LEED, Liability, and You

July 25, 2011

Green buildings can reduce your operating costs, but do they have the potential to increase your court costs?

You’ve invested a lot of time and money into your newly renovated or constructed building to bring it up to the highly prestigious and sought-after LEED standards. The last thing you want is to be tied up with a time-consuming and costly lawsuit.

While the numerous environmental and financial benefits of sustainable buildings are well-known and widely accepted, the potential risks and legal obligations that accompany them are not as extensively recognized. Sellers, builders, and owners of green buildings can be vulnerable to legal claims. And as the practice of green building increases due to popularity and mandates, so may thegotando legal cases.

LEEDigation Lowdown
LEEDigation, a term coined by Christopher Cheatham, principal of The Law Office of Christopher W. Cheatham LLP and publisher of Green Building Law Update (www.greenbuildinglawupdate.com), encompasses a multitude of potential disputes that arise from LEED certification, green technology, and all other green building components.

Most liability scenarios in green buildings are the same as those in regular buildings, and, therefore, are already addressed by existing laws, as courts may apply existing construction law to green building project defects.

LEEDigation Challenge 1
Northland Pines High School

Not formally brought under litigation in court, this case is a challenge to the LEED certification of Northland Pines High School in Eagle River, WI.

A group of local residents filed a complaint with USGBC that challenged the 2007 LEED Gold certification of the school. The group alleged that the HVAC system was not sufficient and that the project does not meet LEED prerequisites EA1, EA2, and EQ1.

Even though one of the engineering companies retained by the USGBC found several violations of ASHRAE Standard 62.1 and Standard 90.1, it was determined that the project was essentially “close enough.” USGBC denied the challenge, concluding that the school’s prerequisites and credits were met, and therefore, no action would be taken.

However, “LEED certification presents a new legal issue that has not previously been addressed in contracts,” Cheatham explains. “LEED certification is unique in that it involves the performance of multiple parties, each with specific responsibilities necessary for a project’s success.”

Little Green Lies
“One set of potential liabilities that relate to green building projects has to do with the technology and the performance of the building,” explains Shari Shapiro, associate with Obermayer Rebmann Maxwell & Hippel LLP, and publisher of Green Building Law (www.greenbuildinglawblog.com).

Building owners have the obligation to ensure that their buildings perform as promised to tenants. If your building fails to meet tenant expectations, you open yourself up to litigation, similar to the ongoing court case with the Riverhouse, One Rockefeller Park development. “The core of the Riverhouse litigation, where the purchasers of this condominium unit are saying that the offering plan that was circulated by the sponsor of the building, what was promised to them in terms of the building’s green feature and energy efficiency isn’t reflected in the actual construction,” says Stephen Del Percio, associate at Arent Fox LLP and publisher of Green Real Estate Law Journal (www.greenrealestatelaw.com).

“There is the possibility for other similar suits also in the commercial context where tenants say, ‘Hold on, I leased space in this LEED Gold building because I thought, based on this marketing, that I was getting something that I didn’t,’” he continues.

Being wary of how you market your building space can prevent potential tenant vs. owner litigation. “Owners have to be very careful about how they market these buildings. Don’t market the building as LEED-certified before it gets certified, don’t call your building energy-efficient before you actually have some data to back it up. It’s a liability concern,” Del Percio concludes.

LEEDigation Challenge 2
Gidumal vs. Site 16/17 Development LLC.

More commonly known as the Riverhouse, One Rockefeller Park case, this lawsuit challenges the greenness of a building.

The building was touted as being extremely green and on the cutting edge of green technology, yet the plaintiffs in the case are alleging fraud and breach of contract by the building’s developers and are suing for more than $1 million.

Steven Gidumal and Allison Keely, the plaintiffs, bought a condo in the building in January 2007 (according to the court document) and then filed a complaint to the New York State Civil Supreme Court in May 2010. Gidumal and Keely claim that conditions in the apartment are not what was promised, including a defective terrace railing, frosted vs. clear windows, and the “green” heating system failing to provide adequate heat.

The defendants in the case are listed as Site 16/17 Development LLC; Daly, J Christopher; BPC Mezz LLC; BPC Holdings LLC; Sheldrake Site 16/17 Development LLC; and Site 16/17 Investors LLC.

The plaintiffs claim that the conditions are different from those represented to them and that the conditions are due to negligence of the project sponsor’s design professionals.

The case was transferred to New York Civil Court on July 20, 2010. As of press time, the court has yet to rule on motions to dismiss the case.

