PROJECT NOT GREEN ENOUGH? WHAT TYPES OF GREEN $$$ CAN AN OWNER RECOVER?

Angela R. Stephens, LEED AP +BD&C, GA-CR® Stites & Harbison, PLLC

Chris CheathamClaimKit

American Bar AssociationForum on the Construction Industry

2013 Mid Winter Meeting

Overview• Growth of Green Building

• Lack of Litigation

• Developments increasing likelihood of suits

• Claims, Green $$$ Damages

• Ways to Reduce Risks

Yes, People are stillbuilding green buildings

(Source: State of Green Business Report: GreenBiz Group January 2012)

WHY GO GREEN?

1) Energy/Operational Cost Savings2) Tax Incentives3) Financing4) Healthier Workspace5) Increased Productivity6) Positive Press7) Better for Environment

Environmental

SocialEconomic

Willis Tower $350M Renovation

Cut electricity use by 80%

Save 24M gallons of water each year

Empire State Building $20M Renovation

Cut energy costs by 38%

Seeking LEED Platinum Status

Why the lack of litigation? Team Mentality

Why the lack of litigation? Lack of

Enforcement By USGBC By Owners

Once certified . . . Always certified.

10

Northland Pines High School (USGBC Internal Dispute Resolution)

H.S. bldg committee alleged award of LEED Gold was not justified Complaint with USGBC Claim - failed to satisfy energy and

atmosphere prerequisites USGBC hired two engineering

consultants to review credits issued Appeal Denied

Why the lack of litigation?

Recession

Lack of assets to fight.

DEVELOPMENTS INCREASING THE LIKELIHOOD OF GREEN

CLAIMS AND DAMAGES

Regulations

That may lead to claims. . .

State Laws Codes

Incentives

Fed. Laws

20 States Mandate4 Encourage

STATE OF ARIZONA:EXECUTIVE ORDERs 2005-05 2008-29

2-11-05 / 12-16-08

State Funded Buildings: Design and construct to derive 10% of

their energy from a renewable resource. Meet energy efficiency standards

established by law. LEED Silver

Failure to achieve certification required by State Law?

Common law Breach of contract Breach of warranties (express and implied)

Majority of States - No express damages

Potential Green $$$ Damages

Failure to achieve certification required by State Law?Cost to repair v. diminution in valueOperational costsLEED Certification Premiums paid

Construction or Design TeamLEED Certification fees

Green Building Codes

CALGreenJuly 17, 2008

Effective 1/1/11:

Reduced water use

Reduced energy use

Use of recycled materials

Applies to residential construction

ASHRAE 189.1PHigh Performance Green Buildings AHSRAE, USGBC, IESNA

Applies to all buildings except low-rise residential

Similar to LEED

International Green Construction Code

Application Sale of Property** Change in Occupancy Repairs/Renovations

Even in minor – HVAC and energy reqs

Not for residential

ASHRAE 189.1 path

Federal Codes and Mandates

Executive Order 13514 – Net Zero by 2030 All federal agencies

GSA currently requires LEED Gold Creation of Own Code?

Potential Green $$$ Damages

Failure to achieve certification required by Codes?Penalties – each day separate offenseMisdemeanor or civil infractionReasonable Attorney’s feesPlus . . .

Potential Green $$$ Damages

IGCC Optional Ordinance – if adopted – forfeiture of:Performance Bond Irrevocable Letter of Credit or CashPlus . . .

Potential Green $$$ Damages

Cost to repair v. diminution in valueOperational costsLEED Certification Premiums paid

Construction or Design TeamLEED Certification fees

Incentives increasing likelihood of suits . . .

Green Bonds

Tax Incentives

Green Bonds San Mateo, CA

Commercial or industrial buildings > 3000 sq ft

$5,000 bond If don’t comply = forfeiture

Green Bonds Miami, Florida

All new buildings more than 50,000 sq ft Amount of performance bond based on sq ft

50,000 – 100,000 = 2% total cost of construction 101,000 – 200,000 = 3% > 200,000 = 4%

Green Bonds Washington D.C. Green Building Act

2012 – LEED Certification nonresidential and post-secondary educational facilities Failure to achieve:

Forfeit Performance Bond up to $3,000,000.00 Plus fines by Mayor

Tax Incentives

www.dsireusa.org

Tax Incentives Nevada - Property tax abatements:

LEED Platinum = abatement 35% of taxes imposed

Gold = 30% Silver = 25%

New Mexico – tax credits LEED Silver = $3.50 / sq.ft. LEED Platinum = $6.25/ sq.ft.

