The Foundation for a Legally Green Construction Practice

The Foundation for a Legally Green Construction Practice

Prepared For:
Green Built Michigan

By:
Patrick R. Drueke

Patrick R. Drueke, Attorney at Law

Patrick R. Drueke
Rhoades McKee, P.C.
Grand Rapids, Michigan

Patrick R. Drueke is a shareholder at Rhoades McKee. He helps individuals and
businesses solve real estate disputes, real estate transactions, land development
challenges, condemnation claims and construction matters. He is a Leadership in
Energy and Environmental Design® Accredited Professional (LEED AP), and is also
certified by Green Advantage® - Commercial/Residential. The LEED rating system is
the nationally recognized benchmark for the design, construction and operation of
high-performance green buildings. As a LEED AP, he can navigate clients through
the evolving legal and regulatory requirements relating to green building, as well as
assist clients through the LEED certification process from startup to final verification
of a project’s green measures.


NAHB Gold Certified Home
Blansfield Builders
Darien, CT

Features: Reclaimed hemlock & heart pine for the ceiling, floors, & cabinets, 11kw
solar photovoltaic system, high efficiency heat pumps, and countertops made from
recycled paper, glass, & concrete.


Learning Objectives

• Identify the underlying risks and liability potential in green
construction.
• Identify contractual provisions to mitigate legal risk.


Is There New Legal Exposure for
Green Building?
• “While the process of incorporating environmental considerations into
the home building process is not new, today’s green building activity is
expanding quickly, and as with any emerging field the potential exists
that mistakes will be made and the unexpected will occur.” NAHB,
Before You Build Green: A Primer on Liability Pitfalls.

• “Take proactive steps to reduce the risk that your green building project
could become a major headache for you and your customer, ending in
litigation.” NAHB, Before You Build Green: A Primer on Liability Pitfalls.

• “As with other aspects of your business, the key is to accept risk
knowingly.” David Jaffe, NAHB Vice President for Construction &
Liability Research, March 2007.


• The United States Green Building Council contends that there is no new
legal risk in its paper: “The Legal Risk in Building Green: New Wine in
Old Bottles?”

• The paper suggests that liability risk associated with green building
is nothing different than traditional construction (i.e. “the novel
liability associated with building green are . . . new wine in old
bottles”).
• The paper suggests that the framework of legal liability is not new:
local building codes and land use regulations must still be followed.
• The paper suggests that there have been very few insurance claims
against green design professionals.


The Legal Risks of Green
Building
Green Building: Assessing the Risks – A comprehensive study recently
released by Marsh identified the top five risks facing green building
projects:
2. Financial;
3. Standard of Care/Legal;
4. Performance;
5. Consultants/Subconsultants and Subcontractors; and
6. Regulatory.

http://global.marsh.com/news/articles/greenbuildingsurvey


Standard of Care/Legal Risks
• Achieving the appropriate third party certification;
• Competency of team members;
* Training subcontractors may avoid unintended violations of the
rating system, and produce more accurate bids.
• Evolving building codes with the potential for strict liability standards.
• Challenge determining an appropriate standard of care as green
building expertise evolves;
• Uncertainty with respect to allocating fault and determining
responsibility;
• Untested contract language;
• Managing expectations.


Whaddya Mean by “Green”

The EPA defines “green building” as follows:

“Green building is the practice of creating structures and using processes
that are environmentally responsible and resource-efficient throughout a
building's life-cycle from siting to design, construction, operation,
maintenance, renovation and deconstruction.”

Manage expectations and avoid misunderstandings by clearly defining
what “green” means in your contract.
State that the structure will be built according to the National Green
Building Standard.
The as-built structure must then comply with the specified standard.


Regulatory Risks
• An uncertainty about how the regulatory environment might evolve with
respect to green building;
• Concern that regulations might drive owners to seek warranties and
guarantees;
• Evolving green standards and interpretations governed by a non-
regulated entity;
• Mandates requiring a choice between third party standards;
• Imposing mandates as opposed to offering incentives.


The Legislation of Green Building
Requirements
Green building may be increasingly difficult to avoid:

− Many federal, state and local governments now require that
public buildings meet green standards.
− Some state and local governments have extended green building
mandates to new residential and commercial construction.
− According to research conducted by the University of Wisconsin,
in 2008 there were 134 mandatory green building programs in
place in 118 counties in the United States.


