Green Building Law Update : Green Building & Construction LEED AP, Lawyer & Attorney Chris Cheatham : Washington DC, Virginia, New York City

Ever since I read the D.C. Green Building Act and its "performance bond" requirement, I have been morbidly interested in the idea of LEED bonds.  When Kristen Bradley, at SuretyBonds.com, offered to write an article on the topic, I couldn't help but say yes.  SuretyBonds.com, a nationwide surety bond producer, works with a number of construction companies and distributes information to help keep the industry's professionals updated on developing regulations.

As the concern for environmentalism continues to grow, so, too, do the regulations and systems involved with green building. Entrepreneurs continue to develop new building practices and products, and keeping up with new green building regulations can be challenging for some contractors. The growing concern for protection related to green building practices has only increased as new green products and regulations are pushed onto the construction industry. One possible solution for guaranteeing a contractor's compliance is the use of green performance bonds. However, concern regarding their implementation and enforceability continues to be heavily debated among stakeholders throughout the industry.

Confusion surrounding the 2006 Green Building Act

In 2006 the D.C. City Council passed legislation that would require green performance bonds to be used on construction projects beginning in 2012. However, no such bond actually existed when the legislation was passed. Although some advocates think the legislation's enactment will be crucial for the green building industry, contractors and government agencies alike have been struggling to clarify what the act actually means. As the deadline approaches, many construction professionals in the area are still confused as to what exactly will be expected of them.

How green performance bonds would work

Green performance bonds are a specific type of surety bond. Although there are thousands of surety bond types available, they all function similarly to guarantee a certain level of performance. Government agencies typically mandate the use of surety bonds to protect public funds as well as consumer interest. Most contractors who work on public projects are probably familiar with how other forms of contractor bonding work. Green performance bonds work in the same way, but they are specific to green building practices. Each surety bond that's executed acts as a legally binding contract between three entities.

1. The government agency or project owner that requires the bond acts as the obligee.
2. The contractor required to purchase the bond acts as the principal.
3. The agency that executes the bond acts as the surety.

When it comes to green performance bonds, the bond would offer a financial guarantee that the principal will adhere to certain green building regulations. If the contractor should fail to do so, the surety would be accountable for making sure the principal resolves the problem, which usually requires monetary compensation.

The likelihood of green performance bond implementation

There's no way to predict how exactly green performance bonds will be used in the future. For now, though, there's no question that project owners need a guaranteed way to collect recompense on problems resulting from negligent green building contractors. Likewise, contractors need a financial guarantee to protect themselves from personal liability if such problems were to arise. Unfortunately, this pushes a great deal of burden onto surety providers who might be skeptical to execute bonds on risky projects. This is, in fact, what most surety agencies try to avoid. Ultimately, government agencies' decisions regarding the use of green performance bonds will require an evaluative process. Once Washington D.C. clarifies its expectations and contractors there begin securing green performance bonds, the rest of the nation can begin analyzing just how effective the bonds are. 

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News continues to emerge about the challenge to the LEED Gold certification received by the Northland Pines High School.  Green Building Law Update previously reported on a statement made by United States Green Building Council (USGBC) General Counsel Susan Dorn that the certification challenge had been denied.
 
There is so much more to this story.
 
First off, the LEED challengers are not satisfied with the result, and they are not going away quietly.  This past weekend the challengers and their experts released a statement and documentation surrounding the LEED challenge.  The LEED challengers are five individuals from the community surrounding the high school:

• Mr. Ronald Ritzer, an architectural design professional and local builder of high performance homes
• Mr. Roderick McKinnon, a commercial property developer
• Mr. Patrick Smith, a construction professional
• Dr. Kevin Branham, a Doctor of Chiropractic with a Masters degree in Public Health
• Mr. Curt Hartwig, a local businessman and community leader

Since I previously published the USGBC's statement regarding the challenge, here is the other side of the story, as told by the five LEED challengers: 

What is all the ruckus about Northland Pines?
 
In 2004, the voters of Vilas County Wisconsin voted to approve the sale of $28,535,000 worth of bonds to finance a new High School for the Northland Pines district.

The appellants in this case all served on the Building Committee for the new school and each brought specific talents and experience in design and construction of large buildings. Each was dedicated to the proposition of creating the most efficient structure possible.
 
The design team and school board discouraged any outside input and set forth to design and construct the school as they saw fit.
 
As the design developed, the appellants questioned whether the facility would indeed meet the prerequisites for LEED® Certification and were told that it would despite what appeared to be glaring shortfalls with respect to these requirements.
 
The appellants retained the service of two highly regarded consulting engineers to review the plans. Both of them determined that the facility as designed would not qualify for LEED® Certification.
 
In December 2008, the appellants filed an appeal with the USGBC challenging the award of the Gold Certification given to Northland Pines. Some 16 months later the appellants were notified that the USGBC had looked into the matter and found everything to be fine. They based this on reports from two more consulting engineers who said that the building did not meet the prerequisites but concluded that “pretty close” is close enough. When the appellants' engineers asked for the back up data to the USGBC reports, they were told that they were pretty busy and would address that request when they have time. Time has passed and the requested materials have not been forthcoming. Why?
 
On behalf of the taxpayers of Vilas County who would like to know with certainty whether they got what they paid for or not, we ask the engineering community to look at this file and tell us, did we miss something here? How can it be alright to certify a building that doesn’t fully comply with the rules set forth by the body that is doing the certifications?
 
We would love to hear what you think. We are only in search of the truth which ultimately will be what is best for Northland Pines.

