Green building, the use of construction processes that are environmentally responsible and resource efficient throughout a building's life cycle, has become a big business. It is fundamentally changing the nature of how today's construction industry must operate in order to remain competitive. The value of the green building market is expected to grow from between $55 billion and $71 billion in 2010 to $135 billion by 2015, with commercial green building expected to represent 40% to 48% of the market by 2015. As a result, requests for certification of a project's "greenness" by objective third-party verifiers are being sought for various reasons, including perceived clout and marketing power to generate higher sales and rental prices, compliance with local building code requirements, and assurance to owners and tenants of lower future operating costs.
Certification versus Performance
Although there are several third-party verifiers market-wide, the U.S. Green Building Council's ("USGBC") Leadership in Energy and Environmental Design ("LEED") has been at the forefront domestically and internationally. As a voluntary, four-level (Certified, Silver, Gold, Platinum), point-based certification system, LEED has fostered a culture of expected energy efficiency in commercial real estate. The federal government has led the way, both by adopting LEED Silver as a baseline for its building inventory and by encouraging pursuit of LEED-certified projects in the suppressed economy through financial incentives offered under the American Recovery and Reinvestment Act. Many state governments have followed suit, either by requiring energy-efficiency standards for public projects or by empowering local governments to adopt LEED or other expressions of sustainable development as part of their building code standards. The private sector has embraced LEED projects as well, seeing them as good not only for the environment and its social conscience, but also for the wallet.
Despite strength and support on the design side, the desired results of LEED projects may not be matched by actual performance. The USGBC is fending off a legal and public relations attack in the form of a class action lawsuit alleging that the USGBC fraudulently represents the performance of LEED buildings as more efficient than standard construction. The principal plaintiff has amended the complaint to characterize the USGBC's representations of the energy efficiency of LEED-certified buildings as not based on verified energy performance, thereby fostering a false sense that the end product will perform better than yesterday's new construction.
Individual projects have seen challenges as well. Though not styled as a green building case when filed in Maryland in 2006, the first lawsuit involving LEED certification began as an action to enforce a mechanic's lien. The project owner responded with a $1.3 million counterclaim seeking, among other things, $635,000.00 in what it alleged were lost tax credits under a state-level green building program that were necessary to make the project viable. The owner alleged that the project was not completed timely and not delivered in a condition sufficient to receive LEED Silver certification in order to qualify for final state tax credit certification. The underlying construction contract did not address the risks associated with pursuing tax credits that were contingent upon the project receiving LEED Silver certification. The case settled without answering many questions, such as whether the value of the lost tax credits were recoverable as consequential damages, or whether a breach even occurred if the project was not complete until the award or denial of LEED certification by the USGBC's Green Building Certification Institute ("GBCI").
Avoiding Potential "LEEDigation"
Even without fully developed caselaw upon which to rely, there are ways to identify risks to avoid in order not to become someone else's lesson well learned. Green building inherently requires an ongoing integrated process joining the project owner, architect, engineer, and contractor throughout the design, construction, inspection, and operation of a project. In addition, LEED, high performance, or other green building concepts, as well as energy codes and ancillary regulations, make what would be a typical construction claim more complex. Therefore, specific, detailed, and unambiguous green building contract clauses should be drafted to address these unique risks.
Achieving LEED certification is a unique and complex undertaking within a relatively new and evolving field that imposes requirements that are both design and performance based. As a rating system developed predominantly by architects concerned with the design phase of green buildings, LEED certification has design aspects over which a contractor has little control. Furthermore, although performance elements are intended to produce a high performance building, LEED certification can be achieved before measurement and verification of actual performance results are obtained well after project completion. Understanding which requirements are design-focused – how a component is designed and what materials it uses – and which are performance-focused – how effectively and efficiently the component performs once it's complete – is critical to producing a high performing LEED-certified project.
Third-party "green" certification is a new risk which must be addressed in design and construction contracts, and it is important to clearly communicate expectations early. All contracts should clearly define green terminology and green goals, and plan early for green elements. Each contract should identify team members as well as their roles and responsibilities, such as which party is responsible for documentation collection and submission to the GBCI for LEED projects or the acquisition and installation of green products or technologies. Owners should recruit a knowledgeable and experienced project team, including skilled subcontractors experienced in green building and sustainable products and installation. Ultimately, the quality of the team may impact the cost and success of the green building more than the level of "greenness" itself.
While breach of a traditional construction contract focuses, for the most part, on immediate post-project and occupancy deficiencies, green building projects have new and unique elements (such as improved air quality, energy efficiency, water conservation, and LEED certification itself) that can be measured only well after substantial completion. Appropriate risk transfer contract language can provide a wealth of protection to the involved parties. First, it is important to recognize the difference between performance-based standards and specifications – such as achieving LEED certification or being 30% more energy efficient than a baseline building – versus prescriptive standards – such as installing an HVAC system with equipment that complies with federal minimum energy-efficiency standards. Second, it is important to identify the parties responsible for the design and construction related to each goal and to allocate the various risks that the goal will not be met to the party better able to control the risk. For example, it is better for a contractor to be responsible for the risks involved in meeting specifications related to methods of construction and materials, but to allocate the risks of meeting LEED certification requirements and deadlines to the project's owner or designer. Recognizing the risks of not achieving certification and allocating those risks to the party better suited to monitor and control each particular risk optimizes the chances for success.
There is no one-size-fits-all form contract for green building projects. As more government agencies and municipalities legislate green initiatives and third-party rating systems into their project requirements and building codes, allocating green risk will become essential. Green building projects by no means are immune from the traditional construction claims of breach of contract, negligence, fraud, and misrepresentation. Add to that mix malpractice and professional liability claims against LEED Accredited Professionals with specialized knowledge, and there are plenty of reasons to spend time crafting clear, complete, and unambiguous green building contracts.
© 2011, Ward and Smith, P.A.
For further information regarding the issues described above, please contact Amy P. Wang.
This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.