Education can go a long way in preventing liability lawsuits. “With a green building, there’s an expectation that you’re getting something different,” says Brenda Hustis Gotanda, partner at Manko, Gold, Katcher & Fox, LLP. “Perhaps people are expecting that this will be a more energy-efficient building and therefore their energy costs may be reduced. There may be an expectation that there will be better air quality because they’re assuming a better system is in place.”

“It’s very important to be clear when defining what the green attributes of a building are, because you don’t want to be in a situation where you’re misleading somebody or being accused of greenwashing,” she explains. “Both the building owner and tenants really need to do their homework and understand what it is they’re getting, why they’re going to this green building, and what the attributes are that they think they’re going to have for this particular building.”

A third-party certification program, such as LEED, is one way to back up your green building marketing claims. “Make sure that if you’re calling a building green that you’ve got a reasonable basis to substantiate it,” she continues. “I think often using one of the third-party certification programs is a good way to do it so you don’t have to then claim your building is green, because there is no uniform standard, but then you can say that you’re Green Globes certified, LEED certified, or that you have an ENERGY STAR rating of X. By using a third-party measure, I think you insulate yourself a little bit from claims that what you’re saying isn’t really substantiated.”

Conception, Contracts, Construction
Liability begins with conception, before the building enters the construction stage. With multiple parties working on one project, there’s enough blame to go around when something doesn’t go as expected, but deciding which party owns the blame becomes the challenge.

“If you’re aiming for a LEED building, you’ve got to plan as to what points you’re going to get in order to achieve that certification,” explains Gotanda. “You’ve got various parties involved in the design of the building; you’ve got architects involved, you’ve got contractors building the building, you’ve got a host of people, all of whom are necessary to make sure that you can achieve those credit categories that you need in order to get your certification in the first place. If somebody is not on board with the plan and doesn’t take proper measures during the course of construction, and then you fail to get certification, there certainly is liability associated with that.”

An ironclad contract may not completely eliminate your liability, but it can certainly prevent much of it. “In order to avoid litigation, you need to make sure that you explicitly spell out who’s responsible for what in the contract,” explains Cheatham. “Who is responsible for what green building points and who’s responsible for putting the documentation together? If you can assert who’s responsible for each part of the green building, then I think you’re more likely to get a successful result in the end and avoid litigation.”

“It’s easy to say that somebody should be doing something, but without having that contractual obligation, there’s a lot of miscommunication and potential for liability if you don’t get the certification,” adds Gotanda.

Ensuring that each member of the project team is aware and on board with the green building goal is crucial to circumventing liability issues. “I think LEED liability demands the attention of the members of the project team and their lawyers,” explains Del Percio. “Specifically in terms of contracts, address the scope comprehensively. Align the parties’ expectations in terms of the green building goals and certification scheme and ultimate level of certification. I think the primary risk management tool is making sure expectations are aligned from the very beginning of the project. Then from there, it follows in terms of representations in the contracts about the roles and responsibilities of the parties in terms of how those goals are achieved from the construction side and the demand side.”

As a building owner, the green building responsibility is ultimately yours. And if you don’t have an ironclad contract, it’s difficult to prove that the shortcomings of the building are anyone’s fault but your own.

“I think the primary issue for owners is to understand what they’re paying for,” Del Percio adds. “When you’re pursuing LEED certification, unless you’re bringing the entire team together from the very beginning of the project, you’re not necessarily guaranteeing yourself an energy-efficient building. In terms of protection, I think most savvy owners recognize that the LEED label isn’t a proxy for performance or a sort of magic bullet.”

Numbers: Actual Vs. Theoretical
One component of LEED is energy and water modeling. What happens if your building is projected to utilize X amount of energy but really ends up utilizing twice the projected amount? “Most of the time, green buildings are designed to save water and save energy and so forth,” says Shapiro. “And to the extent that the modeled energy performance or water savings don’t match up with the actual water savings and so forth, that can be an area of liability.”

The new LEED Minimum Program Requirements mandate that building owners complete certain criteria, such as complying with all environmental law and supplying energy and water data. At this point, buildings with actual numbers not matching up with the projected numbers won’t necessarily lose LEED certification, but there is a chance that could change in the future.

LEEDigation Challenge 3
Gifford vs. USGBC

This particular lawsuit does not challenge merely one green building and its claims, but the LEED system as a whole.

Henry Gifford of Gifford Fuel Savings, Inc., filed a class action lawsuit against USGBC on Oct. 8, 2010, on behalf of taxpayers, buyers of LEED products, and building professionals.