Potential Green $$$ Damages

Failure to achieve certification?Lost tax incentives

Shaw Development v. Southern Builders

$7.5 Mill – 23 condo units

Attempting LEED Silver

Owner sought $635,000 in lost tax credits under state-level green building program

Case settled

Contracts increasing likelihood of suits . . .

B214 CD 310

DBIA Exhibit

Who is responsible for green goals?

What happens if not achieved?

Varies by contract

Architect = LEED AP manages the LEED documentation prepares LEED Certification Plan

ID’s participants and their roles. crucial in any contract

Green “goals” - not mandates

Owners may point to:2007 AIA Code of Ethics - CANON VI Members should promote sustainable design and

development principles in their professional activities.

Ethical Standard 6.1 Sustainable Design: In performing design work, Members should be environmentally responsible and advocate sustainable building and site design.

Or point to:2007 NSPE Code of EthicsEngineers are encouraged to adhere to the principles

of sustainable development in order to protect the environment for future generations.

Potential Green $$$ Damages

Failure to achieve green goals under B214?Contract Silent

GBF – Only party liable?? Article 7.7 - Project Participants shall perform

elected green measures identified as their responsibility

Article 8.3 – No Project Participant other than the GBF shall be liable or responsible for the failure to achieve Green Status

• No One Party Control of Points/Goals

Potential Green $$$ Damages

Failure to achieve Green Status under CD 301?Refer to underlying contract If waived in contract, lists consequential damages that are waived:Lost profits Increased operating and maintenance costsLost tax incentivesLost marketing opportunities

Owner and DB can agree to incorporate sustainable elements or achieve a designated level of certification

Contains a Remedies Section Parties agree to appeal – pd for by Owner Selection of Remedies

Potential Green $$$ Damages

Selection of Remedies under DBIA Exhibit?WaiverLiquidated Damages – sole remedyLimited Obligations to Cure – max $$$

Remaining contingencyShare of savings (if GMP contract)Set amount

CASE STUDIES

Destiny USA Biggest and most environmentally

friendly structure

$2 Billion in Green Bonds from US Treasury

Destiny USA $238 Million in Green Bonds from

Syracuse Industrial Development Agency Private investors purchased in exchange for:

Interest Tax free status on interest

Developer received tax-free loan $120 Million in savings

Destiny USA To get $238 million in Green Bonds :

“demonstrate, and provide written assurances” that the project would receive LEED certification.

project had to include “a brownfield site” meet “goals for conservation and technology

innovation.” Reduced electric consumption Reduced sulfur dioxide daily emissions photovoltaic capacity fuel cell energy generation capacity

Destiny scrapped renewable energy features• No plant running on biofuel• No expansive solar panels

http://www.syracuse.com/news/index.ssf/2012/03/irs_says_destiny_usa_green_bon.html

Bonds not dependent on actual achievement of green building and renewable energy goals

Potential Green $$$ Damages

If IRS had a different ruling?

Forfeit $2.38 M in developers reserve fund

Revoke tax exempt status - $120 M savings

Revoke tax exempt status from investorsMESSY

1st to obtain LEED Platinum Certification

Parallams exposed to the weather . . .

Chesapeake Bay 2003 – water intrusion 2009 – widespread rot

Parallams not treated properly

or treatment not suitable

Foundation, architect and contractor settled and sued Parallam supplier Breach of contract Indemnity Contribution Negligent misrepresentation Negligence

Potential Green $$$ Damages

Demand to Parallam supplier = $6 M in damages InvestigationRemoval and replacementLost revenueLoss in value of CenterAttorneys fees

Chesapeake Bay

Action dismissed - statute of limitations

Gidumal

Gidumal Marketed as LEED Gold Building

Cutting edge green technology

Complaint Not enough energy savings

= additional costs = decreased unit values

SUMMARY OF POTENTIAL DAMAGES

Building Not Green Enough?

Cost to repair v. diminution in valueOperational costsLEED Certification Premiums paidLEED Certification feesCode penalties Attorneys fees

Potential Green $$$ Damages

Forfeiture of:Performance Bond Irrevocable Letter of Credit or Cash

Potential Green $$$ Damages

Lost tax incentivesLost marketing opportunities

Potential Green $$$ Damages

Liquidated Damages – sole remedyLimited Obligations to Cure – max $$$Remaining contingencyShare of savings (if GMP contract)Set amount

Potential Green $$$ Damages

Investigation costsLost revenue during renovationsReduced rental ratesFinancing costs

WHAT DOES THIS MEAN?

New Risks?

Clients on a tight rope?

Tips to minimize the risks.

Legal Issue #1. Express Warranty

Don’t guarantee:

“reduce operating costs”

“healthier and more productive occupants.”

