One specific issue I am focusing on in connection with preparing for a presentation later this month is enforcement mechanisms in green leases: if either the landlord or tenant breaches a green provision in the lease, what specific rights and remedies – if any – does the lease provide to the parties? I have discussed this issue previously at GRELJ, particularly in the aftermath of last fall’s panel at the Urban Green Expo here in New York City where the consensus was that most landlords would likely not want to create self-imposed gaps in their building’s net operating income by evicting tenants who breach green lease provisions. Attorney Larry Schnapf of Schulte Roth & Zabel echoes these sentiments in an article he published in the November 2009 issue of The Practical Real Estate Lawyer, writing that “[i]n most cases, the ‘nuclear’ option of lease termination is probably not a reasonable remedy. The best solution may be rent abatement [if the space fails to perform or the building fails to earn the anticipated certification] or increased rent if a tenant space exceeds certain energy demands or water consumption. The parties may want to negotiate ‘cure’ provisions to provide a reasonable period to correct the deficiency.”

Perhaps unsurprisingly, then, I had difficulty identifying specific buildings or spaces where the breach of specific green obligations in a lease give either party the ability to declare a default and terminate the lease. However, and as Schnapf suggests, I was able to find some details on the leasing structure for the New South Wales Police Headquarters Building, just outside of Sydney in Parramatta, Australia, which provides a specific remedy for the tenant in the event that the landlord fails to satisfy certain terms of the green lease. Designed by architects Bates Smart and completed in 2003, the 15-story tower’s lease document between the landlord, the Department of Commerce, and the New South Wales Police Service requires the landlord to earn a 4.5 star NABERS rating (National Australian Built Environment Rating System, an environmental self-reporting system that’s roughly equivalent to our Energy Star program) over the lifetime of the lease. The rating is evaluated annually and, if the landlord fails to earn 4.5 stars, the tenant’s rent is reduced by the amount of any increased energy and water costs that arise as a result.

This is an interesting arrangement which we haven’t heard much about here in North America. Is it conceivable that a tenant could demand that the landlord build in a rent rebate provision into its lease in the event the building or space fails to earn (or maintain) the rating required by the terms of the lease? I think it would be difficult to quantify the difference in operating expenses between a LEED Silver building and a LEED Gold building, but the concept is interesting to consider. (Of course, such an arrangement would depend on whether the lease is gross (the landlord pays for building operating expenses) or net (the tenant pays)). What about tying a reduction in rent to a lower level of third-party certification? Again, the question would be how to quantify such a reduction, but I would think a landlord would only agree to using its “reasonable efforts” to pursue the third-party rating anticipated by the tenant. Nevertheless, in a soft leasing climate where deals are far and few between, tenants may be able to insist on stricter language in green leases during negotiations.

Just as a side note, the USGBC’s Green Lease Guide suggests, under its form Defaults and Remedies section, that “[t]he remedies included in a lease for breaching environmental objectives will reveal how critical these obligations are to the parties. If the objectives are aspirational, the lease will include something less than an absolute obligation to comply, such as reasonable efforts. On the other hand, if the objectives are critical, the lease will include an absolute obligation to comply.” For example, if a tenant is required to occupy space in a LEED-certified building or LEED-CI-certified buildout (as is the case for the General Services Administration, which must occupy LEED Silver-certified space pursuant to federal legislation), the landlord’s failure to deliver that space at the required level may necessitate the tenant insisting on a right to terminate in the body of its lease. Conversely, for the landlord pursuing LEED-EBOM certification pursuant to a similar mandate or, more significantly, in order to comply with applicable legislation, certain green lease provisions may need to have more teeth.

Has anyone come across arrangements in leases similar to the New South Wales Police Headquarters or other provisions where green obligations were more than merely aspirational?

California’s recent adoption of a state-wide green building code once again has green building legal practitioners focused on the legal issues surrounding green building legislation. Although the California legislation does not directly implicate it, one topic which has received mostly lip service to date is whether the mass adoption of LEED into state- and local-level building codes could raise antitrust problems. Last fall, I published an Article in the William & Mary Environmental Law & Policy Review which used the USGBC’s ongoing review of Credit 7 under the LEED 2009 New Construction rating system’s Materials and Resources Credit Category to take a closer look at federal case law where environmental standards promulgated by private third-party organizations – like USGBC – were challenged by stakeholders on antitrust grounds. (The citation for my full piece is 34 Wm & Mary Envtl. L. & Pol’y Rev. 239 (2009); I’d be happy to email you a copy of the full article if you’re interested in reviewing it).

As you may know, in order to earn LEED’s MR-7 credit, projects must “[u]se a minimum of 50 percent (based on cost) of wood-based materials and products that are certified in accordance with the Forest Stewardship Council’s principles and criteria for wood building components.” In other words, wood-based products that are not certified by FSC are effectively excluded from earning this credit under LEED 2009 for New Construction, Core and Shell, Commercial Interiors, and Schools. USGBC, however, expressly disclaims on its website that the organization “does not certify, endorse or promote products, services or companies, nor do we track, list or report data related to products and their environmental qualities. LEED is a certification system that deals with the environmental performance of buildings based on overall characteristics of the project. We do not award credits based on the use of particular products but rather upon meeting the performance standards set forth in our rating systems. It us up to project teams to determine which products are most appropriate for credit achievement and program requirements.”

Nevertheless, USGBC is currently reviewing proposed amendments to MR-7 which would create a USGBC Forest Certification System Benchmark. The Benchmark would recognize certain forest certification systems, and the credit would be awarded for only wood products that “use a minimum of 50 percent (based on cost) of wood-based materials and products that are certified in accordance with a forest certification scheme that is recognized after evaluation against the USGBC Forest Certification System Benchmark for wood building components.” More than 50 forest certification regimes currently exist globally; the four major players in the North American market are FSC, the Sustainable Forestry Initiative, the Certified Family Forest, and the American Tree Farm system. It’s unclear how many in addition to FSC the Benchmark would recognize.

The leading Supreme Court case in this space which I analogize in the Article to the ongoing issues with the MR-7 credit is Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492 (1988). In Allied Tube, a manufacturer of plastic electrical conduit claimed that a rival member of the National Fire Protection Association which manufactured steel conduit had packed the organization’s annual meeting with sympathetic interests in order to vote against the plastic manufacturer’s proposal to include plastic conduit in the Association’s National Electric Code. The Supreme Court noted that “private standard-setting associations have traditionally been objects of antitrust scrutiny,” that the Code was “the most influential electrical code in the nation,” and that many governments had adopted it into state- and local-level legislation by reference. It also suggested that “members of such associations often have economic incentives to restrain competition and that the product standards set by such associations have a serious potential for anti-competitive harm.” The significant factor for the Court in finding antitrust liability against the manufacturer of electrical conduit was the adoption of the Code into legislation. Although my Article does not suggest (nor am I suggesting here) that this sort of activity is taking place within USGBC, I do think the Supreme Court’s identification of legislation driving market effect in this context is an important consideration for policymakers.