Following this post are links to the engineering reports, correspondence and opinions that have been made available by the LEED challengers.  If you have a few minutes, I would recommend reviewing these documents.  We will be reviewing discussing these documents in the coming weeks.
 
Please share your opinion on this LEED challenge.  I would like to put together a post with some of the best responses from you, the readers.

Photo credit: Reway2007
 
Related Links:

LEED Credibility Destroyed (pdf)
Complete NPHS Appeal (pdf)
Horizon Report (pdf)
Taylor Report (pdf)
USGBC Letter (pdf)
Response to Horizon Engineering Report (pdf)
Response to Taylor Engineering Report (pdf)
Appellants' Statement (pdf)
 

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On Wednesday, I began a review of the Green Building Certification Institute's ("GBCI") LEED Certification Challenge policy.  There are three reasons why the LEED Certification Challenge Policy creates significant risk for all parties involved in a LEED-certified project:

(1) Any person can challenge a building's LEED certification;
(2) Any and all LEED points can be challenged; and
(3) A LEED certification challenge can be brought at any time.  

Today we are looking at the second point, "any and all LEED points can be challenged."  Here is the relevant language from the policy:

"GBCI may revoke previously granted LEED certification or take other action regarding LEED certification such as determine to reduce points or category of LEED certification previously granted, if GBCI determines that credits/prerequisites for LEED certification were granted based on erroneous determinations or inaccurately or falsely submitted documentation."  

Obviously, the opportunities to challenge LEED certification are only limited by the LEED prerequisites and credits obtained on a specific project.  In theory, a person could challenge every single prerequisite and credit applicable to a project.  

If you are an architect, engineer, contractor, subcontractor, consultant or any other party that takes part in projects seeking LEED certification, you should be concerned by the additional liability created under the challenge policy.  Under the policy, one LEED point that you were not involved with could be challenged and result in LEED certification being revoked or stripped.   If you are responsible for a building's LEED certification, you could find yourself defending a challenge to every single point and prerequisite, whether those points were your responsibility or not. 

On Monday, we are going to look at a hypothetical (with video!) of how this liability could arise.  

Related Links

Cranks, Gadflies and Rivals Can Challenge LEED Status (GBLU)

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A few weeks ago, after a green building legal presentation, I remarked to a colleague that I was growing tired of discussing Shaw Development v. Southern Builders, the prime example of LEEDigation.  Less than one week later, along came the Wisconsin LEED challenge and the discovery of the LEED Certification Challenge Policy.  

The LEED Certification Challenge Policy is the most significant legal risk for LEED certified projects that I have seen to date.  You may recall the discussion of Minimum Project Requirements last year and the possibility of LEED decertification.  The risks inherent in the LEED Certification Challenge Policy substantially dwarf the LEED decertification issue.  

There are three reasons why the LEED Certification Challenge Policy creates new risks for all parties involved in a LEED-certified project:  

(a) Any person can challenge certification;
(b) Any and all LEED points can be challenged; and
(c) A LEED certification challenge can be brought at any time.  

(1) Injury - the person was harmed;
(2) Causation - the injury was caused by the conduct of the other party; and
(3) Redressability - a favorable court decision can remedy the injury.

"Persons concerned with possible inaccurately granted LEED certification are encouraged to contact the GBCI, provided however that GBCI reserves the right to institute an investigation and review of such possible errors or inaccuracy or veracity of documentation without third party complaint.  

Person desiring to make a complaint may submit a written statement identifying the person alleged to be involved and the facts concerning the alleged conduct. . . . The person making the complaint shall identify him/herself by name, address, and telephone number."

• Environmental groups could challenge a corporations' achievement of LEED certification in order to protest corporate actions.  

• Concerned citizens could challenge local projects' LEED certification if the citizens want a greener project or a less expensive project.  

• Rival developers could challenge each other's LEED certification in order to develop a business advantage. 

The possibilities for "persons" that will bring LEED challenges seem limitless.  What other examples can you come up with?  

Related Links: 

Shaw Development v. Southern Builders (GBLU)

Northland Pines High School LEED Challenge (GBLU)

This Post is Really Imporant and Not For the Faint of Heart (GBLU)

Will Clark on Twitter (Twitter)

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One of my very first Green Building Law Update posts focused on the insurance and surety industries' concerns related to green building.  Nearly two years later, some in the insurance industry are still expressing concerns regarding green building projects.  A recent P&C National Underwriter article highlighted numerous insurance-related concerns related to green buildings: 

• Vegetative roofing—using soil and plants to insulate a roof—minimizes the loss of heat in the winter and reduces cooling expenses in the summer. However, the additional weight of soil and vegetation creates structural integrity and collapse potential. Rainwater accumulation adds additional weight to the roofing structure.
   
• Rainwater runoff in green buildings is often collected in cisterns used for on-site cooling and gray-water systems (that is, waste water—including rainwater—often used for irrigation). But properly channeling the water collection from the roof to the holding tanks might provide challenges beyond traditional gutter systems.

• Alternative energy generation systems common in green real estate—such as solar panels, wind turbines and geo-thermal heating systems—need to be insured properly. Whether property insurance coverage is provided under a commercial property or a businessowner’s policy, specific covered property should include damage to these alternative energy systems.

I often hear from architects, engineers and contractors who want to know what the hold up is in green building insurance and surety instruments.  

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When I prepare construction claims for clients, one of the first steps is to gather the facts and develop potential legal bases for the claims.  There is one legal basis that clients seem to know, and argue for, more than any other:  Differing Site Conditions. 

