On November 23, 2011 the Supreme Court of Pennsylvania rendered a decision that may have far reaching implications with regard to state, county, municipal and school district leasing of buildings and office space. In a case captioned 500 James Hance Court, et al. v. Pennsylvania Prevailing Wage Appeals Board, ___ A.3d ___, 2011 WL 5865752 (Pa. 2011), a developer planned to construct a building and then entered into a preconstruction lease with a charter school. The construction of the building was to take place in essentially two phases, the shell and the interior fit out. The Bureau of Labor Law Enforcement made a determination that the entire project was subject to the provisions of the Prevailing Wage Act and the developer filed a grievance to appeal this conclusion. The matter worked its way through the Prevailing Wage Appeals Board, the Commonwealth Court, and finally to the Supreme Court of Pennsylvania. Through the appeal process the Bureau and Prevailing Wage Appeals Board, which had initially decided the matter, took the position that a five part test utilized by the federal government to determine the applicability of the Davis-Bacon Act must also be used to determine whether the Act applies to a preconstruction lease between a private developer and a public entity.
After consideration of the Pennsylvania Prevailing Wage Act and the facts of the case, the Supreme Court concluded that although the lease and construction agreements did not clearly separate the construction of the shell and interior fit out of the building, such bifurcation was a natural result of the construction process into phases which are to be treated separately for prevailing wage analysis. Because it was undisputed that the interior fit out would be completed by the charter school, there was no question that prevailing wage requirements would apply to that phase of the construction. However, with regard to the shell of the building, the Supreme Court flatly rejected the Prevailing Wage Appeals Board’s position that the five part federal analysis must be applied to the shell of the building.
In that regard, the Supreme Court articulated a test to be used to determine whether the Prevailing Wage Act applies to a preconstruction lease arrangement between private developers and a public entity subject to the Act. The court noted that “privately financed construction work does not facially implicate the terms of the act …” and that a developer could establish a prima facie case that the prevailing wage relation is not implicated where it presents evidence that “… it is incurring the risk and obligations of an owner/mortgagor in construction, that there is no public financing component to the work (or, under, Penn National I, in the relevant major phase of construction), and that its relationship with the covered entity is as a lessor under a facially legitimate lease… .”
Central to this analysis was the question of whether there was any public financing as the Prevailing Wage Appeals Board asserted based on rents to be paid under the lease, which would ultimately be used to recoup the costs of construction. The Supreme Court also rejected this position as there was no evidence that the recoupment period would be substantially shorter than the industry norm for building shells of the type involved in that matter. Likewise, the Court found that provisions in the lease allowing for an option to purchase did not satisfy the public financing component where the building would be purchased at fair market value. In rendering its decision, the Supreme Court has now provided a clear analytical tool for determining whether a preconstruction lease will be subject to the requirements of the Prevailing Wage Act.