What’s also interesting when reviewing the line of case law presented in my Article is that USGBC’s Antitrust Compliance Policy states that “from an antitrust standpoint, [USGBC] will be commonly referred to as a trade association. Trade organizations are subject to antitrust scrutiny because they involve meetings of competitors, but they frequently engage in a number of legitimate, pro-competitive and lawful activities. In order to avoid allegations of illegal price signaling, there should be no communications or discussions between any USGBC members either at USGBC meetings or at any other time about (a) current or future prices, pricing plans or production plans, or (b) announcements of price changes or output changes. . . . As a general matter, each member should be extremely careful and seek legal advice before engaging in any conduct that could possibly provide evidence to support allegations of collusion.”

As it turns out, though, the antitrust issues raised in my Article are more than just legal theory. As you may know, back in October,  the Coalition for Fair Forest Certification filed a complaint with the Federal Trade Commission (FTC) alleging anti-competitive behavior on the part of FSC and USGBC. Among other things, the complaint alleges that “the preference shown for FSC-certified products by the USGBC raises concerns about the viability of fair competition with other domestic certification programs. The Coalition submits that USGBC and FSC operate in tandem to disadvantage wood products certified by SFI and other certification systems. Thus, to the extent an investigation is warranted, the [FTC's] Bureau of Competition should look closely at the conduct of USGBC and its favoring of FSC certification.” It’s unclear what the current status of the complaint is and whether FTC has initiated any sort of investigation.

My Article concludes with some recommendations for policymakers, including a suggestion that the “LEED Certifiable” concept and general trend towards flexibility in how green building legislation is implemented may be an implicit acknowledgment of these emerging antitrust issues. I also present a number of other federal cases that are similarly interesting to review in light of current green building regulatory activity.  I would also note that the bases raised in my Article are by no means the only antitrust grounds on which LEED or other third-party systems might be challenged at some point.

Finally, I do expect many of these antitrust considerations to crystalize further during the course of 2010 as USGBC begins to evaluate various forest certification systems against its Benchmark and the Coalition for Fair Forest Certification’s complaint moves forward within the FTC.

On November 10, 2009 the Virginia-based ConsensusDOCS organization released its Green Building Addendum. The document joins the AIA’s B214-2007 scope of services document as a form contract exhibit for green building projects promulgated by a major North American A/E/C industry organization. Unlike the B214, though (which purely addresses scope), the Addendum includes a section that specifically addresses the allocation of green building risk. The Addendum is also important to note in a variety of other contexts; it is rating-system neutral, for example, and is designed to be implemented as an exhibit to a set of underlying design and construction agreements (which, from the construction lawyer’s perspective, may raise other important issues with respect to implementation).

The Addendum also creates a new role for design professionals, contractors, or consultants: the Green Building Facilitator, responsible under the terms of the Addendum for coordinating and facilitating the process of obtaining the owner’s desired green building status or certification, identifying green building measures (both procedural and physical), potential design and construction alternatives, and other services as required by the terms of the Addendum. The Green Building Facilitator is identified explicitly in Section 4 of the Addendum and can be the architect, engineer, contractor, or other corporate entity (or individual). However, the Addendum places certain risks on the Facilitator, and parties that choose to accept this role pursuant to the Addendum should review its terms and conditions carefully.

What’s most interesting for purposes of this article, though, is that Article 8 of the Addendum is devoted exclusively to risk allocation. Article 8.2 provides that the parties- including the Green Building Facilitator- will be subject to any limitations on liability that are included in their underlying contracts. However, this provision explicitly acknowledges that the owner’s “loss of income or profit or inability to realize potential reductions in operating, maintenance, or other related costs, tax, or other similar benefits or credits, marketing opportunities and other similar opportunities or benefits, resulting from a failure to attain the [project’s green building goals as defined in the Addendum] shall be deemed consequential damages subject to any applicable waiver of consequential damages” in any underlying design or construction contract. Compare this provision to the discussion which arose out of the Shaw Development litigation, where many commentators wondered what types of damages flowing from the breach of a green building contract would be deemed consequential in nature rather than direct. It’s therefore particularly noteworthy that the Addendum (i) acknowledges the types of unique damages that may flow from the breach of a green construction contract; and (ii) actually makes an initial effort at defining them. Of course, parties are free to negotiate the terms of the Addendum, including (depending on the project’s scope) (i) the types of damages which would be included in the provision; and (ii) any waivers – mutual or otherwise – in the underlying agreement. In Shaw, as you will recall, the issue was whether the lost tax credits were consequential and therefore waived by the owner through the A201’s mutual waiver provision; under the form terms of the Addendum, they would have been explicitly categorized as consequential. Had the parties in Shaw implemented a document like the Addendum, it would have assisted them in more comprehensively assessing the green building-related risk associated with the project and allocating that risk accordingly.

The Addendum also makes it clear that no project participant other than the Green Building Facilitator will be “liable or responsible for the failure of [any procedural or physical green measures] to achieve the [project’s green building goals as defined in the Addendum],” including the project’s failure to earn any third-party certification as designated in the Addendum. However, the Addendum also makes clear that these limitations on the project team’s liability do not relieve them “from any obligation to perform or provide [procedural or physical green measures]” as required by their underlying contracts. It will be interesting to see if additional form green building contracts and/or addenda are issued in 2010, whether they take these types of risks and limitations on liability into account, and, if so, in what particular fashion.

As you may know, ConsensusDOCS was founded in 2007 and, to date, its suite of form design and construction agreements has been endorsed by 23 different A/E/C organizations. You can download a copy of the Addendum via the link below. As always, the Arent Fox Green Building & Sustainability and Construction Practice Groups are happy to assist you with any additional questions you might have about either the Addendum or working with construction contracts generally.

• 310 Green Building Addendum (ConsensusDOCS)
• New Document Defines Role in Green Building Projects (Arch. Record)

Back in November, in Destiny USA Holdings, LLC v. Citigroup Global Markets Realty Corp., the Appellate Division for the Fourth Department upheld (in a split 3-2 decision) the Onondaga County Supreme Court’s decision that Destiny, the developer of a highly publicized mega-mall project in Syracuse, New York which is currently seeking LEED Platinum certification from USGBC, was entitled to a preliminary injunction requiring its construction lender, Citigroup, to fund certain pending draw requests under Destiny’s construction loan. 889 N.Y.S.2d 793 (App. Div., 4th Dep’t 2009). The decision is noteworthy from a green building legal perspective because the court specifically identified the Destiny project’s sustainable design features – and construction financing, which employed federally-backed Green Bonds – as so “unique” and “revolutionary” that money damages alone would not be sufficient to compensate Destiny if the injunction were denied; this allowed the court to find, under New York law, that the potential existed for irreparable harm to Destiny if the project did not move forward while Destiny’s suit against Citigroup for breach of contract was pending.