A Differing Site Condition is essentially an unanticipated physical condition encountered by a contractor at a project site, which requires additional work by the contractor. Most federal contracts contain a Differing-Site-Condition clause.  As described in Foster Constr. C.A. & Williams Bros. Co. v. U.S.:

"The purpose of a [differing site] conditions clause is thus to take at least some of the gamble on subsurface conditions out of bidding.  Bidders need not weigh the cost and ease of making their own borings against the risk of encountering an adverse subsurface, and they need not consider how large a contingency should be added to the bid to cover the risk."
 

1.  The contractor expected certain labor conditions in the surrounding area.  When he started the project, labor conditions had changed due to a competing project.

2.  The contractor properly relies on site boundaries in preparing its bid.  When the project starts, the site boundaries change.  

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Last Thursday, during a webinar on green building legal issues, I stated the following:

"I really believe schools will be a hotbed for green defect claims, in terms of energy efficiency, and other green building components.  Schools rely on tight budgets. . . .  Be careful what you are promising on these green school projects."

On Friday, I read an article titled "Construction Delayed at West School," which led with the following paragraph:

"Construction is at a stand-still at Washington-Nile School, where issues surrounding state-mandated LEED (Leadership in Energy and Environment Design) elements have placed the new middle school building project over-budget. Now attorneys working for the school are researching the equity of LEED funding for schools in Ohio; the outcome of which could also affect building projects at New Boston and Clay."

I was close.  

In Ohio, the Ohio School Facilities Commission (OSFC), administers the state’s Kindergarten through 12th Grade public school construction program and helps school districts fund, plan, design, and build or renovate schools.  In a previous post, we highlighted the OSFC's green buiding requirement for Ohio schools:

"OSFC Resolution 07-124 . . . mandates that all newly constructed or substantially renovated school buildings that are state funded achieve a minimum of Silver certification in the US Green Building Council's LEED-Schools (Leadership in Energy and Environmental Design) rating system with emphasis in energy conservation."

As highlighted in the article, the OSFC accepted the Washington-Nile School (tiny red dot in the photo to the left) as a special-needs project.  Because of the district’s low wealth base, the OSFC agreed to provide 98 percent of the funding for a new $16 million middle school. The remaining 2 percent (about $320,000) was paid from the school’s General Fund.

By accepting the OSFC funds, the school district is required to build the new Washington-Nile School to LEED Silver certification.  But the bids for the school were over-budget despite numerous changes made to the design:  

"'We knew a little about LEED. We didn’t know much, so they (the OSFC) educated us and they did a very good job. We bought into that and we designed accordingly. We made sure we had some educational LEED credits,' Washington-Nile Superintendent Patricia Ciraso said. She explained that while striving to meet these LEED requirements, the school had to give up other features they had hoped to add. By choosing to cut-back on windows, the school had change its lighting system, which means redesigning the entire electrical system — and what they ended up with still was estimated at least $1.2 million over-budget."

On Friday, we will look at allegations by the Washington-Nile school district that the OSFC is not properly funding the necessary LEED-certification costs.  You will want to check back, as these allegations include a creative legal challenge to the state's funding of green schools, which could have broad implications for other state green building programs. 

Related Links: 

Sensible Interview:  OSFC (GBLU)

Live Webinar (GBLU)

Construction Delayed at West School (Portsmouth Daily Times)

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In December 2009, an Amendment to the D.C. Green Building Act of 2006 was introduced by the D.C. Council.  Labeled the "Green Building Technical Corrections, Clarification, and Revision Amendment Act of 2009," this Amendment includes many revisions to the original Green Building Act.  One of those revisions involves the "performance bond" requirement:

"'Sec. 6. Bond requirements.'.

(2) Section 6 is amended by striking the phrase 'performance bond' wherever it appears and inserting the word "bond" in its place."

That's it.  This feels anti-climatic.  We have been discussing this same issue since the dawn of Green Building Law Update.  Back on August 15, 2008, one of my very first posts pointed out the performance bond issue.  So what does this fix? 

1.  Replacing "performance bond" with "bond" will eliminate the confusion that was certain to ensue in the construction and surety industry.  Performance bonds guarantee a contractor will building according to the plans and specifications.  Here, a developer has to guarantee that a project will achieve green building certification. 

2.  I still have concerns about the bigger issue of whether these "bonds" will be available.  Bond instruments guaranteeing green building certification simply do not exist in the market.  Maybe a surety will develop these bonds, maybe they will not. 

In the end, I applaud the D.C. City Council for addressing the "performance bond" issue. 

What do you think about this revision?  Disaster averted? 

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Back in April 2009, I took a vow of silence.  I promised to stop writing about the "performance bond" requirement in the D.C. Green Building Act.  I had faith the D.C. Council would address the issue.  Thankfully, it appears our long nightmare may be coming to an end.

Today, I am going to reset the "performance bond" issue (I have not written about it since April 2009!).  On Monday, I will discuss the "Green Building Technical Corrections, Clarification, and Revision Amendment Act of 2009" (pdf) and the proposed revision to the "performance bond" requirement. 

As background, for every green building mandate, you need an enforcement mechanism. The D.C. Green Building Act of 2006 requires that "after January 1, 2012, all new construction of projects 50,000 square feet or greater must comply to the LEED certification level."  Here is how I described the enforcement mechanism in a previous white paper:

"One of the most controversial provisions in the Green Building Act is the performance bond requirement.  After January 1, 2012, an applicant for construction of a privately-owned building must provide a performance bond which is due and payable prior to receipt of a certificate of occupancy.  Thus, after January 1, 2012, if a construction project must meet green requirements in the Green Buildings Act, the 'applicant for construction' must also provide a performance bond guaranteeing satisfaction of the green requirements." 

