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Completed in 2006 and overlooking the scenic Chesapeake Bay, The Captain's Galley condominium building in Crisfield, Md., is a high-end, 23-unit, $7.5 million project. It was also the subject of an historical first. When the building's owner, Shaw Development, missed out on about $635,000 in tax credits due to a delay in its LEED certification and a number of other technicalities, it sued its contractor, Southern Builders, for breach of contract and negligence. Southern Builders v. Shaw Development was the first ever LEED-related lawsuit, and many saw it as a sign of things to come.
Then, two surprising things happened: The case was settled out of court in 2008, and the details of the settlement were sealed, depriving the real estate law community of a much-sought-after precedent. And then, silence. No other lawsuits hit the docket. In fact, today, Southern Builders v. Shaw Development is still the only lawsuit directly related to a building that failed to achieve an expected LEED certification.
Theories abound about why there has been but one LEED lawsuit. The lack of a concrete precedent is one big reason. The poor economy and owners' unwillingness to take on expensive litigation have also surely contributed. "The area of green litigation is so disorganized, there are really no trends yet," says Vicki Harding, an attorney with Pepper Hamilton, LLP.
Still, when it comes to green legal issues, especially potential legal recourse for an owner of a green building that doesn't live up to expectations, questions abound. If a building performs much worse than the energy design model shows, can an owner sue the designer or engineer? If a particular level of LEED certification is promised, but not achieved, is the designer liable? And if so, for what, exactly? If LEED is required in a particular municipality, but not achieved, does the owner have legal recourse?
Unfortunately for owners, those questions don't have simple answers. But the place to start, say experts, is the contract. "In determining legal recourse, the key question is 'What do the contracts say?'" says Harding. "The message for owners is to think through what you want in the construction documents and the contract."
Truth be told, say experts, there isn't much new in terms of green building legal issues that traditional construction and contract law doesn't cover. "Really, the only unique legal issue in green building is LEED certification," says Chris Cheatham, managing partner of Cheatham Consulting, LLC and publisher of the online Green Building Law Update. "We've been dealing with materials defects, breach of contract and negligence for a long time."
So the contract is key, as is the case in any other building project or service relationship. Structuring a green building contract, like any negotiation, is always one part power play and one part compromise. Owners want designers to guarantee certain attributes or levels of performance, but designers want to limit their liability. And so the question becomes, what can an owner reasonably expect a designer to agree to?
One answer is, only that which the designer controls. "Far and away the biggest issue for contracts in regards to LEED is that there are lots of moving parts," says Stephen Del Percio, associate at Arent Fox, LLP and publisher of the Green Real Estate Law Journal.
For this reason, rarely if ever will designers agree to structure a contract in such a way that they're liable if a level of LEED certification is not met. That's because they don't control the process from start to finish. Harding offers a simple example: "A subcontractor is running out of time, and can't get the low-VOC paint specified. So he uses what he always does. Right there, you've blown a point, which could make a difference in your LEED certification. Who's responsible? Not the architect."
Similarly, a designer will probably not agree to guarantee that the energy performance of a building will be as good as the design model predicts on the grounds that how the building is operated has as much impact on energy efficiency as the building's design. And an energy model will not be admissible in court as proof of negligence or breach of contract, says Harding, if a building fails to meet its modeled targets.
That's not good news for most owners, who want the peace of mind of a guarantee. But it doesn't mean they are out of options. For one: "You may get them to have very conservative goals," says Harding. "But they're not going to guarantee without a whole bunch of qualifications. Or, you may be able to get them to guarantee, but at a cost that won't be justified."
That still probably isn't exactly appealing, so a better option for owners is to come to the bargaining table and work with the designer and consultant to distribute responsibilities on the project, and thus the risk or liability associated with each part of the process. Then, spell out that responsibility explicitly in the contract so it's clear who is at fault if something goes wrong.
"The integrated design process provides the perfect opportunity to sit down and figure out how to allocate risk," says Gina Vitiello, a shareholder in the Atlanta office of the Chamberlain Hrdlicka Law Firm. "If who-does-what is spelled out explicitly in the contract, it reduces the chances for litigation."
This process could get to the level of detail of specifying who's in charge of each individual LEED credit. Del Percio says his advice is to divide the credits into design and construction phases, and explicitly divide the risk in the contracts this way.
Another area where this allocation of responsibility is crucial in a contract is determining who will be responsible for securing any rebates or incentives for the project. Owners often hire a LEED consultant to steer the project through its certification initiative. The LEED consultant also is often in charge of rebate procurement. Experts suggest contracts with this person be written so it's clear that the consultant will file the paperwork and perform other tasks necessary to secure the rebates or incentives.
For specific technologies — like photovoltaics, for instance — make sure the contract says who is responsible for installing the technology correctly, as proper installation could affect the status of a rebate. "If part of the component installed doesn't meet specifications, and you don't get the rebate, there is liability there," says Cheatham. "Make sure to spell out in the contract who is responsible for all phases of making sure the incentive is received."
Responsibilities Must Be Spelled Out In a Green Building Contract