In New York (like most jurisdictions), one of the elements for obtaining a preliminary injunction is whether there will be irreparable injury to the moving party if the court denies provisional relief. However, if the court can calculate the moving party’s damages with precision, there can be no irreparable injury while the action is pending because the moving party would be adequately compensated by money damages if it were to prevail at trial. The Destiny court, however, found two exceptions to the irreparable injury test based explicitly on the project’s green features. It held that

“an exception is warranted because the Project’s unique character renders it difficult to calculate any damages sustained by Destiny Holdings. Citigroup stated through its managing director at a U.S. Green Building Council Presentation on November 8, 2007 that the Project is a ‘visionary project’ that has created a ‘new financing paradigm for green economic development’ that is ‘revolutionary.’ Citigroup Chairman and Chief Executive Officer Charles Prince called the use of newly-created Federal Green Bonds [created under the American Jobs Creation Act of 2004 and authorizing up to $2 billion in tax-exempt, private activity bonds to be issued by state or local governments for qualified green building and/or sustainable design projects] in financing the Project ‘groundbreaking [and] a step forward in addressing climate change in the U.S. because the Project incorporates sustainable design, energy conservation, and renewable energy sources on a large scale. He further commented that the Project ‘is good for economic development and good for the environment.’ Thus, the unprecedented nature and scope of the Project makes it unique, so that it has no established market value and any damages sustained could not be calculated with reasonable precision.”

The court also found a second exception to the general rule because of the project’s highly touted green features, stating that “Destiny Holdings has established the enormous potential for harm to its reputation and the reputation of the entire ‘Destiny USA’ project. Harm to business reputation is harm for which money damages are insufficient and for which injunctive relief may be appropriate.” I don’t think it’s unreasonable to infer here that the court was connecting the project’s green features to its “reputation” in order to carve out another exception to the general rule barring injunctive relief in similar contexts. For both of the foregoing reasons, the Appellate Division upheld the trial court’s decision, but modified the order granting the preliminary injunction to require Destiny to post a bond in order to compel Citigroup’s performance under the loan agreement.

Interestingly, two justices joined in filing a dissenting opinion that ignored the project’s green features. The dissent stated that “there is no support in the record for the majority’s conclusion that an ‘enormous potential’ for harm to the reputation of Destiny Holdings exists, other than the bald assertion of a principal of Destiny Holdings that its reputation would be damaged as a result of its failure to complete the project. The core of the majority’s argument is that the nature of the project makes it unique and thus that Destiny Holdings would be entitled to specific performance [of the construction loan agreement]. While the scope of the Project may be unique to the region in both its size and impact, the record clearly establishes that the [construction loan agreement] itself is simply one to loan money in order to finance construction.”

I think that there are a few important things to take from this opinion. First, notwithstanding the Destiny project’s massive scope, the Appellate Division has given owners a basis for arguing that green building projects – regardless of their financing mechanism – are inherently unique.  In the event of any type of dispute, owners or other parties which might be seeking provisional remedies or are engaged in other motion practice (that, like in Destiny, is unrelated to the project’s green design features) can now rely on appellate authority that green building projects are different and deserve different treatment under applicable law.

Conversely, the opinion suggests why construction and real estate attorneys need to be well-versed in the green building space; if you were asked to oppose a similar motion where the movant was arguing that “green buildings are different,” you would likely want to argue in opposition how, to date, many green building projects have not resulted in such different outcomes from conventional projects (i.e, by identifying the ongoing LEED performance gap and studies analyzing the alleged rental and asset premium for different types of certified green buildings).

The decision is also important to note from a lender’s perspective. If potential borrowers looking to finance a green construction project have the ability to argue that their projects deserve special treatment in connection with any lending dispute, lenders may consider, for example, revisiting the terms of their construction loans or otherwise pricing this type of risk into the loan itself.

Are there other green real estate-related legal issues arising out of this opinion that you might anticipate arising in connection with these types of construction lending disputes?

My thanks to Kevin Garrison of Baker Donelson for forwarding a copy of the Appellate Division’s opinion in this matter to my attention. Either of us would be happy to forward you a copy of the opinion upon request.

As we move into the first full week of 2010, the Northland Pines decertification proceeding is casting a long shadow over the short-term green building legal landscape- but more on that in a bit. Before we push forward here at GRELJ and continue dissecting them in much more detail this year, I think it makes sense to look back at what I think were the five most important green building-related legal issues which emerged during 2009:

• The stimulus package contained numerous green building-related provisions, including significant funds for state and local governments to implement energy efficiency codes. However, most of these funds have yet to be distributed, so it will be interesting to track legislative implementation during the course of 2010. Some municipalities are beginning to look more closely at the logistics of  implementing third-party-driven legislation, including in our own backyard here in New York. This will be a critical and ongoing issue to monitor.

• USGBC acknowledged the legal risks implicit with building green, but its white paper on the subject dubbed them “old wine in new bottles.” We reviewed the white paper here at GRELJ and concluded that it seemed “to be an effort to sweep many of the thornier legal issues that may indeed ferment into ‘new wine’ under the rug.” My reasons for disagreeing with the paper’s conclusions stemmed (and continue to stem) from the pace of regulatory activity, the lack of input from the insurance industry on green building risks, the uncertainty over the prevailing standard of care for design professionals practicing in the green building space, and the questionable body of green building performance data.

• Critiques of LEED building performance moved into the mainstream; USGBC mobilized in response. The ongoing debate about the energy performance was picked up on in media outlets that included the New York Times after Henry Gifford and USGBC’s Brendan Owens debated the merits of LEED at the NESEA forum last March. LEED Version 3.0 was released with the obligation for owners and landlords to report data on building performance to USGBC, though many of you wondered what USGBC would actually do with that data upon its compilation. USGBC’s Building Performance Initiative, which was launched in advance of Greenbuild in Phoenix, is ongoing; we’re likely to start seeing results and further studies and critiques of LEED building performance throughout 2010.

• The National Institute of Building Sciences convened a Task Group to review various third-party building performance rating systems, which identified associated risk and policy problems for the A/E/C community to contemplate. The Task Group’s recommendations to NIBS’ Board of Directors included the development of various white papers analyzing risk and policy issues in greater detail; we emphasized the import of this effort in the context of NIBS’ political backing and the scope of the report’s conclusions.

• The potential for decertification of LEED Version 3.0 projects that (1) fail to report building performance data or (2) provide a legal mechanism for the reporting requirement to carry forward after a sale or sublease caused a firestorm of blogosphere commentary. Interestingly, though, the first publicly reported decertification proceeding- the Northland Pines High School complaint, which USGBC is currently reviewing – received comparably little attention.

