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Weekly UpdatesINTRODUCTION
CRITICAL THINKING ABOUT THE LEGAL AND RISK MANAGEMENT issues related to green buildings is in its relative infancy. With the sustainable development revolution upon us and a general consensus that it is here to stay, attorneys for owners, architects, contractors, lenders and the like are beginning to identify how designing, building, certifying and marketing green buildings could subject the various project participants to liability as well as how to protect their clients accordingly. There are an astounding number of players in the sustainability arena sporting green blinders and operating under the premise that green buildings are better buildings, therefore eliminating or reducing the risks in designing, constructing and delivering certified green buildings to the marketplace. Those of us currently counseling clients undertaking green building projects and pursuing third-party certification find such a premise not only untrue but also irresponsible. When you combine new building systems and technologies, inexperienced players throughout the development chain, and the relentless pursuit of a third-party green building certification with exploitation of its attendant marketing benefits, the result is a perfect recipe for potential legal exposure.
While the first generation of certified green buildings has been around for several years, industry groups are only now working on model green building lease language, tooling green design and construction contract provi- sions, and beginning to identify the insurance risks, coverage implications and possible new products. Why the delay in focusing on legal and risk management issues? After having the opportunity to meet many participants in the delivery of green buildings over the past few years, I have concluded that many developers, designers and contractors bold enough to embrace sustainable development and pursue third-party certification before it was chic, did not know if green building was a fad or if it was here to stay. Without knowing the longevity of the movement and not truly appreciating or understanding areas of potential exposure, there was little investment made or attention paid to risk management issues such as reworking design and construction contracts, scrutinizing the sufficiency of standard professional liability and property insurance, or implementing marketing and leasing protocols to minimize unreasonable expectations of certification and performance outcomes.
From entitlement, design, construction and consulting to incentives, leasing, marketing and insurance, the delivery to market of a building that is striving for LEED [R] (1) or some other third-party certification poses a host of legal and risk issues that require deliberate and thoughtful management. Nonetheless, attention to legal and risk management issues for buildings or developments seeking certification under green rating systems significantly legs behind the uptake and utilization of green building rating systems. This author believes that important areas for sound risk management in the delivery of a green building or development must be the marketing and entitlement statements and the project governance.
RISK MANAGEMENT ISSUES FOR CONSIDERATION:
Marketing the Green Project
One of the areas rife with legal exposure is the marketing of green buildings. The genesis of the risk comes from enthusiastic owners and zealous marketing in combination with leasing professionals who are proud and eager to tout the sustainable aspects of the project; the time lag between commencing a green building project and the actual receipt of the certification; a general lack of knowledge or unwillingness to acknowledge or appreciate that all green buildings are not meeting certification or performance expectations; and finally, mismatched incentives for owners, marketers and leasing brokers. When the marketing claims discussed below regarding the certification of the project or the building performance are untrue at the inception or prove to be inaccurate, a tenant, purchaser or other third party with unmet expectations (or the desire to get out of a contract for an unrelated purpose altogether) could allege misrepresentation, fraud in the inducement or breach of contract.
Certification Statements
Let's assume an owner/developer is proposing to build an office building and it is the owner's objective to obtain a LEED Gold certification under the LEED for Core & Shell Green Building Rating System[TM]. Procedurally, the project is registered with the U.S. Green Building Council (USGBC) early in the design process. However, it is not until construction of the building is completed that all final LEED letter templates and documentation are submitted to the USGBC to begin the final certification process. Note that under the LEED Core & Shell program, it is possible to obtain "Precertification" based on an early design document review that is intended to essentially allow the owner (and third parties such as tenants and lenders) to expect that if the building is constructed as designed, it is likely to receive certification. Based on current estimates, it can take from several months to a year after the building is completed and final project documentation is submitted for a final disposition of the rating. It is only upon completion of that final USGBC review and certification decision and exhaustion of any appeal, if applicable, that our hypothetical owner will know if the project obtained the LEED Gold certification. In light of this lag, marketing of the project form its inception until the certification determination is made can be problematic.
It is not uncommon, for example, after merely registering a project with the USGBC in pursuit of certification, for an owner to make statements early on in advertising, project signage and other marketing materials that the building "is LEED Gold," "will be LEED Gold" or "will be the first LEED Gold office building in X Town." The design and construction of an office building involves multiple parties--architects, engineers, contractors, subcontractors, and vendors--who all have the ability to compromise the owner's certification objectives. Combine this with the fact that the ultimate rating decision is made by an independent, non-profit, non-governmental organization which often doesn't confer the level of certification being sought by the owner, and it becomes clearer why it is imprudent to make assertions that the project "is" or "will be" certified or certified at any particular level. Furthermore, just because a building may be the first in a particular jurisdiction to be registered with the USGBC is no assurance that another building will not be registered and actually complete certification first. In fact, the number of buildings registered far outstrips the number actually certified. If a tenant or purchaser ascribes substantial value to a particular building being first in some market based on an owner/developer's marketing claims and this ends up not being the case, the owner/developer could face substantive difficulties. Last, it is important to realize that many in the corporate/tenant community do not clearly understand the difference between "Precertification," "Certification," "Registered," "Certifiable," or other locutions devised by marketing departments or currently part of the green building vocabulary. Therefore, developers should take extra care not to promote their building as being certified, or assured of certification, and should be particularly careful about these representations if a prospective tenant or purchaser is drawn to "green" as a differentiating advantage.
Now consider that the risk of promoting; but not achieving the rating sought is compounded for a project seeking certification under the proposed LEED for Neighborhood Development (LEED-ND) rating program, and why extra vigilance will be merited in marketing the project. According to the USGBC, LEED-ND is a rating system that integrates the principles of smart growth, new urbanism and green building into the first national standard for neighborhood design. It is being developed by the USGBC in partnership with the Congress for the New Urbanism and the Natural Resources Defense Council. Whereas other LEED rating programs focus primarily on green building practices, LEED for Neighborhood Development looks not only at the buildings but also the location of the project and its site design, and draws largely on new urbanist planning principles such as high-density mixed-use, connectivity and reduced reliance on the automobile. Certified green buildings are not required; however, points are available within the LEED-ND rating system for including LEED-certified buildings and for integrating green building practices within the buildings on the project site. These credits relate to energy efficiency, reduced water use, building reuse, recycled materials, and heat island reduction.
LEED for Neighborhood Development is currently being tested as a pilot program that includes 238 projects in 39 states and six countries. The pilot projects are in the process of gathering documentation based on the rating system, which will be submitted to the USGBC with the goal of becoming certified. After feedback and refinement, the resulting draft rating system will be posted for public comment before it is submitted for final approvals and balloting. It is expected to be released to the public in 2009.
There are three stages in the certification process for LEED-ND: 1) Optional Pre-Review; 2) Certification of an Approved Plan; and 3) Certification of a Completed Neighborhood Development.
* Stage 1 - Optional Pre-Review is available for projects to use at any point before the entitlement process begins. If pre-review approval of the plan is achieved, the USGBC will issue a letter stating that if the project is built as proposed, it will be eligible to achieve LEED for Neighborhood Development certification. The Pre Review letter is intended to assist the developer in garnering local government support for the project during entitlement, as well as attracting financing and potential occupants.
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