There are two primary problems with the D.C. Green Building Act "performance bond" requirement. 

1.  "The Act incorrectly uses the term 'performance bond' as the bond described in the Act 'seems to function more in the manner of a license or compliance bond, which typically guarantees compliance with a law or code.' A performance bond typically assures one party that another party will perform the contract in accordance with its terms and conditions."

2.  "Let me make this clear: no bond or insurance instrument has been created that guarantees green certification.  This type of security instrument does not exist.  I have discussed the issue with sureties, surety industry groups, insurance companies and insurance brokers.  None of them know of a security instrument that guarantees green building certification."

So what did the D.C. City Council correct either of these problems?  Check back on Monday as I continue this discussion. 

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We previously reviewed a green building contract that can be used to manage the architect-owner relationship. But what about contractors?

As a member of the AGC ConsensusDOCS committee, I had the pleasure of collaborating on the ConsensusDOCS 310 Green Building Addendum, which was recently released:

On Nov. 10, ConsensusDOCS released the construction industry's first and only comprehensive standard contract document addressing the unique risks and responsibilities associated with building green projects -- the ConsensusDOCS 310 Green Building Addendum. The Addendum incorporates contractual best practices to identify the project participants' roles and responsibilities, as well as the implementation and coordination efforts critical to achieving a successful project using green building elements, particularly those seeking third-party green building rating certification. It was drafted to work well not only with the other ConsensusDOCS contract documents, but also with other form contracts.

If you have an opportunity to review or work with ConsensusDOCS 310, I would like to hear your thoughts. Based on conversations with owners, contractors and architects, there seems to be a real need for standardized green building contracts. Simple modifications to your existing contracts are not enough.

What other relationships exist on a green building project that require a contract?

Related Links:

ConsensusDOCS 310 Green Building Addendum (AGC)

What Does A Green Building Contract Look Like (GBLU)

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The American Recovery and Reinvestment Act (ARRA) projects have resulted in extremely low bids.  These low bids could be the result of improved efficiency in the construction industry; or the low bids could be the result of cut throat competition.  

“These days, there are more companies competing for comparatively fewer contracts, and that means contractors are facing downward pressure on their bids,” McBrady said. “The key for contractors is that it is OK to be competitive, but that bids should accurately reflect the cost to execute the work. Government officials are going to be on the lookout for contractors who make false claims, such as inflating costs for work conducted under change orders.”

• GAO
• Agency IGs
• RAT Board
• National Procurement Fraud Task Force
• Congress
• DOJ Antitrust Division 
• State and local auditors
• Whistleblowers
• The Public 

Photo:  zenosparadox

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[Today, I am bringing you a guest post from Mark Rabkin.  I have been on Mark for awhile to write a guest post.  He is doing a tremendous job looking at the insurance and surety concerns related to green building.  Back when I was looking at alternatives for the D.C. Green Building Act bond requirement, I leaned on Rabkin's knowledge of the surety industry.  You may recognize Rabkin's post, which highlights surtey and insurance implications from LEED de-certification, because it was originally a comment last Friday.  Check out other posts from Rabkin over at Konstructr.com.]

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Love might be too strong of a word but you get the point.  The idea of LEED de-certification has touched off a firestorm of comments, some in support and others in objection.  I think a follow up post is warranted. 

First, I want to clarify one important piece of information as I noticed some were heading down the wrong path.  The LEED 2009 Minimum Project Requirements (MPR) require, among other things, that projects report energy performance data.  If projects do not report energy data, then LEED certification may be revoked (i.e. de-certification).  The USGBC has not stated that LEED certification will be revoked for poor energy performance itself.  Go take a look at the USGBC's MPR webpage if you get a moment.

Furthermore, the USGBC's decision to require energy reporting and threaten LEED de-certification makes sense.  Why?

The number of people complaining about LEED certified projects that were not reporting energy performance reductions was growing everyday.  Ever heard of Henry Gifford?  He actually engaged in an open debate with the USGBC in March 2009 about the merits of LEED certification.  This was not good press.  This was  not a good development for the USGBC.  

In response, the USGBC took a dramatic step to fix the problem.  The USGBC has taken what I think is only the first step to ensure improved energy performance.  Additionally, the USGBC used the only "stick" (i.e. enforcement mechanism) it had available:  LEED de-certification. 

On Wednesday, there was a great piece in ENR regarding the LEED energy reporting and de-certification.  Both an American Institute of Architects representative and a Building Owners and Managers Association representative came out in favor of the reporting requirements.  Of course, there was some criticism in the ENR article regarding LEED de-certification: 

The “bottom line” is, these conditions “may end up doing more harm than good for the future vitality” of LEED, says attorney Edward B. Gentilcore, a partner of Duane Morris LLP, Pittsburgh. “This would be a significant loss in light of the accomplishments to date,” he adds.

Mr. Gentilcore is a fellow construction attorney.  Us attorneys are going to be worried about any new requirement that creates additional risk and liability.  That is why we are here.  We are here to worry about your risks and liability.

The moral of the story?  As LEED 2009 changes are implemented, your contracts need to change as well.  Let us do the worrying for you.

Photo:  JonBen

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Disclaimer:  If you are sensitive to or frightened by new risks and liabilities in the green building industry, please skip this post.

On Monday, I highlighted the USGBC's decision to create requirements to ensure a building's performance matches modeled energy savings.  I finished the post by asking, what happens to projects that do not comply? 