In my opinion, these last two items were clearly the most important green building legal stories of 2009. Although the Northland Pines proceeding is not the full-blown green building litigation that many have predicted, it implicates all of the legal issues associated with decertification that were discussed last year. It is also the type of scenario out of which green building litigation could arise in the event USGBC/GBCI revokes the school’s LEED Gold status. For all of these reasons, and regardless of the outcome, the Northland Pines proceeding will be the first major green building legal story of 2010, particularly because we are (publicly) witnessing USGBC/GBCI follow the procedures of its Certification Challenge Policy for the first time.

If there are any other noteworthy issues we missed, please feel free to note them in the comments below. Happy New Year, everyone!

For those of you reading this article in a reader or by email, we recently gave GRELJ a makeover and encourage you to visit the site in your browser. Hopefully the new design is easier to read and better organized. One new feature is threaded comments, which allow you to reply specifically to a given comment in each thread. I look forward to any feedback on our new look.

Earlier this year, in the aftermath of USGBC’s release of the new LEED 2009 Minimum Program Requirements (“MPRs”), there was extensive discussion here at GRELJ and elsewhere with regard to the potential for decertification of LEED projects that fail to comply with the MPRs. A LEED 2009 decertification proceeding, though, would not be the first presented to USGBC/GBCI; according to an article that appeared last week in Eagle River, Wisconsin’s Vilas County News-Review, a group of local residents have filed a 125-page complaint with USGBC that challenges the award of LEED Gold certification to the Northland Pines High School, which was completed in the fall of 2006 and earned formal certification under LEED for New Construction Version 2.0/2.1 on May 10, 2007. It’s unclear when the complaint was filed or what specific allegations it asserts. However, according to the article, the residents initially raised concerns about the project during the design phase, claiming that a more efficient HVAC system was available and should have been specified by Hoffman LLC, the Appleton, Wisconsin-based firm that designed the school. A site visit from Hoffman and USGBC representatives is scheduled; the article reports that a December 7 conference call was to address certain areas of the complaint which USGBC was unable to clarify to the school board.

In terms of the procedures which both the residents and USGBC/GBCI are obligated to follow in addressing the complaint, the GBCI’s Certification Challenge Policy is important to review. It states, in pertinent part, that “GBCI may revoke previously granted LEED certification or take other action regarding LEED certification such as determine to reduce points or category of LEED certification previously granted, if GBCI determines that credits/prerequisites for LEED certification were granted based on erroneous documentation or falsely submitted documentation. Persons concerned with possible inaccurately granted LEED certification are encouraged to contact the GBCI, provided, however, that GBCI reserves the right to institute an investigation and review of such possible errors or inaccuracy or veracity of documentation without third party complaint.” In the full version of its article (which is not available online), the Vilas County News-Review reports a USGBC official as stating that USGBC “gets challenges from time to time on certification designation” but that the Northland Pines challenge is “off the wall.”

Independent from the technical merits of the complaint – which I am curious to review – the article raises many critical legal questions. First, if the allegations are indeed true, will GBCI exercise its ability to decertify the building? If it does, will the party or parties alleged to be responsible face legal action for those failures? Will the complaint – and any written record created pursuant to the requirements of the Certification Challenge Policy – result in precedent that GBCI will follow in any subsequent decertification proceedings? If so, could Northland Pines become the next Shaw Development, cited as the seminal case for LEED decertification and subsequent green building litigation? If other decertification proceedings take place in jurisdictions where legislation is tied to formal LEED certification, how will state and local governments penalize projects that are decertified (if at all)? Finally, to what extent – if any – will USGBC make decertification materials available to the public for peer review? The Northland Pines proceedings may not answer any of these questions, but because it is the first time a decertification proceeding has been reported publicly, we will be keeping a close eye on what transpires in connection with GBCI’s review of the complaint, a copy of which I am attempting to obtain.

• Citizens Challenge Green Certification of Pines School (VCNR)

*USGBC has kindly provided us with a copy of its Green Office Guide to give away here at GRELJ. Just add a comment to this post before 5PM ET next Wednesday, December 16; we’ll select one of you at random and pick up the tab for shipping. We’ll email the winner directly for contact information.

One of the reasons why New York City’s Greener, Greater Buildings Plan, which our City Council passed earlier today, does not (as originally drafted) require owners to pay for capital improvement projects that boost energy efficiency is that, under most local leases, landlords who pay for those improvements can’t pass along associated costs to their tenants, who benefit from the resulting decrease in operating costs. USGBC’s Green Lease Guide, which was published earlier this fall, does much more than just discuss the split incentive that’s a major barrier to implementing a truly green lease; it provides tenants with a form environmental impact questionnaire designed to assist them in vetting potential properties, as well as eleven pages of sample green lease provisions (many of which we’ve written about here at GRELJ previously). The Guide is primarily written for commercial office tenants, but landlords will find its background information – which describes LEED’s accreditation and certification processes – useful as well. More specifically, here’s how the Guide breaks down:

Section 1 – Why Green the Leasing Process?

- How Buildings Affect the Environment and Tenants
- Primer on LEED

Section 2 – Greening the Leasing Process

- Environmental Strategies for the Leasing Process
- Implementing Environmental Strategies at Renewal and in New Space Searches
- Greening the Lease
- Best Practices for LEED for Commercial Interiors Project Management, Design, and Construction
- Implementing Environmental Strategies Under Existing Leases

Section 3 – Tools for Greening the Leasing Process

- LEED for Commercial Interiors Scorecard
- Basic Environmental Impact Questionnaire
- Sample Criteria for Qualifying Project Team Professionals
- Sample Green Building RFP Guidelines
- Building Questionnaire for Tenants Seeking LEED for Commercial Interiors Certification
- Sample Green Lease Provisions
- Sample Environmentally Preferable Purchasing Policy for Tenant Operations

Resources

Copies of the Green Lease Guide are available for purchase here; our thanks again to USGBC for providing us with a complimentary copy to give away here at GRELJ. We’ll have much more to say on various specifics of the Guide moving forward, particularly with respect to its discussion of aspirational green lease provisions and enforcement mechanisms. In the interim, if you have any questions or require assistance in connection with greening your leasing documents, the Arent Fox Green Building & Sustainability Practice Group would be happy to help you out.

I’m glad to be back after a great wedding and honeymoon- thanks to everyone who passed along their regards.

Back in August, you may recall that Community Solutions executive director Pat Murphy authored the first piece of a three-part survey titled “LEEDing from Behind: The Rise and Fall of Green Building,” which we noted here at GRELJ. Our article pointing you to the piece generated quite a bit of commentary and, now that Mr. Murphy has completed Parts 2 and 3, we thought we’d point you to his new book compiling the survey which is titled “The Green Tragedy: LEED’s Lost Decade.” The book was released while I was away last month and builds on Part 1 by tracing the historical argument promoting minimal green building cost premiums, reviewing the ongoing marketing efforts behind LEED, and concluding that policy makers should demand energy efficiency standards more akin to the German Passive House rather than “cheap quick ‘green’ solutions.”

