Building "green" involves legal risks: what to know when seeking LEED certification.
Sustainability is especially important in buildings because they annually consume 39 percent of total energy and 72 percent of electricity use in the U.S. Fortunately, the pace of "green" building has quickened. By 2015, the number of retrofit and new "green" buildings is projected to rise to approximately eight billion cumulative square feet--more than a 15-fold rise in seven years. To spur creation of the workforce required to retrofit U.S. buildings, the U.S. Department of Energy is investing over $4 billion in training and education.
While the "green" stampede is historic, going "green" does require caution and education. Below are a few areas of legal concern arising from "green" building.
While LEED is the most widely used "green" building rating system, there are many others. Selection of the right one may have important consequences. LEED is a comprehensive and rapidly evolving rating system that currently certifies existing buildings (operations and maintenance), new construction, homes, commercial interiors, core and shell projects, neighborhood development (in pilot), and schools, healthcare, and retail projects. LEED also accredits professionals who have attained a high degree of knowledge in the LEED rating system. For example, I am one of only 15 attorneys who are LEED-Accredited Professionals in the state.
Two other prominent rating systems are Green Globes and NAHB Green. Green Globes is an environmental design and management tool that delivers an online assessment protocol and rating system. It also provides guidance for "green" building design, operation and management. It is interactive and provides market recognition of a building's environmental attributes through third-party verification. The National Association of Homebuilders has developed a complete system, NAHB Green. It relates to certification of homes that meet its ANSI approved ICC-700-2008 National Green Building Standard or its Model Green Home Building Guidelines. Builders may also attain Certified Green Professional status through a course of training offered by the NAHB. For more information on these rating systems, go to: www.usgbc.org or www.nahbgreen.org.
Some rating systems score the sustainability of a building by aggregating the scores from several other systems. For example, in 2008, the Capital Markets Partnership (CMP) created an underwriting standard that scores the "green" value of a building based on such factors as the number of points the building receives under ENERGY STAR and LEED and whether the building is certified as being Climate Neutral. The CMP Green Value Score Formula provided by these standards assigns a different weight to each of these factors and then provides a final score. The Green Building Underwriting Standard and the CMP Green Value Score are tools that allow lenders, private equity investors, developers, and real estate owners to rate an asset's "greenness" at the time of financing or acquisition. For more information, go to capitalmarketspartnership.com.
The first reported "green lawsuit" occurred in 2008 and involved the Captain's Galley Luxury Condominiums in Crisfield, Maryland. The developer was seeking LEED silver certification for its $7.5 million building and $635,000 in tax credits which were tied to achieving the certification. The contractor made the classic mistake of filing a lien and then suing the developer to obtain payment on a relatively small unpaid sum. The developer then countersued the contractor for $1.3 million, claiming that the contractor was responsible for developer's failure to achieve the LEED certification and the loss of tax credits. The developer claimed that the contract required that the contractor construct an environmentally sound "green building" in conformance with a "Silver Certification Level according to U.S. Green Building Council's Leadership in Energy & Environmental Design (LEED) Rating System." It also alleged that the contractor was nine months late in completing the project.
Unfortunately for the contractor, while the contract did contain a waiver of consequential damages, the contract documents attached to the developer's counterclaim contained no provisions limiting the contractor's liability relating to any "green building" aspects of the project, did not discuss the role of the developer or the design/ construction team regarding obtaining LEED certification, and did not discuss the LEED process or the effect of a project delay on the attainment of tax credits. The case was settled in 2008 and the terms of the settlement were not made public.
To avoid this type of problem, owners should first address (1) how to assure that their certification and other "green" goals will be achieved, and (2) how to allocate responsibility for lack of certification or subsequent failure to meet performance criteria. This is typically handled in a contract. Designers and contractors may want to limit their contractual or other liability exposure if the owner's goals are not achieved.
Contracting parties should also be aware of risks arising from the "newness" of "green" building. Some of these risks include use of untested materials, improper installation of material, delays in production or delivery of "green" products, building code issues, difficulties measuring product and building performance, lack of quality control, and increased costs and delays arising from inadequate training and experience.
Performance issues may result in liability for loss of tax incentives, injuries to building occupants arising from poor indoor air quality, lost employee productivity, reduced financing arising from a lower building valuation and project delays, loss of tenants, and a wide range of other issues.
Insurance is often overlooked or not understood. Professional liability, general liability and property insurance should all be reviewed to be certain that potential "green" risks are covered. The insurance industry is currently analyzing these risks and methodically responding to them. For example, in 2009, Marsh published a 2008 year-end report entitled "The Green-Built Environment in the United States," which outlined the status of insurance markets relating to "green" building and all major forms of insurance products. This report outlined the perceived risks of "green" building as to various insurance products and summarized some of the insurance claims already experienced with "green" building. For a copy of this report, go to global.marsh.com/news/articles/GreenBuilding/index.php.
Because of the tremendous interest in the "green" area, Marsh went one step further than its market report. It brought together 55 construction industry executives who each participated in one of a series of four half-day forums held in various major U.S. cities. Participants identified the five risk categories of greatest concern relating to "green" building based on cost impact and likelihood of occurrence. These risks included financial, standard of care/legal, performance, consultants/subconsultants and subcontractors, and regulatory. Despite concerns, participants felt that most of their concerns could be addressed to varying degrees through insurance and surety solutions and through contracts. To review a copy of the full report entitled Green Building: Assessing the Risks, go to: global.marsh.com/news/articles/greenbuildingsurvey/index.php.
While "green" building is here to stay, because the "green-built" industry is still in its early years, those involved in "green" projects should carefully weigh the risks and be proactive to maximize success and minimize unintended consequences.
Harvey Berman, a LEED AP, is a partner at the law firm of Bodman LLP practicing in its Ann Arbor office.
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|Date:||Nov 1, 2009|
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