Okay, brace yourself: 

NOTE: CERTIFICATION MAY BE REVOKED FROM ANY LEED PROJECT UPON GAINING KNOWLEDGE OF NON-COMPLIANCE WITH ANY APPLICABLE MPR.  IF SUCH A CIRCUMSTANCE OCCURS, REGISTRATION AND/OR CERTIFICATION FEES WILL NOT BE REFUNDED. 

It is time to introduce a new word into your green building vocabulary:  de-certification. 

Everytime I start thinking about the implications from de-certification, my head starts spinning and I have to sit down. 

It just happened again. 

I have definitely not uncovered all of the potential issues, but here are three that immediately jump to mind:

1.  De-certification makes regulations tied to LEED certification very difficult to enforce.  What does a jurisdiction do if a project is de-certified?

2.  Insurers and sureties are going to be extremely concerned about coverage issues after design and construction work is complete.  Could an architect or contractor remain on the hook for potential de-certification long after a project has been completed? 

3.  For you owners out there, the commitment to provide energy data must carry forward if a building or space changes ownership or lessee.  How in the world do you write this into a contract? 

The room is starting to spin again.  Please elaborate on any additional risks and liabilities implicated by de-certification in the comments.

Photo:  Kevin (iapetus)

Update:  Also check out Stephen Del Percio's detailed analysis of the Minimum Project Requirements. 

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According to a recent Washington Post article, “Construction firms are so eager for work in the sagging economy that project bids are coming in much lower than expected.”

Great news, right?  Not necessarily.  Lower bids can be a good thing if they are the result of increased efficiency in the construction process.  But lower bids can also be the result of increased competition.  These lower bids can be just that - too low - and result in delays and litigation. 

What factors are causing the lower bids on stimulus projects?  According to Kenneth Simonson, chief economist for the Associated General Contractors of America: 

"Wherever I go, I hear of projects that used to attract two to three bids just a couple of years ago, now it's 20 or 30," Simonson said. "Many [contractors] are coming down on the minimum size of projects they will bid on, and ones who didn't do schools now are bidding on schools. Others are coming from out of state to a new region just to keep busy. And they are essentially giving away their services just to keep their key employees busy."

Why should this be a concern to the green building industry?  As I have detailed, the stimulus is providing nearly $25 billion for green building projects.  The green building industry is newer, the parties more inexperienced, and the technology relatively untested.  The opportunity for underbidding these green building projects is tremendous.  Projects that can't be completed at the promised cost could lead to LEEDigation. 

Be careful with your bids. 

Photo:  Jim Frazier

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Over the weekend, while writing a response to a Summary Judgment Motion, I was reminded of the most important legal principle in construction law.  Under the Spearin Doctrine:

"If [a] contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications."

United States v. Spearin, 248 U.S. 132, 39 S.Ct. (1918).*

What does this have to do with green building? 

Generally speaking, if a contractor agrees to build a green building project according to the plans and specifications and it does so, the contractor will not be responsible for any subsequent problems. 

Of course, this won't always be the case.  Some contractors will also guarantee LEED certification.  If a contractor were to guarantee LEED certification, that contractor might be required to achieve LEED certification regardless of the project design.  The contractor could build according to the plans and specifications, not achieve LEED certification due to some design error or omission, and the contractor might still be on the hook for the failed certification. 

Do you see the problem there? 

*Today marks what I believe is the first case law ever cited on Green Building Law Update.  We are 150 entries in and I managed to never cite to case law.  That is either extremely impressive or embarrassing. 

Photo:  SnoShuu

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On Wednesday, we looked at the best case scenario that can result from the D.C. Green Building Act "performance bond" requirement.  We assumed that the green building "performance bond" was created.  The scenario was not pretty and involved extensive LEEDigation™ . 

Green roofs not covered by B.C. insurers

 

No coverage means no new residential developments.  This has left developers caught between the possibility of being mandated by city governments on one hand and shut out by insurers on the other. 

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Today I am speaking once again on the D.C. Green Building Act "performance bond" issues (see slides in this post).  I have a new message for this presentation because, frankly, I am not certain we are getting anywhere.  If you need some background, here are all of the Green Building Law Update posts regarding this hot topic. 

What will this LEEDigation look like?  The Surety will file a lawsuit against the Architect or Contractor, blaming them for the project's failure to achieve LEED certification.  The Architect will file an additional lawsuit blaming the Contractor, or vice versa.  Oh, and the Architect will also file lawsuits against all of the Engineers.  The Contractor will go a similar route and sue all the Subcontractors. 

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If you have been paying attention to Green Building Law Update, you know D.C. has a bit of an issue regarding a green building "performance bond" currently required by law.  In short, green building "performance bonds" do not exist.  A few weeks ago, George Hawkins, Director of the District Department of the Environment, testified in support of the use of “performance bonds” as a method of enforcing the District’s Green Building Act (PDF link).  Among the comments that caught my attention, Mr. Hawkins stated that green building performance bonds will be created just as car insurance was created: 

"For example, before there were automobiles, there was no such thing as car insurance.  When the law recognized a growing need to insure against harms that may be perpetrated by automobile drivers to others, the market rose to the demand." 

Automobiles were invented in the mid-1890s. Although various vehicle insurance schemes existed in the late 1890s through the first decades of the 1900s, Massachusetts was the first state to make vehicle insurance compulsory in 1927. New York was the second state to make vehicle insurance mandatory, in 1956. The 'invention' of automobile insurance clearly preceded the state's mandating of such coverage. The DC GBA reverses this precedent by mandating something for which no appropriate instrument exists.