Interestingly, in the preface, Murphy observes that “[w]e are now faced with a movement to adopt LEED as part of our building codes. An over-marketed standard that is under serious attack for its poor energy performance is now being proposed and accepted by cities as a requirement for our buildings. The idea of accepting as law an inadequate standard that has been developed by the building industry – thereby allowing that industry to usurp the long-established methodology of setting building standards by government policy- is absurd and dangerous.”

In addition to their significant legal implications, these remarks resonate with the conclusions of the recent NIBS report and, in my opinion, portend the types of critiques I believe we will see more forcefully in 2010 if LEED buildings do not perform at a statistically higher level under Version 3.0. Mr. Murphy’s book is available here, and I look forward to continuing the robust discussion that emerged after we noted Part I here at GRELJ in the comments below.

• The Green Tragedy: LEED’s Lost Decade

Recent efforts by Atlanta’s restaurant industry to resist proposed green building legislation implicate the conclusions of NIBS’ report about state- and local-level green building policy which we noted last month here at GRELJ. The Atlanta Sustainable Building Draft Ordinance would require the city’s commercial buildings and residential dwellings three stories or higher to comply with either LEED or specifications drafted by the Sustainable Atlanta committee. What’s particularly interesting about the pushback is the extent to which it reflects the conclusions in the NIBS report; for example, Keisha Carter, director of public affairs of the Georgia Restaurant Association, stated in a recent piece in Nation’s Restaurant News that “[t]here needs to be more due diligence on this before the city council can even consider passing it. There is a lot of political play going on with this thing, but we’re trying to stay on top of it and be heard. There is major concern that it will pass, but the members of the city council must come to realize it’s not in any shape to be passed just yet.”

This comment reminded me of language in the NIBS report which noted that “[a]t an increasing rate, state and local governments and their code/regulatory agencies are adopting building rating/certification systems, intended as voluntary systems, to be their code or regulatory requirements, often without fully understanding their benefits, tradeoffs, and costs.” While the Atlanta restaurant industry seems more concerned with what it perceives to be a green building cost premium, the fact that its opposition is also grounded in the lack of sufficient input from stakeholders also echoes many of the policy issues we’ve raised here at GRELJ over the past year, particularly with respect to the rush to mandate green building requirements.

In that vein, it’s also interesting that although Atlanta’s Bureau of Buildings will enforce the ordinance, the city council has yet to determine what types of fines or other enforcement mechanisms would be imposed on buildings that fail to comply. “This is still a work in progress,” a spokesman observed, and the restaurant industry is pointing to this specific comment as one of the bases for arguing that the ordinance needs more work before the city council even considers passing it. Again, this echoes the types of observations noted in the NIBS report. While these types of details are being worked out, the restaurant industry is instead advocating for additional financial incentives (such as tax credits and building permit fee reductions); this also reflects the conclusions of the NAIOP report issued earlier this year, which called for financial incentives rather than mandates to bridge landlords’ payback period gap for most types of energy efficiency improvements.

On another note, the ordinance may present some novel green leasing implications which the restaurant industry has picked up on. Although building owners will bear the responsibility under the text of the ordinance for ensuring that the required standards are satisfied, the restaurant industry is warning restauranteurs who do not own the premises out of which they are operating to review their lease documents and confirm that they will not be responsible for executing the legislation’s required retrofits. It is not difficult to imagine the scenario where a lease includes a clause obligating the tenant to comply with all applicable codes and regulations, and the landlord pinning responsibility for any such retrofits on that tenant in the absence of affirmative language to the contrary.

Just a quick editorial note- this article will be the only new post here at GRELJ for the rest of the month as I am getting married this Saturday and then off on the honeymoon. Thanks to everyone for your support and comments since we launched this site almost a year ago (and patience over the past couple of weeks while the pace of our posts has slowed in advance of the wedding). See you on the other side!

• Operators in Atlanta Fight Forced Green Conversions (NRN)
• Costly Eco-Friendly Laws Overlook Industry’s Proactive Green Efforts (NRN)

Back in June, developer Allan Malbranck and his wife Anita opened a new 2-story, 12,800-square-foot office and retail building located at 1735 Corydon Avenue in Winnipeg. The couple believes their property is the first in the Canadian province of Manitoba that requires potential tenants to sign a lease binding them to operate their respective spaces in a sustainable manner. Although details on the parameters of the specific document being used by Mr. Malbranck are unclear, it appears that the project is the first in North America to actually require all tenants in a multi-tenant commercial office and retail building to sign a green lease. Among other provisions, tenants at 1735 Corydon Avenue are required to deposit waste in landlord-provided recycling bins, install efficient light bulbs and office equipment, use environment-friendly cleaning supplies, and fit out their spaces according to guidelines that demand environment-friendly flooring, cabinets, and building materials. There is not much more of substance in either of the newspaper articles from last month which reported the first tenant to sign with Mr. Malbranck, but I do think the story is important to note for a number of reasons, including the lack of any other North American landlords who have reportedly implemented similar requirements to date.

First, although Michael Brooks of REALpac (who participated in last month’s green leasing panel at the Urban Green Expo here in New York City) is quoted in one of the articles, it is not clear that Mr. Malbranck’s lease is derived from any of the forms which were discussed during that panel, including REALpac’s, the Model Green Lease, or the BOMA Green Lease Guide. As Mr. Brooks notes, “it’s impossible to say how many commercial buildings in Canada are using green leases because no one, including REALpac, tracks that at the moment.” It’s certainly a relatively small number, but as an increasing number of landlords attempt to implement green leasing practices, questions about the uniformity of green lease provisions could become an issue. I’m also intrigued about the idea of tracking green leases and whether any other organizations have attempted to do so (none have, to my knowledge).

In terms of other landlords applying similar blanket green lease requirements across available space in their buildings, I thought it was interesting to note that Mr. Malbranck admits that “a number of leasing agents and prospective tenants have inquired about the space, but backed off when they found out about the green leases. ‘They didn’t come right out and say it, but you got the sense it was an issue with them.’” However, the lone tenant that has signed up to date with Mr. Malbranck was attracted by the green lease concept; the owner of Lux for Sprouts, a children’s clothing and toy store, states that she specifically selected 4100 square feet of space on the first floor based on (1) the image that occupancy in a green building should create for her company; and (2) her belief that green buildings make it easier to attract and retain employees. Here, I would suggest again the importance for landlords to closely scrutinize broad, aspirational representations in green leases about green building benefits or performance, particularly if such representations are overstated or ultimately unrealized by tenants.