Express Warranty

Do Not GuaranteeLevel of Certification

1. Minimize Risks:

Do not guarantee certification

It is a Goal, Not Promise Except as required by law.

Warrant that Work will be in accordance with:

The Contract Industry Standards

Marketing Efforts: Energy/Operational

Cost Savings Healthier

Workspaces Increased

ProductivityCan these claims be

verified?

LEGAL ISSUE #2: Implied Warranties

LEGAL ISSUE #2:Potential Actions for Over-Promising:

Fraud

Negligent Misrepresentation

False Advertising (Lanham Act/FTC) FTC Green Guide

Consumer Protection Acts

Gifford v. USGBC

False Statements: §43(a) of the Lanham Act

Deceptive trade practices (under New York law).

New York’s False Advertising Act,

false advertising, unfair competition, and unfair business practices under the common law.

Gifford v. USGBC LEED buildings use less energy “LEED is providing third-party verification

that a building or community was designed and built using strategies aimed at improving performance across all the metrics that matter most: energy savings”

LEED-certified buildings and other allegedly “green buildings” “Boost Employee Productivity.”

LEGAL ISSUE #2:How can you minimize risk? Manage expectations -Don’t over-

promise

Disclaim promises – “All warranties are limited to those expressly stated in the Contract. No other warranties, written or implied shall be binding or enforceable against _____________.”

LEGAL ISSUE #3: Standards of Care

• Will you be held to higher standards of care?

Architects/Engineers – suppose to promote sustainable design and construction

LEGAL ISSUE #3: What can you do to avoid being held to a higher standard

of care?

Identify the standard of care: ______ shall not be held to a heightened

standard of care on the Project. The ____ shall perform its services consistent

with the professional skill and care ordinarily provided by ___ in the same or similar locality under the same or similar circumstances.

LEGAL ISSUE #4:Identify which standards apply

Project

LEED/ US

ASHRAE189.1

IGCC

Green Globes

Other?BuildingCodes

ZoningLaws

Owner’sStandar

ds

Energy Star

• No One Party Control of Points/Goals• Obtain buy-in of all effected parties

LEGAL ISSUE #5:Identify Participants, Their Roles and Responsibilities.

LEGAL ISSUE #5:Identify Participants, Their Roles and

Responsibilities Add this to LEED Addendum

LEGAL ISSUE #5: Narrow Responsibilities to those

points you control:

LEGAL ISSUE #6: Insurance

• Questions over Insurability of LEED projects

• Contracts agreeing to provide insurance that is not available

• See your agent

.

LEGAL ISSUE #7: LEED Certification Documentation

• Find a dedicated professional• Delineate responsibilities in the contract

LEGAL ISSUE #8: Delays

Green materials - availability Skilled workers Longer durations for installation of new technologies Time to obtain certification from USGBC

Necessity of Appeal of Ruling

LEGAL ISSUE #8: Delays – What can you do?

• Limit responsibility • Include a Force

Majeure clause

LEGAL ISSUE #8: Delays – What can you do?

• Define Substantial Completion• Don’t make SC dependent

upon achieving LEED Certification

• Waive Consequential Damages

LEGAL ISSUE #9: Green Materials/Methods

Long-term maintenance issues

Who is responsible for maintenance?

What happens if mfg goes out of business

What happens if component malfunctions?

Provide a Notice and Opportunity to Cure clause in your contract.

LEGAL ISSUE #10:VE and Changes

VE and Change Orders may effect the ability to achieve certain points or green measures.

A/E or LEED AP should review changes to plans (COs/ VE) to see how goals are affected. May want to consider establishing time frame

for review and approval of COs

LEGAL ISSUE #11:LEED AP Liability

If LEED AP is an independent party?No assets? No insurance coverage?

What can you do? Talk with owner regarding LEED AP selection. Ask whether the LEED AP is insured.

LEGAL ISSUE #12:Computer Modeling

Define source of standards and data to be used for computer modeling.

Do not guarantee that the building will perform in accordance with the models.

LEGAL ISSUE #13:LEED Appeals

Be aware of time limitations established by GBCI25 business days to

appeal the results of the Final Review

LEGAL ISSUE #13:Specify who will pay for LEED Appeals

“___ shall not be responsible for any costs associated with the appeal of any LEED Credits.” $500 per credit appealed

LEGAL ISSUE #14:Incentives for Sustainable Construction

Waiver of consequential damages

LEGAL ISSUE #15:Payment

Certification level may take months. Don’t tie payment to the achievement of

a certain certification level Owners may insist on withholding some

retainage until all paperwork and appeals processes are complete.