More directly, auto insurance is an extension of tort law, and vehicle insurance exists to compensate a party for its loss, whether personal or property. These loses are either known (cost of repair or treatment) or negotiated. In the case of the DC GBA, the compensated party (District's Green Building Fund) is not the party of loss.  Regarding forfeiture, the legislation states "All or part of the performance bond shall be forfeited to the District and deposited in the Green Building Fund if the building fails to meet the verification requirements." There is no method in the legislation to negotiate (or dispute) the severity of loss or even identify the loss. Certification of LEED projects is made by the US Green Building Council (USGBC), a non-governmental entity, and includes a mix of objective and subjective requirements. Because a failure to achieve the desired certification could be the result of subjective failures, a surety bond is an inappropriate method to ensure compliance.

Photo:  Larry Miller

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It may surprise you to learn that I have a real job.  Seriously, I do and I love it!  I am a construction litigator and I am currently involved in a major construction delay claim.  I have been preparing a motion the last few days, hence the late filing of today’s post. 

There is a lot going on in the green building world.  The Stimulus.  D.C.’s unique green building bond (i.e. the green building unicorn).  LEED AP exam deadlines.  And also a little basketball.  I often don’t have time to touch on all the issues I would like, so today, I provide you my thoughts on these many issues. 

The stimulus.  In my “Green in the Stimulus” slideshow, I indicated that the General Services Administration has until April 3, 2009 to prepare a list of federal projects to receive stimulus-funding.  While that is true, apparently the GSA does not intend to release this list on April 3:  “Morris said a list of stimulus-funded projects is being vetted by the administration, but he could not give a date for the list’s release.”  Stay tuned for further details.

The D.C. Bond.  You may have noticed that I have been writing a lot about the D.C. Green Building Act's performance bond requirement.  It seems the issue takes a new turn everyday.  The most recent rumor is that the D.C. may incorporate the green building bond into zoning requirements.  How are we going the wrong way on this?  Look for a guest post next week on the issue. 

The LEED AP Exam.  I get a lot of google hits from people trying to decide if they should take the LEED AP exam.  My general thought is that if you are interested in a career in green building and you have some free time and money, you should take the exam.  You do know the deadline to sign up for the LEED AP exam is March 31, right?  Also, the Green Building Certification Institute recently announced that you actually have to take the LEED AP exam by June 30, 2009.   

The Defending Champions.  Finally, it is my favorite time of year.  It is the time of year when the University of Kansas Jayhawks take flight.  In addition to my job and this blog, I also am just a little bit COMPLETELY AND UTTERLY (ed: my fiancee made this change) obsessed with Kansas Jayhawks basketball.  Always have been, always will be.  I hope Sherron Collins, Cole Aldrich, Bill Self and company continue rolling and dispatch of the Spartans in quick fashion tonight.  Rock Chalk Jayhawk! 

Photo:  ruralocity

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Last week, I had the pleasure of testifying before the D.C. Council regarding green building policies in the district.  As mentioned in my post last week, the focus of my testimony was the Green Building Act's "performance bond" requirement.  Before my testimony, I had the opportunity to hear George Hawkins, Director of the District Department of the Environment.  During his speech, Mr. Hawkins directly addressed the "performance bond" issue and many of the points I raised in my White Paper last Wednesday.  After you review Mr. Hawkins testimony, I would be very interested in hearing your thoughts. 

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“Performance Bond” Requirement for Private Projects

I would now like to turn to the issue of performance bonds and criticism of this enforcement tool. Pursuant to the Act, commercial applicants will be required to submit a “performance bond.” If the building fails to meet the LEED certification requirements, “all or part of the performance bond shall be forfeited to the District.” Experts in the area of environmental finance analysis and DDOE’s research on the subject support this approach as an appropriate and sufficient enforcement mechanism to ensure compliance with the Act.

One of the concerns that has been raised is that “performance bonds” do not currently exist in the financial assurance world. There are, however, a number of laws and regulations that have required forms of financial assurance that at the time of the inception did not exist in the market. In each regulatory context, private financial markets have developed to provide the insurance, bonds, and other financial instruments necessary to demonstrate assurance. For example, before there were automobiles, there was no such thing as car insurance. When the law recognized a growing need to insure against harms that may be perpetrated by automobile drivers to others, the market rose to the demand.

The breadth of operations and environmental risks covered by current rules is an additional testament to the market’s ability to conform to and rise to the demand of a new form of financial assurance. For example, the Resource Conservation and Recovery Act (RCRA) requires that financial assurance be provided by the responsible party as proof that adequate funds will be available when needed to undertake the necessary corrective action at a RCRA treatment, storage, and disposal facility. Many states have their own laws requiring financial assurance, including our own DDOE requirement that developers post a bond equal to the cost of stormwater management infrastructure until DDOE verifies proper installation.

A second concern that has been raised is that it may prove difficult and financially burdensome for developers to provide letters of credit, collateral to obtain a bond, or escrow in amounts up to $3,000,000 (the maximum requirement under the Green Building Act). While opposition to new financial assurance rules is common regardless of industry, DDOE believes fears of business disruption from this new assurance requirement are unwarranted. When the District began to require condominium developers to place 10 percent of the cost of construction in an escrow account or provide a letter of credit under the Condominium Act, the same concerns were cited, and yet, this is now common practice.