I was also reminded of Mr. Brooks’ remarks on our panel about enforcement of green lease provisions; although the articles reporting on 1735 Corydon Avenue did not get into this level of detail, I do think it’s worth repeating what Mr. Brooks noted about green leasing practices in Australia (where he had met a landlord whose form lease included a variety of green provisions which- if breached- entitled it to terminate the lease and evict the offending tenant). If more landlords apply mandatory blanket green leases, it will be curious to see what types of specific enforcement mechanisms (if any) are included in those documents. Given that Mr. Malbranck has only signed up a single tenant, I would be surprised if he ultimately exercised any right to terminate based on the breach of any green lease provisions, but the fact that potential tenants have balked at his requirements may suggest that such enforcement mechanisms are included in the scope of his green lease.

Finally, I also think that 1735 Corydon Avenue suggests it’s not unreasonable to consider the possibility that, eventually, the LEED system (or some other third-party green building rating system) will require owners to exclusively negotiate and execute green leases in order to earn certification, whether as an individual credit, for example, under LEED’s New Construction or Core and Shell rating systems, or perhaps even as a mandatory Minimum Program Requirement that serves as a prerequisite to formal LEED certification. For example, USGBC recently released its Green Office Guide: Integrating LEED Into Your Leasing Process and, although I have yet to review it, it’s clear that USGBC is beginning to pay closer attention to the intersection of green leasing and LEED.

We’ll try to flesh out more details about 1735 Corydon Avenue and follow up here at GRELJ as appropriate.

• Green Leases Give Building Manitoba First (Winnipeg Sun)
• Green Leases Seen as Wave of Future (Winnipeg Free Press)

In September of 2008, the Board of Directors of the National Institute of Building Sciences (“NIBS”) assembled a Task Group of design professionals, builders, and its own staff members to review third-party building performance rating systems and associated individual accreditation programs currently in use across the United States. The Task Group identified twenty systems and programs and interviewed representatives from AIA, ASHRAE, BOMA, GBI, NAHB, EPA, USGBC, and Victor O. Schinnerer & Co.. among others, in compiling its “Report on Building Rating and Certification in the U.S. Building Community,” which was released last month. NIBS provided the Task Group with a broad charge, requesting recommendations that could range from continued monitoring of the identified systems to assisting it in crafting better green building guidance for policy makers and industry stakeholders. Although the Task Group did not identify specific rating systems (i.e. LEED or Green Globes) in the report, its conclusions are striking and emphasize many of the ongoing points being made here at GRELJ about the limitations of and risks inherent in third-party green building rating systems. The 10-page document is a quick read and although we’ll likely have much more to say about the report in the near future, I thought there were a number of items in particular worth pointing out that might lead to further discussion in the comments below.

First, with respect to building performance, the report notes that “[t]here is very limited data that correlates verifiable improvements in building performance with building rating/certification system requirements. Many people view the few data sets that do exist as controversial in terms of methodologies and conclusions drawn from them.” It also observes that “[t]here are growing concerns that the implied guarantee of building energy performance emanating from building rating/certification/labeling systems may confuse or mislead policy makers and the public.” The controversial USGBC-backed New Buildings Institute study- whose conclusions continue to be cited in support of LEED building performance claims- could certainly be the partial genesis of these remarks.

In terms of green building legislation, the report also emphasizes a number of important points, noting that “[e]lected officials and policy makers at the federal, state, and local levels only rarely understand the objectives, development, intended uses, opportunities, and limitations of rating/certification programs for buildings and accreditation programs for individuals.” Moreover, the report argues that “[a]t an increasing rate, state and local governments and their code/regulatory agencies are adopting building rating / certification systems, intended as voluntary systems, to be their code or regulatory requirements, often without fully understanding their benefits, tradeoffs, and costs.” These remarks comport with the notion that many state and local governments have rushed to legislate in knee-jerk fashion, failing to analyze or review  corresponding legal implications; the AHRI v. City of Albuquerque litigation, for example, is illustrative here.

Perhaps most significantly, the report levels a heavy-handed critique at the organizations which promulgate green building rating systems, stating that “[m]any of the building rating/certification systems and individual accreditation systems appear to place the goal of generating revenue for their development organization as a goal equal to the organization’s commitment to knowledge development and advocacy around its issue,” and that such systems “appear to certify expertise in applying the program more than improving the actual building’s performance.” With respect to that expertise, the report acknowledges “a growing concern that individual accreditation programs are not based on rigorous criteria and testing that validate competence.” Note here that no single system was identified in the body of the report, though I’m curious whether these remarks will elicit any response from USGBC or other organizations.

In terms of legal risks arising out of green building projects, the “Owner Expectations and Professional Liability” section of the report acknowledges many of the types of risks which have been discussed here and elsewhere over the past year. For example, the Task Group notes that “design and contractor liability risk may rise if performance expectations are not realized in completed projects” and that rating systems and accreditation programs “are beginning to impact the professional standard of care recognized by law and the building community. Such systems and programs may cause design professionals, owners, managers, and facilities personnel to be held to higher degrees of expertise and performance.”

A shifting standard of care being fueled by green building practices is a critical issue that we have discussed frequently at GRELJ, and it’s important for design professionals to note that NIBS specifically identified it in the report. The Task Group also discusses green building insurance claims, noting that “[t]he vast majority of insurance claims involve misrepresentation, miscommunication, and misunderstood expectations between owners and design and construction professionals.” This remark reminded me of a BIM/green building panel held here in New York City nearly two years ago where a number of insurance industry professionals warned that claims- in the green building space or otherwise- always start with violated expectations.

The Task Group concludes the report with a set of recommendations to NIBS moving forward, which include encouraging the A/E/C community to “support one comprehensive, consensus-based building rating or certification or labeling program to reduce the complexities and contradictions that currently exist” and the development of various white papers that analyze the foregoing points in greater detail. As you may know, NIBS is a non-profit organization that was founded in 1974 by act of Congress; 6 of the 21 members of its Board of Directors are appointed by the President and approved by the Senate. Given NIBS’ backing and the scope of the Task Group’s conclusions and recommendations to the Board, its release of this report could mark the beginning of a serious uptick in the level of analysis being performed in this area.

You can download the report through the link below. I look forward to your thoughts and reactions in the comments.

• Report on Building Rating & Certification in the U.S. Building Community (NIBS)

Back in 2007, the Energy Engineering Program at the University of Massachusetts Lowell completed a study of the actual energy performance of 19 green buildings across the Bay State. The study was funded by the Massachusetts Renewable Energy Trust and identified 13 schools which were certified under the LEED-based Massachusetts Collaborative for High Performance Schools Criteria, as well as 6 buildings that had earned LEED certification. The study compared energy consumption as predicted during the design phase and actual occupancy post-construction; buildings included in the study provided at least one year of occupancy data. The authors also interviewed individual project teams and energy modelers and conducted occupancy surveys in evaluating the effectiveness of various types of efficiency measures. All of the buildings received design or construction grants from the Massachusetts Technology Collaborative, which provided the prediction data that project teams had submitted in connection with their funding applications.