The document claims that the LEED rating system is supplanting building codes in jurisdictions, undermining marketplace competition, and obscuring other standards that are proven to reduce energy use and carbon emissions (unlike LEED). In addition, LEED accredited professionals are often people with no experience, and “When L.E.E.D.® accredited professionals design and build buildings instead of skilled professionals, such as the Plaintiffs, with years of experience making safe, comfortable, and energy-efficient environments, the marketplace, consumers, and the environment, often suffer,” according to the court document.

The document ends with an order for USGBC and LEED to cease and desist their deceptive practices and demands judgment for compensatory, statutory, and punitive damages, and a trial by jury for all issues that are triable by jury.

In the $100-million lawsuit, Gifford alleges the USGBC is guilty of fraud, unfair competition, deceptive trade practices, and false advertising. The claim is based on a federal law called the Lanham Act, which prohibits companies from engaging in misleading business practices, such as false advertising.

Gifford filed an amendment to the first complaint on Feb. 7, dropping the class action status and including additional plaintiffs.

On April 6, USGBC filed to have the case dismissed. It argues that only a business competitor can bring a false advertising claim under the Lanham Act (Gifford claims he is a competitor because his company provides building owners with energy advice, like USGBC), that Gifford can’t prove the LEED system actually harms him or his business, and that the claims USGBC makes about LEED are true.

As of press time, the judge has yet to rule on the case.

“If you have somebody collecting your energy data that’s going to be reported, there needs to be a person actually taking a look at it and seeing if it lines up with what was modeled,” Gotanda says. “If it doesn’t, you need to investigate and find out why not. Maybe there are some adjustments that need to be made or things you can do. You don’t want to be in a position to say ‘We have a LEED building, it’s very energy efficient,’ and then have information out there that says that your building is not as efficient as you predicted and you’re not doing anything about it, particularly if the folks who are buying or leasing your building feel that was really important and the reason why they came to your building vs. another building.”

In addition, ensure that access to information is in your leases. When buildings are leased out to tenants, the building owners often have nothing to do with energy – the tenants pay for and monitor it themselves. “You have to put in place, either in the lease or otherwise, the ability to get the energy information if you need it, because you’re the ones that are maintaining the green certification,” explains Gotanda. “Something to think about in terms of potential liability issues is that if you don’t put it in place, then you don’t get the information, you can’t give it to USGBC, and you lose certification. You really need some strategic planning up front to avoid some of these legal liabilities that you may have.”

Will Mandates Lead to Court Dates?
Localities and the government enforcing green building standards (even mandating LEED-certifiable buildings) are proof that the green building movement is here to stay. With the increase of green building requirements, the building industry – as well as the legal industry – can expect to see an increase in legal cases.

“If you have an entire city mandating LEED certification, it does two things,” explains Cheatham. “That creates more buildings that are seeking LEED certification and oftentimes some of those owners won’t want to be seeking LEED certification, but they’ll do so in order to comply with regulations, so that’s going to create an impetus for potentially unhappy owners. The bigger issue is that there will now be enforcement mechanisms in place if the building doesn’t get its LEED certification. In Washington, D.C., for example, if a building doesn’t get its LEED certification in 2012, as required by the Green Building Act, then the owner has to forfeit a bond to the city that can be up to $3 million. That’s a very specific amount of money that can be alleged in a complaint. And if you can point to a statute and say ‘I lost $3 million because I didn’t get my LEED certification or didn’t get up to the level that was required,’ then I think that creates a greater likelihood of litigation.”

The legal implications of green building requirements don’t stop just after construction. Legal liability cases can arise when an owner wants to sell a building.

“The real concern from a risk perspective comes where green building requirements become code and become part of the federal or local requirements for buildings,” says Shapiro. “When those things become law, there is a much greater impact on risk than a voluntary system. What we’ve seen is a significant increase since 2005 at all levels of government of green building requirements becoming law. We’re starting to see building energy performance disclosure requirements becoming law. If you violate the law or are forced to disclose your energy audit and it is demonstrated that your energy doesn’t perform as well as it was modeled, and then you can’t sell your building or have to sell it at a decreased price, that is where you’ll really start to see a lot of litigation.”

Still Need LEED
As the adoption of LEED standard green buildings becomes more widespread, building owners will not be able to turn away from green building practices and certification in order to protect themselves from liability lawsuits. Instead, owners should be educated when picking members of the project team, market their green buildings without being misleading, and stay on top of the numbers. While these practices may not completely rule out the chance of a LEEDigation lawsuit, adhering to them may reduce the likelihood of one.

“I wouldn’t tell an owner that it’s not worth getting LEED because you’re opening yourself up to liability if the building doesn’t perform,” says Del Perico. “It’s just being objective and not overpromising what the space is going to deliver.”

Kylie Wroblaski ([email protected]) is associate editor of BUILDINGS.

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