An additional criticism of the current “performance bond” requirement is that the enforcement mechanism creates an inherent conflict of interest because those that would require forfeiture of the bonds would also directly benefit from the forfeiture. If forfeited, performance bond funds are to be “deposited in the Green Building Fund.” Under the Act, the Green Building Fund is to be used, in part, for “staffing and operating costs to provide technical assistance, plan review, and inspections and monitoring of green buildings.” On the contrary, it is important to note that many legally-required fees, fines, and penalties are used by governments to fund the operation of the program under which they are collected. For example, D.C. Official Code § 7-632 authorizes the establishment of a Regulatory Enforcement Fund to be used by DDOE to finance its regulatory practice. The Council has routinely authorized use of enforcement proceeds to finance future enforcement actions.

In summary, we believe the bond requirement under the Green Building Act is viable and can be implemented. We have already, and will continue to, participate in discussions with our sister agencies and stakeholders as to how this enforcement mechanism should best be implemented.

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Do you think Mr. Hawkins is right?  Will the financial sector come up with a green building performance bond?

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I am very excited for an event taking place today:  the Public Oversight Roundtable on Green Building Practices hosted by the Council of D.C. Committee on Government Operations and the Environment. 

As you may recall, Green Building Law Update has repeatedly discussed the "performance bond" requirement of the D.C. Green Building Act .  As currently written, the D.C. Green Building Act, starting in 2012, will require a performance bond as a guarantee the private development projects will achieve LEED certification. 

Last week, I wrote that no bond, security or insurance instruments exist to guarantee LEED certification.  I have never liked pointing out problems without also providing a solution.  Today, at the Roundtable, I will be speaking about problems with the performance bond and highlighting two potential solutions:

(1) "Financial security" in the form of a fee if a project fails to achieve LEED certification; or
(2) a "D.C. Feebate" similar to Portland's feebate system . 

In order to crystallize these solutions, I wrote a white paper discussing this complex issue and potential solutions.  You can download "White Paper:  Revisions to Performance Bond Requirement of the D.C. Green Building Act" or read the white paper in its entirety after the jump. 

If you have any critiques or suggestions, please do not hesitate to share. 

Photo:  Echo9er

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I have been working with the D.C. City Council recently on revisions to the D.C. Green Building Act of 2007.  In particular, I have been looking for an enforcement mechanism that can be used to ensure compliance with LEED certification requirements for commercial buildings.  The problem is that the current Green Building Act requires a "performance bond" to guarantee certification.  Green Building Law Update has covered the issued extensively and you can read more about it here. 

Photo:  Martyn and Debz

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• D.C. Green Building Act
• SFAA and SBP Letter Regarding "Performance Bond" Requirement 
• Related GBLU "Bond" Posts

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I like categories.  I like to categorize ideas, issues and thoughts in order to develop my understanding.  The same is true for green building law; I like to think of this emerging practice in terms of categories.

The other day I was asked "what is green building law?" by an environmental attorney.  I had never really been asked that question before so I reverted to my categories.  This is what I told the environmental attorney, almost word for word:

Green building law has both front-end and back-end components.  At the front end, you have the contract.  Additionally, you have to deal with financing, land use and real estate legal issues.

At the back end, green building law deals with potential disputes.  These potential disputes fall into one of three categories:  

(1) Certification - Disputes arise from green building certification when a project fails to achieve certification.  Which party will be responsible for the failed certification?

(2) Regulations - Regulations refer to those green building regulations that require or incentivize green building development.  Failure to comply with these regulations can result in green building litigation.

(3) Green building strategies -  Specific components of a green building  that can result in litigation.  The example I give is a green roof that leaks.  Who will be responsible for the leaking green roof?

Do these categories properly define green building law?  What am I forgetting?  Most importantly, do you have a better understanding of what a green building attorney can do for your business?  

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Here at Green Building Law Update, sometimes we wonder if we are just talking to our parents and significant other.  Then we get a comment or a great email from one of our readers and we realize someone is actually paying attention.  With that said, what happened this past week in the green building industry astounded and amazed Green Building Law Update.  

Earlier in the week, your humble author presented a seminar “Green Building Law from a Surety’s Perspective” to a client.  Just prior to the seminar, an article was published in the Washington Business Journal that highlighted the D.C. Green Building Act of 2006 performance bond requirement.  The first few paragraphs were sent to me but I didn’t have time to review the full article before the presentation. 

You may recall that this performance bond requirement drew the ire of the Surety and Fidelity Association of America (SFAA) and the National Association of Surety Bond Producers (NASBP) and Green Building Law Update.  When I first read the performance bond requirement, I literally gasped out loud and realized the green building industry may have some serious legal problems in the very near future.  Basically, the D.C. Council was demanding an insurance instrument that didn’t exist.

During the presentation to the surety client this past week, I highlighted the D.C. Green Building Act performance bond requirement as an enforcement regulation that was going to cause the surety industry problems.  After the presentation, I returned to my office and attempted to unbury myself from hundreds of emails.  With time on my hands, I opened the full version of the Washington Business Journal article and, once again, gasped out loud when I read the following paragraph:

Both trade groups, as well as the Surety and Fidelity Association of America, have met with D.C. officials to air their concerns, one of the first challenges to legislation that is among the first of its kind nationwide.

Alan Heymann, a spokesman for the D.C. Department of the Environment, said his agency has formed a working group with the Department of Consumer and Regulatory Affairs to address the surety industry’s concerns. Both agencies are tasked with implementing parts of the act.

Green Building Law Update is not taking credit for the D.C. Council’s reconsideration of the green building performance bond requirement.  But after writing numerous articles, posts and having discussions with the D.C. Council, I would like to think I played some small part in effecting change. 

Congratulations to the D.C. Council for taking steps to remedy what could have been a problematic regulation.  Congratulations to the SFAA and NASBP for pointing out this problematic provision.  Congratulations to the green building attorneys writing about these issues and helping the green building industry avoid legal problems. 