Although the study concluded that these 19 green buildings were consuming (on average) 40 percent more energy than predicted, all of the buildings were consuming less than a building designed to Massachusetts baseline building codes. The disparity in predicted versus actual energy consumption is probably not surprising, but the study did identify a number of issues common across the buildings which resonate with many of the technical and operational provisions of documents like the Model Green Lease. I think it is therefore worthwhile to review the study both from a green leasing perspective, but also in terms of LEED, particularly because the Lowell study has not been referenced in many of the recent articles discussing the ongoing LEED performance gap.

Among other factors, the study identified the following as accounting for the disparity in predicted versus actual performance:

• The predictive energy models used during the design phase were created based on the incremental amounts of projected energy savings from each of the proposed systems and efficiency measures which, according to the energy modelers interviewed for the study, did not account for the building’s performance in its entirety once those systems were installed and operational;

• By nature, predictive energy modeling does not account for the behavior of building operators and occupants with respect to their use of plug loads, occupancy levels, and operating hours (but note the importance of green leasing practices in this context);

• Design and materials changes during the construction phase on account of budget constraints (which emphasizes the need for ongoing construction counsel); and

• Some of the buildings suffered from increased energy consumption during the initial months of occupancy due to incompletely installed or commissioned systems, which the study concluded stemmed from contractors who incorrectly set the systems initially, as well as occupants who did not understand how to use the systems.

In addition to suggesting that these specific design and construction factors may impact green building performance, I think it is also important to note that the authors identified a “frustration” in stakeholders over the observed energy performance gulf. The study suggests that the gap be bridged through “communicating uncertainties in design predictions” and “better training in the use of the technologies in the buildings;” the former is a marketing and construction contracts issue which we’ve frequently discussed in the context of LEED, while the latter can be addressed through the use of various types of green lease provisions.

Although the study itself is somewhat dated, I do think that it emphasizes two important points. First, LEED building performance has been a question mark for quite some time, and will likely remain a critical issue for the foreseeable future, particularly while industry stakeholders continue to grapple with addressing the foregoing building performance factors through risk management strategies, construction contracts, and green lease provisions. Second, it confirms the unpredictable nature of energy modeling and importance for project teams to manage their clients’ expectations when discussing the opportunities presented by green building and other sustainable construction practices.

• Barrientos, J., U. Bhattacharjee, T. Martinez, and J. Duffy, 2007, “Green Buildings in Massachusetts: Comparison between Actual and Predicted Energy Performance,” Proceedings Annual Meeting American Solar Energy Society

Last Wednesday, I had the opportunity to join a panel discussion on green leasing at the Urban Green Expo here in New York City. The session, which was titled “Green Leases: Aligning the Incentives of Landlord and Tenant,” presented the results of four projects which aim to provide brokers, landlords, tenants, and their attorneys with guidance towards creating more sustainable leasing structures. The projects, which may be familiar to you, were the Real Property Association of Canada’s (REALpac) Green Office Lease, the BOMA Green Lease Guide, and the NRDC’s Green Lease Forum, which aimed to create a set of principles for lease negotiations and other recommendations for making existing leases more energy efficient. I presented the Model Green Lease Task Force’s Model Green Lease- an effort which, as you may know, was spearheaded by green leasing guru Alan Whitson (who has contributed here at GRELJ previously in an insightful response to an article that we wrote on environmental performance objective clauses).

Unlike the BOMA Green Lease Guide (created by Jones Day partner Steve Teitelbaum, who also participated on the panel), the Model Green Lease is an extremely compact document, drafted from scratch, which is fundamentally based on the theory that, in order to make a more compelling business case for green buildings, leases must be crafted as gross (i.e., the landlord is responsible for building operating expenses, unlike in a net lease, where the tenant pays for its own share of those costs). The document, which also includes a corresponding reference guide, comprises just 17 pages plus exhibits and incorporates ten essential elements that aim to support a specific definition of a green building created by the Task Force for purposes of the project: “[a] building that is environmentally responsible, profitable and a healthy place to live or work.”

The ten essential elements of the Model Green Lease as developed and subsequently drafted by the Task Force are as follows:

• Environmental performance objective clauses (broad aspirational provisions that purport to provide context and clarity to the lease, which also recognize that the parties who draft the lease may not be the parties that ultimately operate the building);
• Gross lease rent structure (acknowledging that the landlord is in the best position to optimize building performance, provided it has the financial incentive to do so);
• A fixed per square foot energy allowance for tenants;
• Objective building performance standards;
• An annual building performance reporting requirement; and
• Provisions related to green cleaning and recycling, building rules and regulations, tenant fit-out guidelines, and a tenant manual and development guidelines.

With respect to the gross lease rent structure and addressing the split incentive, defining the scope of building operating expenses is a major green leasing challenge, particularly with respect to landlord-initiated capital improvements to the building’s infrastructure during the term of the lease. The Model Green Lease addresses this issue by including within its definition of building operating expenses the amortized cost of any capital expenditures that reduce those expenses, but only to the extent that they create actual savings for the tenant. One important related point which we did not delve into on the panel is whether the ongoing costs of certifying the building under a third-party green building rating system – such as LEED-EB: OM, Green Globes or Energy Star – should be included in the definition of building operating expenses; the Model Green Lease does not include these costs, the BOMA Green Lease does (within its Section 4.2 definition of building operating expenses).

One of the many interesting issues that were raised during the course of the panel discussion that followed the presentation of each leasing effort was a hypothetical proposed by one of our audience members. Suppose Tenant A leases space in a multi-tenant LEED-certified or Energy Star-rated building. Tenant A’s lease is green, Tenant B’s is not. In the course of conducting its business, Tenant B does something that jeopardizes either the building’s LEED rating (under LEED-EB: OM or with respect to one of the new Minimum Program Requirements under the LEED 2009 system) or pending Energy Star application (by using an increased amount of energy over what is contemplated by the lease). Now suppose that Tenant A is a public company with a shareholder mandate to occupy space in a LEED-certified building, or for similar reasons relied on the landlord’s representations regarding Energy Star. Could Tenant A sue the landlord for Tenant B’s actions based on violating certain provisions in its green lease?

As the panel pointed out in response, it’s rare that a lease would obligate either party to perform in a certain manner with respect to other third parties, but a broadly drafted environmental performance objective clause might provide the tenant’s attorney with, at a minimum, the ability to assert a claim that might either assist the tenant in renegotiating more favorable lease terms, or rescinding the lease outright. Nevertheless, as we noted previously here at GRELJ, the Model Green Lease puts the onus on the landlord in Section 5.02.3 to “use its reasonable efforts to cause other tenants of the Building to conduct their operations in the Building and their premises in conformity with the Environmental Performance Objective.” Accordingly, everyone on the panel stressed that form green leasing documents are tools and not designed for imminent signature; it’s clear that these types of issues will need to be discussed and vetted in detail as green leasing practices continue to disseminate.

