January 14, 2009

First LEED-related lawsuit in the U.S. sounds warning bell for builders

SAUL CHERNOS

correspondent

In the wake of the first LEED-related lawsuit, green building proponents are being advised to do due diligence and pay careful attention to contracts.

The Captain’s Galley, a US$7.5 million, 23-unit condominium in Crisfield Maryland, was completed in 2006. It included green features intended to support an application to the United States Green Building Council for a silver Leadership in Energy and Environmental Design rating.

However, things turned sour when Southern Builders, the general contractor, seeking payment, filed a US$54,000 mechanic’s lien against Shaw Development. Shaw responded with a counterclaim saying it lost US$635,000 in state tax credits following a nine-month delay in project readiness and certification.

Although settled out of court this past summer, the lawsuit has left its imprint on the building industry, with professional advisors saying green construction projects are ripe for litigation.

“This will probably be the tip of the iceberg,” warns Yves Menard, a specialist in real estate and construction law with Borden Ladner Gervais. “Like anything else in litigation, things often start in the U.S. and make their way to Canada. We saw that with the mould contamination cases.”

Menard said the Maryland case was more about construction delay than LEED.

“They didn’t meet LEED certification within a certain period ... and in order to get a tax credit they had to get an occupancy permit by a certain date, and they didn’t. So to a certain extent it’s similar to a delay-claim suit you would have in Canada, where the contractor agrees to build the building by a certain date and doesn’t.”

With green projects in particular, parties need to do all they can to avoid liability with respect to certification or any other environmental representation or requirement, Menard said. He advises owners and building professionals to vet all hires, verify any claims to green expertise, and design on-site to help ensure projects meet requirements.

“Are you close to public transportation? Is it a brown site as opposed to a green site? Are you on a public sewer system or are you going to have septic fields? These things matter (in respect to LEED credits).”

Menard said architects and other design professionals are particularly vulnerable to green liability and should be careful not to guarantee that buildings will meet certification, because professional liability insurance is unlikely to cover such guarantees.

While Maryland and many other U.S. jurisdictions issue tax credits for green construction, Canadian jurisdictions generally do not. However, Menard said this may change. “There’s lots of pressure on the governments right now to either amend their building codes or, alternatively, to ensure there are more requirements on developers to build more green buildings.”

Menard said new requirements in building codes, such as increased levels of energy efficiency and other stringent conservation measures, mean building and design professionals must adapt and ensure they have proper training.

Geza R. Banfai, a specialist in construction law with Blaney McMurtry, said certifications are administered by third parties and can thus be subject to interpretation. He recommends building professionals be cautious about making promises and avoid assuming responsibility for results not completely under their control.

“The situation becomes further complicated if the owner, midway through the project, orders changes to the design which reduce the number of points achievable in getting the desired LEED certification,” Banfai said. “Presumably most owners make decisions like that knowingly, but what of the owner who, denied his certification, turns around and says to the contractor, ‘You should have told me I wouldn’t get LEED Gold! Otherwise, I would never have ordered those changes!’”

Banfai said the key to avoiding problems lies in the contract. “The owner and contractor need to be clear about their particular risks and responsibilities in achieving the desired certification. The contractor’s obligation should properly be to build to the stipulated design but not to guarantee the outcome ... that risk properly belongs with the owner.”

“If a particular LEED certification is especially important to an owner — for example, in order to qualify for funding under some program — the owner should alert the contractor to that risk in advance,” Banfai said.

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