Legal issues arising out of green building legislation.(FOCUS ON GREEN BUILDING)

AS CONCERN ABOUT THE STATE of the natural environment continues to rate higher on the public's agenda, an increasing number of state and local governments have enacted legislation to combat the significant environmental impact of building construction and operations. As of August 2007, 24 states and 90 local governments had adopted the U.S. Green Building Council's (USGBC) LEED [R] green building standards, while 12 states had included the Green Building Initiative's Green Globes system in legislation. Moreover, recent information from AIA suggests that 14 percent of U.S. cities larger than 50,000 people have green building programs. Each program differs in terms of scope and implementation; some apply through a local building code, while others have been implemented through various types of zoning ordinances. Some municipalities mandate compliance with third-party certification regimes, while others provide various types of incentives as a means of encouraging projects to implement sustainable design features or seek third-party ratings. Nevertheless, in the rush to respond to what many believe to be an imminent natural crisis, much of this legislation has been quickly passed without consideration of its broader legal ramifications.

As a threshold issue, some pieces of legislation have been drafted poorly, incorrectly defining significant terms. For example, Washington, D.C.'s Green Building Act of 2006 (discussed in greater detail elsewhere in this issue by Bryan Seifert) seems to misunderstand the fundamental concept of a performance bond, and led the National Association of Surety Bond Producers (NASBP) to advise its constituency to refuse to issue such bonds until the Act's language was clarified. The purported "performance bonds" essentially serve as a penal sum under the Act in the event that a project fails to meet the requisite level of LEED certification. As drafted, the legislation presents other problematic provisions, including obvious conflicts of interest where the agency evaluating compliance is funded by forfeited fees from projects that fail to meet LEED requirements. Despite NASBP's protests, all indications are that the District is forging ahead with the legislation as drafted, which could have serious repercussions across the surety landscape.

While green building mandates originated in the public sector, an increasing number of laws are migrating to private sector construction, obligating projects over a certain size to comply with an independent, third-party rating system over which the local government exercises no control. For example, Babylon, New York, on Long Island, enacted an amendment to the local building code stating that it "hereby adopts, in principle, the U.S. Green Building Council's (USGBC) Leadership in Energy and Environmental Design for New Construction Rating System, Version 2.2. and, further, automatically adopts any future versions promulgated by the USGBC." Enacted in 2006 as the town's Local Law Number 40, the legislation presents numerous problems for a number of reasons that are detailed later on in this article. Fundamentally, though, this type of legislation is simply undemocratic. It takes local government completely out of the decision-making process and hands control of the building code to a third-party organization over which the public exercises zero oversight.

The legislation took effect in late 2007, and requires all projects greater than 4,000 square feet to receive LEED certification prior to receiving a certificate of occupancy. Has Babylon now tied itself to whatever that next-generation LEED system will ultimately look like? If so, it seems prudent for similar pieces of legislation to include sunset provisions or other grounds for periodic local government review to ensure that they are resulting in the desired outcome.

Legislation containing vague provisions of this type and insufficiently vetted by stakeholders may have serious practical consequences for insurance as well. While other sectors of the insurance coverage market are currently monitoring what's happening across the green real estate industry, the first coverage sector to offer a specific green building endorsement was the property insurance market. Fireman's Fund, Lexington, ACE, Liberty Mutual and Travelers all now offer various types of endorsements to their property insurance policies. For example, in the event of a partial or total loss (e.g., a fire destroys part or all of a building), property insurance policies will typically pay for the cost of rebuilding a building to its pre-loss condition. However, in the absence of a specific endorsement to such a policy, a building owner's property insurer may deny the owner's claim for the costs of certifying the building in order to comply with newly enacted green building legislation. In the current regulatory environment, it's critical that owners continue to monitor local legislative activity and review the terms and conditions of their property insurance with vigilance.

From a broader policy perspective, suppose an owner purchases one of these available green building endorsements, either to upgrade from LEED Silver to Gold or to simply get a rebuilt building certified after a covered loss. What if the rating system itself changes? We have certainly seen plenty of mid-year amendments to LEED, changing credit requirements and prerequisites, for example. What about the next-generation LEED system (LEED 2009) under development right now? Will a Silver rating under that iteration of the rating system be equivalent to a Silver rating under the current version of LEED? This is unlikely, and even more, what will the applicable LEED product look like in five years with the USGBC's avowed desire to continually increase the rating products requirements?

