Suretyship and Green Building

Suretyship and
Green Building
Chris Cheatham, LEED AP, Esq.
www.greenbuildinglawupdate.com

Suretyship and Green Building

What will you learn?
1. Surety enters into three-party
contract with owner, contractor
2. Performance bond guarantees
contractor will build to plans
3. Bonds can be used to enforce
green building requirements

Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OF PRESENTATION]

Agenda

• Suretyship 101
• Bonds in Construction
• A Surety’s Role in Green Building
• Bonds as Enforcement Mechanism


Suretyship 101

Mandatory, unintelligible deﬁnition:

Suretyship is a “contractual relationship
whereby one person engages to be
answerable for the debt or default of
another.”
-Sterns, The Law of Suretyship 1 (1951)


Suretyship 101
Three parties - tripartite agreement:
Creditor

Debtor Surety


Suretyship 101
Two key surety rules:
(1) Debtor is responsible to satisfy
obligation to pay or perform
Creditor

Debtor Surety


Suretyship 101

But what if Debtor fails to pay or
perform?
Creditor

Debtor Surety


Suretyship 101
(2) If debtor fails to pay or perform
and another party, who has
previously promised to pay debt or
perform obligation satisﬁes the debt,
then performing party can receive
reimbursement for payment.


Suretyship 101

(2) Debtor fails, Surety performs,
Surety reimbursed by Debtor
Creditor

Debtor Surety

Suretyship 101

What does surety get?
1. Premium paid by debtor
2. Debtor’s duty of reimbursement
(indemniﬁcation agreement)


[TITLE BondsPRESENTATION]
OF in Construction
Surety and Construction:

Developer Guy

Contractor Guy Surety Guy

OF in Construction
Surety and Construction:
surety is
answerable,
Developer Guy
through bond,
for debt or
default of
contractor to
owner.
Contractor Guy Surety Guy

OF in Construction

Three types of surety bonds for
construction:
1. Payment Bond
2. Bid Bond
3. Performance Bond


OF in Construction
Payment Bond
• Guarantees owner that
subcontractors will be paid monies
due by contractor
Bid Bond
• Guarantees owner that contractor
will honor bid and sign contract


OF in Construction
Performance Bond
• Surety guarantees satisfactory
completion of project by contractor
• Contractor must build according to
plans and speciﬁcations
• Otherwise surety must (1) complete
project or (2) allow owner to
complete, surety pays costs

[TITLE OFRole in Green Building
A Surety’s PRESENTATION]

1. Green Roof Leaks

3. Surety Pays
2. Contractor Developer or
Defaults Rebuilds



Fact: Sureties are already bonding
green building projects
Fact: Sureties are just now assessing
inherent green building project risks
Fact: No major surety has speciﬁc green
building bond


How Underwriters Can Assess Surety’s Risk
in Green Building:
1. Is it a green building project?
2. Did contractor guarantee certiﬁcation?
3. What green strategies involved?
4. What green regulations apply?
5. Is compliance achievable?

[TITLE as Enforcement Mechanism
Bonds OF PRESENTATION]

• Green building regulations require
enforcement mechanisms
• Entities using bonds as enforcement
mechanisms:
• Washington, D.C.

• Arlington County


Washington, D.C. -
Green Building Act of 2006
Section 4 - starting January 1, 2012, private projects
•
greater than 50,000 square feet must be LEED certiﬁed

“(b) On or before January 1, 2012, all applicants for
•
construction governed by section 4 shall provide a
performance bond”

“(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.”



Surety and Fidelity Association of
America and Surety Bond Producers:
Letter to Government of D.C., August 13, 2007
•

“The new law incorrectly uses the term ‘performance bond.’ In
•
short, the performance bond assures that the construction
contract, and therefore, the project will be completed.”

The bond in the Green Building Act “seems to function more in
•
the manner of a license or compliance bond, which typically
guarantees compliance with a law or code.”


“Surety groups fear risks in D.C.
green building act”
Washington Business Journal, December 12, 2008
•

“Alan Heymannn, 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.”

Surety Guy is Happy!


Arlington County -
Bonus Density Program
• Developer declares intent to
achieve LEED certiﬁcation
• Developer applies for FAR variance

• .15 - certiﬁed
• .25 - silver
• .35 - gold/platinum


Arlington County -
Bonus Density Program
• Enforcement Mechanism: Bond

• Bond = Bonus Space * Rental Rate

• Developer posts when
75% complete
• Bond released upon certiﬁcation



Arlington County has successfully
required and released two bonds.

Developer Guy and Surety Guy Happy!


What did you learn?
1. Surety enters into three-party
contract with owner, contractor
2. Performance bond guarantees
contractor will build to plans
3. Bonds can be used to enforce
green building requirements


Want to learn more?

www.greenbuildinglawupdate.com
chris@greenbuildinglawupdate.com

Suretyship and Green Building

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