Law Offers Protection From Green Building Pitfalls

Date: September 4, 2009

Author: Adam D Baker

Despite an economic slowdown affecting nearly all segments of the development industry, green building is positioned to emerge from the recession as a more influential force than ever before.

However, with rapidly changing innovations in green building technology and constantly evolving green building standards, it can be challenging for development professionals to stay abreast of the applicable requirements and expectations to which their projects are expected to adhere.

One of the most important roles we play as attorneys is to serve as advisors to our clients. In this capacity we are able to assist our clients in avoiding potential pitfalls.

Even on the most basic building project, the design and construction process is replete with potential for miscommunication, complications, claims, liability, litigation, arbitration and even bankruptcy. Introduce green building into the mix, and you have added another layer of complexity to an already complicated process.

As the green building industry is in its relative infancy, the potential for problems to arise on a project is rather high. Inexperienced project teams, poorly drafted contracts, complex certification processes and unfamiliarity with applicable standards are all factors which may negatively impact a green building project and potentially lead to legal action.

It is critical for attorneys who represent clients engaged in green building projects to discuss potential legal liability and to take proactive steps to help minimize risk. The earlier these conversations take place, the better positioned the client will be to ensure that they are adequately protected.

Many of the potential risks associated with green building projects are caused by the use of standard form construction contracts that do not address -- either adequately or at all -- green building concepts and allocation of specific green risks.

Each green project is unique and carries with it its own set of risks and liabilities. As a result, contracts for these projects should be tailored to adequately manage the goals and expectations for the project and should clearly define and allocate responsibilities for meeting these goals and provide remedies in the event that there are shortfalls.

A variety of jurisdictions across the country have passed legislation mandating green development or incentivizing it through tax credits or expedited permitting. A popular option for jurisdictions which have established mandates and incentives is to tie the jurisdiction's requirements to a thirdparty certification regime, such as the U.S. Green Building Council's LEED rating systems. Failure to secure available incentives or comply with a jurisdiction's green building mandates is likely to lead to legal disputes.

While green claims and disputes are beginning to arise and it is likely the trend will continue, green issues are largely untested in the courts. The first true green building litigation in the United States was the Southern Builders Inc. v. Shaw Development LLC case in 2007.

The matter involved a project known as Captain's Galley, a $7.5 million condominium complex constructed adjacent to a marina in Somerset County, Md. The owner of the condominiums, Shaw Development, became entangled in litigation with the project's builder, Southern Builders, after the project failed to achieve LEED Silver certification, a standard of green building that if met would have yielded an estimated $635,000 in tax credits from Maryland's green building tax incentive program.

Southern Builders filed a $54,000 mechanic's lien against the project and the owner filed a counterclaim in the amount of $1.3 million. The counterclaim alleged damages for negligence, breach of contract, delays, defective workmanship and failure "to construct an environmentally sound green building in accordance with the LEED rating system."

The damages included the tax credits lost, approximately $635,000. While the contract specified that the project was to be designed to comply with a Silver certification level under the LEED Rating System, it failed to indicate who assumed the risk of obtaining the LEED certification and, in addition, failed to indicate who bore the risk of obtaining the tax credits.

While the case ultimately settled out of court in 2008, the message was clear: Contracts for green building projects need to go beyond the standard construction contracts in order to adequately manage project goals and effectively delineate project responsibilities.

There is little doubt that there will be an increasing amount of green-related litigation over the coming months, but it is likely that most green project disputes will be handled through arbitration, as the majority of contracts now designate mediation, arbitration and other forms of alternative dispute resolution as the ultimate construction dispute mechanism.

Failure to perform
A new concern -- recently emerged and likely to spawn additional disputes among building professionals -- is that projects certified under the U.S. Green Building Council's LEED rating systems may not be performing as efficiently as anticipated.

This disparity between how a building is designed and how it is constructed and operated has prompted the USGBC to announce that it will begin collecting information on energy use from all of the buildings it certifies, with the threat of potentially revoking the certification of those buildings which fail to perform.

LEED v3, the most recent iteration of the USGBC's suite of rating systems, includes a provision that provides that certification may be revoked from any LEED project upon the knowledge of non-compliance with any applicable Minimum Program Requirement. MPRs are minimum design characteristics that a project must possess in order to be eligible for certification under LEED v3.

Under the MPR regime, projects seeking certification must provide energy and water bills for the first five years of operation. The USGBC plans to use this performance data to compare the proposed and metered performance of a building. If it is determined that a project does not comply with an MPR, it runs the risk of decertification. Such a prospect creates novel legal issues.

In the past, before the USGBC was tracking the performance of certified buildings, there was no consequence for failing to operate as designed other than potential PR embarrassment.

Now, with the risk of decertification, it is likely that building owners will be looking to designers and contractors to assign liability for failing to meet the performance requirements. In addition, a government that had provided a certification incentive for a project may seek to recover that incentive where the project is decertified.

Green safety net
Another recent trend with potential implications for the legal side of green building is the emergence of green insurance for building professionals. In order to protect themselves against the risk of liability, building professionals typically turn to insurance.

Argo Insurance Group, a San Francisco-based commercial insurance brokerage, is seeking to fill this need for green building professionals with the recent introduction of the first green professional liability policy for architects and engineers. The policy, underwritten by Lloyd's of London, covers a variety of aspects of green development including technical consulting, site selection, water efficiency and other sustainable services.

The policy, which has been in place for several months, is the first of its kind, which invariably means that its language will evolve, with lawyers sure to have a hand in this progression.

In order to effectively advise and properly manage expectations in such a rapidly evolving industry, attorneys are obligated to keep up with the recent trends and developments in the industry. As green building continues to gain prevalence, it is expected that attorneys will become increasingly savvy in advising their clients on navigating the potential pitfalls in the processes and service contracts.

Although an increase in knowledge and familiarity may not directly result in fewer disputes arising out of green projects, it will certainly create a roadmap for the proper resolution of such disputes.

This article has been reprinted with permission of The Daily Record 2009.