Much of the legislation enacted to date has left these types of key considerations unanswered. For example, will the legislation follow the rating system, or will it periodically be amended to reflect third-party updates? If legislation itself is a moving target, it's even more critical for owners to scrutinize their insurance policies to ensure that sufficient coverage will be available in the event that their projects must comply with a freshly enacted third-party mandate.

While the scope of green construction claims of negligence is beyond the range of this particular article, one practical application of green building legislation may be causes of action asserted as negligence per se. Generally speaking, negligence per se is a legal doctrine that allows a plaintiff to recover in negligence where it can demonstrate that a defendant violated a statute designed to address public safety. It is an easier claim to assert than negligence standing alone because expert testimony is not needed to demonstrate a breach of duty. For example, suppose a contractor is required by an owner to apply for third-party certification as mandated by local legislation. Suppose the contractor fails to do so, or the project itself merely fails to reach the required level of certification. The owner would not need to establish the four prongs of a negligence claim in order to establish that the contractor was negligent; rather, the simple failure of the project to reach certification would be prima facie evidence that the contractor had, indeed, been negligent. The negligence per se claim, of course, would sound in addition to any other causes of action, including breach of contract that the owner might be able to assert against the contractor. Municipalities that enact legislative mandates requiring specific certification levels for projects to achieve under third-party ratings may therefore unwittingly be greasing the wheels of litigation for aggrieved green building plaintiffs.

Third-party-driven green building legislation has the real potential to spawn litigation if project participants are not aware of the specific provisions of applicable state or local level regulatory schemes. The best paradigm for analyzing such a scenario comes from a recent project in northern California--called the Gaia Napa Valley Hotel--where a local municipal incentive offered the developer of the hotel a $1 million tax rebate for occupancy tax revenues, conditioned on the project receiving LEED certification. The hotel opened in November 2006, but didn't formally receive LEED Gold until July 2007. The municipality did not budge, and required the developer to wait for the rebate until it actually received its rating.

While there hasn't been any reported litigation arising out of this particular project, imagine for a moment that, as is typical in many of the third-party-driven schemes that have been created, the local building code had conditioned a certificate of occupancy on receipt of formal certification, or was holding a fixed dollar application sum (generally a percentage of project square footage) in escrow until the USGBC officially made the award. These types of scenarios create the conditions for a developer to seek some sort of recourse, and demonstrate why conditioning official compliance with legislation, and essentially emphasizing process rather than product, is dangerous from the perspective of potential litigation. Moreover, municipalities that fall within the Gaia Napa Valley Hotel paradigm may face claims that they have violated the non-delegation doctrine by improperly delegating a governmental function (reviewing compliance with a local green building program) to a private entity (e.g., USGBC). Accordingly, it's critical that local programs include an appeals process through which projects are given the ability to contest third-party certifications or petition local government in the event that formal certification is delayed due to circumstances beyond either the municipality's or applicant's control.

Given the rapidly changing regulatory environment, it was not surprising that the first green building lawsuit in the country arose out of a project where the developer expected to receive more than a half-million dollars in tax credits under a state-level green building program keyed to LEED Silver. The case, Shaw Development versus Southern Builders, arose out of the construction of a 23-unit condominium project on the eastern shore of Maryland, and has apparently settled out of court. In order to take advantage of the credit, the project had to receive a certificate of occupancy by a certain fixed date as set forth in the contract. The project was delayed by more than nine months and the owner was unable to take advantage of the tax credit. The contract itself (which was the AIA's 1997 version of the A101 Owner/Contractor Agreement) contained no reference to the legislation and accordingly, there was no risk transfer mechanism drafted between the owner and contractor. Again, it's hard to draw any conclusion other than the parties (or their attorneys) did not understand the provisions of the legislation that the owner sought to leverage, and litigation was the unfortunate result of that failure. The lawsuit also demonstrates the danger of relying on form contracts in connection with green building projects, particularly where legislation may apply to either a mandate or an incentive.

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