I also thought that the discussion on enforcement of green lease provisions was particularly insightful; the panel discussed whether certain breaches might be more egregious than others from a sustainability perspective. The Model Green Lease, for example, provides tenants with an allowance for electricity. If the tenant exceeds that allowance, it is required to reimburse the landlord the extra per kilowatt hour cost; the landlord, however, is not given the right to terminate the lease. (Of course, a significant boost in energy consumption might be indicative of the tenant violating the lease’s use provision (Section 4.01 in the Model Green Lease), which would give the landlord the right to terminate). Little consensus was reached during this line of discussion.

However, one final thought about enforcement struck me as particularly noteworthy; Michael Brooks of REALpac explained that while studying green leasing practices in Australia, he met a landlord whose form lease included a variety of green provisions which- if breached- entitled it to terminate the lease and evict the offending tenant. Although this is a drastic remedy, and the panel agreed that most landlords would likely not want to create such a self-imposed gap in their building’s net operating income, it could suggest the direction in which green lease enforcement might head in a rapidly shifting domestic regulatory climate.

The legal issues associated with green leasing are fascinating, emerging, and present an opportunity for the real estate community to make a major contribution to the more efficient operation of commercial and industrial buildings. As energy efficiency continues to rank as a high priority, and retrofit work expands as the economy slowly turns around, the four green leasing tools presented at last week’s Urban Green Expo will become increasingly important for landlords and tenants alike to review, implement, and build upon. Simultaneously, the requirements of LEED 2009 and other third-party systems will need to be translated into or otherwise sufficiently addressed by such documents in order to safeguard the rights and remedies of the parties. We’re looking forward to continuing the discussion here at GRELJ about these critical issues, with particular continued emphasis on the legal implications of various green lease provisions.

• It’s Not Easy Leasing Green (GlobeSt.com)

Green building consultant Jerry Yudelson delivered two keynote addresses earlier this month at an event sponsored by the Central Texas Green Building Council. According to a press release, during the course of his remarks Yudelson “presented clear evidence that high-level green outcomes add significant value to buildings. ‘What part of a 30 percent increase in value from LEED certification is hard to communicate?’ He challenged architects and engineers to do a better job of advocating for green building with their clients. ‘You are doing your clients a disservice by letting them build projects without LEED certification,’ he said. ‘It almost amounts to dereliction of your duty as professionals.’” As you likely know, this latter remark about the design professional’s responsibilities in the green building space is exactly the opposite of what many construction attorneys have been preaching over the past few years as best practices for architects and engineers. Putting aside for purposes of this article any analysis of Mr. Yudelson’s claims of 30 percent increases in value for LEED-certified buildings, I think his remarks provide a good opportunity to review the risk management implications of the design professional’s representations to his or her clients about the possibilities and potential pitfalls of green building, including the LEED certification process.

First, the design professional who functions as an advocate, extolling the promises of increased energy efficiency, asset values, and rental premiums of LEED-certified buildings is creating a corresponding high expectation in the eyes of his or her client. As we noted over at gbNYC in the aftermath of a BIM/green building panel held here in New York City nearly two years ago, insurance industry professionals will almost always observe that claims start with violated expectations. As architect and attorney Fred Butters points out in his seminal Real Estate Issues article, Greening the Standard of Care: Evolving Legal Standards of Practice for the Architect in a Sustainable World, “[i]f the architect does not clearly and sufficiently indicate the positives and negatives [of green building installations, technologies, or certification programs], the client will be looking to the architect to make him or her whole. Becoming an advocate for many types of sustainable approaches may cause the design professional to overlook the messy reality for the sake of being a good advocate.”

Butters also points out that “[i]f the architect is serving as an educator, the client’s decision to ‘go green’ may be only that- the client’s decision. However, if the architect is ‘encouraging’ or ‘advocating’ for the incorporation of green features, his or her advice is implicated in the design decision. In that instance, the possibility that the architect can avoid the effect of the client’s unmet expectations is low.” Advocating for LEED or other green design features may also implicate standard of care issues, potentially elevating that standard beyond what prevails for architects and engineers in their particular geographic location. As we have noted previously, this amounts to an assumption of liability above what is imposed by law; most professional liability policies will exclude coverage for claims where the design professional has failed to satisfy that heightened standard.

What makes this issuer thornier, though, is that the architect actually does, in fact, have an obligation- both in the 2007 version of the AIA contract documents, and the new AIA Canon of Ethics- to promote sustainable design practices. For example, Canon VI, Obligations to the Environment, requires the architect to “advocate the design, construction, and operation of sustainable buildings and communities.” (Ethical Standard 6.2). In performing design work, the architect “should be environmentally responsible and advocate sustainable building and site design.” (Ethical Standard 6.1). As Mr. Butters also points out, and as we’ve noted here at GRELJ previously, the B201 (2007) Owner – Architect Agreement contains similar requirements:

§ 3.2.3 The Architect shall present its preliminary evaluation to the Owner and shall discuss with the Owner alternative approaches to design and construction of the Project, including the feasibility of incorporating environmentally responsible design approaches.

§ 3.2.5.1 The Architect shall consider environmentally responsible design alternatives, such as material choices and building orientation.

The National Society of Professional Engineers’ Code of Ethics contains a similar obligation under Professional Obligations, III.2.d: “[e]ngineers are encouraged to adhere to the principles of sustainable development in order to protect the environment for future generations.” The design professional is thus placed in a delicate position; professionally, it has an obligation to promote sustainability, but at what potential perils?

Mr. Yudelson’s remarks are also important to note in light of our recent article here at GRELJ about the insurance coverage implications of the Energy Ace LEED certification “guarantee.” Unbridled green building advocacy could also provide an insurance carrier with the argument that the design professional has provided the functional equivalent of a guarantee- either LEED certification, performance, or otherwise- that might give the carrier grounds to deny coverage for negligence claims arising out of the project. For example, and as we noted previously, “the concept of a guarantee is essentially representing perfection; anything less is a breach of contract, claims for which are similarly not covered by a professional liability policy (though the insurer may still defend under the policy but reserve its rights). In short, absent confirmation from the carrier that coverage will remain available, it will continue to be dangerous for parties that maintain professional liability insurance to make the types of representations implicated by the Energy Ace guarantee.”

I think it’s therefore worth repeating that while the analysis of green building legal issues related to standards of care, professional liability insurance, and LEED building performance continue to play out, architects and engineers should be particularly careful when making the types of representations that Mr. Yudelson suggests when participating in the design of green construction projects.

• Green Building Consultant Challenges San Antonio City Groups to Welcome “New Green Era” (PR)
• Green Insurance Law: Thoughts on BIM and LEED Coverage for Design Professionals (gbNYC)