown guidance classifies leasing design and construction activities in federal lease contracts as an excepted activity when GSA determines that they are critical to a lease project that has been appropriated by Congress or is necessary to support an excepted agency function (such as law enforcement). This means that a minimum level of GSA personnel should be available to support these actions on a case-by-case basis. In the authors' experience over the past few weeks, there has been continued support for procurements and design and construction of facilities that support U.S. Immigration and Customs Enforcement (ICE) operations.
Rental Term Impacts
Although a delay in rental payments during a government shutdown is largely unprecedented, it is likely to occur if the current shutdown continues much longer. GSA uses carryover funds to pay rent to federal lessors during a shutdown, but these funds are not limitless, and in any event, GSA typically programs money for rental payments mid-month for the following month's rental payment. Given this, lessors should brace for a potential delay in rent payments for December and ensure that they have enough funding to continue to perform lease obligations, which remain in full force throughout the shutdown.
When the shutdown ends, lessors can expect to be reimbursed for the delayed rent, as GSA is legally bound to pay for leases that were fully obligated before a shutdown. The Prompt Payment Act also provides some relief for delayed rental payments. The General Clause that incorporates this statute into GSA (and other government agency) leases provides as follows:
(c) Interest Penalty.
(1) An interest penalty shall be paid automatically by the Government, without request from the Contractor, if payment is not made by the due date.
(2) The interest penalty shall be at the rate established by the Secretary of the Treasury under Section 12 of the Contract Disputes Act of 1978 (41 U.S.C. 611) that is in effect on the day after the due date. This rate is referred to as the ''Renegotiation Board Interest Rate,'' and it is published in the Federal Register semiannually on or about January 1 and July 1. The interest penalty shall accrue daily on the payment amount approved by the Government and be compounded in 30-day increments inclusive from the first day after the due date through the payment date.
Conclusion
In summary, the current federal shutdown will continue to significantly disrupt GSA lease procurement and administration. Most lease procurement activities, including lease awards, options, modifications and extensions, will remain paused unless they support an excepted function or are funded through a non-appropriated source.
Lessors in the procurement pipeline should be prepared to adjust their offers to reflect any additional costs that emerged during the shutdown period. For lessors currently engaged in the design and construction of a lease, the government's delay may qualify as a "change" under the lease entitling them to equitable adjustments for any increased costs directly related to the delay or extended performance time.
It is important for such lessors to maintain documentation of all cost increases and schedule impacts in order to support a request for equitable adjustment. Although lessors generally cannot recover for a delay in rental payment during a shutdown, specific scenarios (such as a delay causing the government to occupy swing space for longer than anticipated) may entitle a lessor to compensation. A delay claim may also be available when lessors can show that their inflated rent costs are the direct result of the government's delay.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