Is There a Basis for this Concern?
• A recent case in Maryland (Southern Builders v. Shaw Development)
emphasizes the importance of understanding the applicable legislative
scheme (mandate or incentive) and clearly describing the
responsibilities of: the owner, design professional, contractor, etc.
• In Southern Builders the parties utilized a standard form contract, and
incorporated a project manual, which stated that the project was
“designed to comply with a Silver Certification Level according to the
USGBC’s LEED Rating System.”
• Maryland offered state tax credits for LEED projects.
• Projects could obtain the credit only after receiving a certificate of
occupancy after construction was complete, and a submittal that the
building meets the criteria necessary to receive the tax credit (i.e. LEED
Silver) – all within a specified time period.


Shaw Builders (Cont.)
• There was no language in the contract documents obligating Southern
Builders to secure any formal certification from USGBC.
• The contractor was required to deliver a Certificate of Occupancy within
336 calendar days from the date of the agreement.
• The contractor failed to deliver the COO, and as a result the project
missed the deadline to obtain the tax credits.
• The owner sued the contractor for “$635,000 in lost tax credits.”
• The lesson learned:
• The parties failed to recognize the risk created by the regulatory
scheme that led to the loss of tax credits.
• The contract documents did not include a risk transfer mechanism
with respect to securing the tax credits.


Pending Incentives in Michigan
HB 4124 (Introduced January 27, 2009):
• Tax credit equal to 50% of the total cost for the construction of a
green building or the rehabilitation of a building into a green
building and the expenses incurred to obtain LEED certification or
$50,000.00, whichever is less.
HB 4193 (Introduced February 5, 2009):
• A credit equal to $5,000 for the purchase of an eligible green
residential structure; or a credit of 30% of the costs incurred for an
eligible renovation or addition or $2,000, whichever is less.

HB 4927 (Introduced May 12, 2009):
• Provides a tax credit equal to $50,000, or 50% of the cost of LEED
certification (including third-party commissioning, consulting and
verification costs) whichever is less for the construction or
renovation of a qualified green building.


Pending Mandates in Michigan
HB 4575 (Introduced March 12, 2009):
• Would amend the State Construction Code Act.
• Permits local municipalities to adopt its own code consisting of
either the National Green Building Standard, ICC-700, or the
“current version of Leadership in Energy and Environmental Design
(LEED)”
• Current Status: Referred to Committee on Regulatory Reform
• Potential legal issue: Unlawful delegation of governmental
power, or too vague (to the extent a local municipality mandates
“the current version of LEED” as opposed to a specific version of
LEED).


Existing Local Mandates
City of Grand Rapids Resolution No. 74599:
• All construction and renovation projects involving municipal buildings larger
than 10,000 square feet and a cost of $1 million or more must receive LEED
certification.
City of Auburn Hills:
• Its Green Building Policy encourages the voluntary achievement of
LEED certification for municipal and private development projects.


Key Issues
• As green building becomes increasingly tied to financial incentives
and government mandates your clients will expect contractual
assurances.

• As verification and measurement advances your clients will be able to
objectively compare the design versus the actual performance.

• You must know the state and local regulatory framework which
governs green building standards, or that otherwise offers incentives
for such projects.

• Because “green” design is non-traditional you cannot rely on a
contract that might be used for a traditional built structure.

• Avoid unintended warranties and subjective expectations through a
clearly defined contract.


Managing Risk Through Your
Contract

• Current form contracts do not contain language specific to green
projects.
• The contract should include provisions relating to:
• Specification for certification (if applicable);
• Define exactly which third-party rating system is being used (i.e.
The National Green Building Standard, ICC-700).
• The completed structure must comply with the specified
standard.
• A contractor should delete any requirement to achieve a
certain level of certification if another party designed the
structure.


• Avoid guarantees of a certain Performance Point Level (e.g. Bronze,
Silver, Gold, Emerald) under the National Green Building Standard.
• A guarantee can be risky because third parties determine
certification.
• Do not warrant the performance of any material, product or system
manufactured by a third party.
• Liquidated damage provisions should be considered:
• A contractor can mitigate risk by specifying a predetermined
amount of damage to be paid in the event of a breach.
• Such a clause would avoid the owner claiming “actual
damages.”
• Avoid a cancellation of the contract in the event the structure is
not certified.


• Obtain a waiver of consequential damages.
• Force majeure clauses are important:
• NAHB Green Building Guidelines: “Use materials manufactured
from renewable resources or agricultural by-products such as
soy-based insulation, bamboo, or wood-based products.”
• You must account for the possibility that these materials will
not be readily available.
• Allocate responsibilities and risk:
• for obtaining certification and specified rating;
• for seeking applicable incentives;
• for complying with applicable mandates


Questions & Answers


Patrick R. Drueke
Rhoades McKee, P.C.
161 Ottawa Ave., NW Ste 600
Grand Rapids, MI 49503

(616) 233-5175
prdrueke@rhoadesmckee.com
http://twitter.com/patdrueke


The Foundation for a Legally Green Construction Practice

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