Of course, there are going to be more green building legal problems.  Green Building Law Update is excited about discussing these issues in 2009 and, hopefully, effecting more change.  

Related Links: 

• Green Bond Coming to a City Near You (GBLU)
• Surety groups fear risks in D.C. green building act (Wash. Bus. Journal)
• What's Your Green Construction Strategy? (GBLU Article)
• Surety Industry Continues to Critique (GRELJ)
• Will the surety industry kill Washington's green building law? (GBLB)

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Sorry, I won't be answering this rhetorical question today.  Instead, a group of construction, design and surety legal experts will attempt to address this difficult question at an upcoming symposium: 

What:  Trends in Green Building Seminar

Who:  Tom Mawson - The USGBC and Trends in Green Building; Chris Cheatham - The Emergence of Green Building Litigation; Bryan Phillips - Green Construction: A Legal Perspective, Dan Knise - Designing Green - With Reward Comes Risk, Geoff Delisio - A Surety Perspective on Green Building

When: Tuesday, December 2, 2008  9:00 - 12:00 AM

Where:  4301 Wilson Boulevard, Arlington, VA 22203

You can also download a complete invitation here. 

I will be speaking about the emergence of green building litigation with a focus on the Shaw Development v. Southern Builders case.  Other speakers will address green building issues from a construction, design and surety perspective.  Seating is limited so please RSVP by November 21 to Nancy Shipley at nancy.shipley@rutherfoord.com. 

Let me know if you have any questions regarding the event.  If you are going to attend let me know (chris@greenbuildinglawupdate.com) -- I would love to meet some of my readers!  
 

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GBLU has previously mentioned that September is going to be a big month for green building regulations and the green building performance bond in Washington, D.C.  So far, we have highlighted D.C.’s Green Building Act performance bond requirement and the surety industry’s response. It now appears the Government of D.C. is forging ahead with the green building performance bond requirement. 

On April 25, 2008, D.C.’s Department of Consumer and Regulatory Affairs (DCRA) included new building codes in a proposed rule.  DCRA has since completed the rule making process and on June 26 submitted the Construction Code Supplement of 2008 to the full D.C. Council.  The Construction Code Supplement includes the following rules to enforce the Green Building Act’s green building performance bond requirement. 

1301.2.3 Prior to Preliminary Review, the applicant shall file any

documentation required . . . and post a performance bond (or letter of credit or escrow

account) pursuant to Section 6 of the Green Building Act, D.C. Official Code

§6-1451.05.

1301.2.4. Upon or before construction completion, the permit holder (whose

permit has been obtained pursuant to the Expedited Green Building Permit

Process) must apply to the Certifying Entity for “certification” of its 

compliance with the Green Building Act.

1301.2.5 If green building verification is not obtained in accordance with

the requirements of D.C. Official Code § 6-1451.05, all or part of the

performance bond shall be forfeited as provided in D.C. Official Code § 6-1451.05(g) and (h).

The Government of D.C. remains very serious about incorporating a green building performance bond requirement that guarantees compliance with the Green Building Act.  The City Council is set to vote on the green building codes in September 2008. The final vote will have a significant impact on the surety industry’s bonding of D.C. projects. 

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In a previous post, GBLU referenced problems with a green building performance bond requirement in Washington D.C.’s Green Building Act.  So what are the apparent problems with this green performance bond? 

On August 13, 2007,  the Surety and Fidelity Association of America and the National Association of Surety Bond Producers detailed the problems with the bond requirement, pointing out that the Act “includes bond requirements that, if not clarified significantly, may make sureties reticent to issue such bonds.”  The SFAA and NASBP outlined several perceived problems with the Green Building Act’s performance bond requirement, including:

•    The Act incorrectly uses the term “performance bond” as the bond described in the Act “seems to function more in the manner of a license or compliance bond, which typically guarantees compliance with a law or code.” A performance bond typically assures one party that another party will perform the contract in accordance with its terms and conditions.

•    The Act does not designate which party is to furnish the performance bond.  The letter argues that “the building owner or developer, as the originator of the building project that retains the design professional and contractor, hold the ultimate responsibility for whether the building achieves compliance with the Act’s requirements.” 

The SFAA and NASBP’s primary concern with the Act is that contractors and performance bonds are improperly suited for guaranteeing green building compliance.  The Government of D.C. so far has continued to incorporate the green performance bond in building codes and rules used to enforce the Green Building Act.  September 2008 is going to be a big month in D.C. for green building codes and the green performance bond.  GBLU will continue to keep you apprised.

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    When people ask me about green building lawsuits and legal issues, I usually start with Washington D.C.'s Green Building Act of 2006. 
  
    The Green Building Act is a very progressive Act that requires both that private and public projects comply with specific green measures.  I have written more extensively about the Act in the article "What's Your Green Construction Strategy" available here. 

    The biggest problem with the Green Building Act is the green performance bond requirement.  When I read this performance bond requirement I literally gasped so I am going to post portions of it word-for-word.  Please note that "section 4" details green building requirements for privately-owned construction projects: 

    (b)  On or before January 1, 2012, all applicants for construction governed by section 4
shall provide a performance bond, which shall be due and payable prior to receipt of a certificate
of occupancy.

    (g)  All or part of the performance bond shall be forfeited to the District and deposited in
the Green Building Fund if the building fails to meet the verification requirements described in
sections 3 and 4.

Did you gasp?  If not, make sure you catch my later posts detailing the potential problems with this green performance bond.
 

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