In a suit that was filed earlier this month in New York County Supreme Court under Index Number 105958/10, the owners of a condominium unit at the LEED Gold-hopeful Riverhouse development in lower Manhattan’s Battery Park City are seeking the recovery of $1.5 million in damages from the project’s developer for a variety of alleged construction defects. While this type of construction litigation is not uncommon, the purchasers also claim that “the building’s much-heralded ‘green’ heating system consistently fails to provide adequate heat” to their unit and that this failure is a condition which is “is materially different from those represented by the project sponsor and its principals in the condominium offering plan.” These allegations – which are the the basis for two claims in the complaint alleging fraud and misrepresentation – mark the first time we have seen claims asserted against the developer of a green building for the developer’s alleged failure to deliver the project as represented during pre-construction. (Note that this is not the scenario which many in the legal community predicted would arise out of green building projects, but rather a much more specific type of claim that has been folded here under other allegations of design and construction defects).

More specifically, the Riverhouse complaint alleges that the building “was marketed as being at the cutting edge of ‘green’ technology. It is supposedly a LEED Gold-rated building featuring fresh filtered air, filtered water, eco-friendly materials and is designed for low energy consumption. However, plaintiffs have consistently experienced cold drafts and insufficient heat in their Unit. An energy audit performed on plaintiffs’ Unit revealed a number of defects in the Unit that contribute to the unsatisfactory heating situation. First, too much cold air is infiltrating the Unit through doors, windows, and exterior walls. Plaintiffs’ engineers found a deviation of 49 percent over the USGBC’s LEED and [Battery Park City Authority] standards in the cumulative size of holes and cracks allowing infiltration of cold air.”

This line of allegations goes on to describe pipes that are not insulated, heating unit covers that are not sealed, and air filters that are clogged. The purchasers then allege that these failures constitute a breach of contract under the offering plan, and that the developer’s representations in the offering plan about the building and its units were false and therefore fraudulent. However, it is important to note that there are no specific allegations in the complaint with regard to the representations – if any – that the developer made in the offering plan related to the building’s LEED application and/or green features which were allegedly breached.

While the allegations of the project’s construction defects are noteworthy standing alone- and will likely be fleshed out in more detail through discovery if the lawsuit moves forward – it is the fraud allegations that are particularly critical to analyze in the context of the project’s offering plan. For this reason, it is important just to briefly consider here why this type of alleged fraud or misrepresentation may be actionable under New York law.

Offers to sell residential condominiums in New York are governed by a particular section of the Martin Act (Article 23 of the General Business Law), whose purpose is to provide prospective purchasers with sufficient factual information for them to make an informed decision about purchasing the property through an offering plan. Accordingly, an offering plan must be filed with and approved by the state Attorney General’s office. Under the Martin Act, the offering plan must “not omit any material fact or contain any untrue statement of material fact.” Although there is no private cause of action under the Martin Act (i.e., the Attorney General is invested with exclusive authority to investigate and prosecute alleged violations), the Martin Act does not preclude a private party from prosecuting an otherwise valid common law fraud claim in connection with the sale of securities – including under an offering plan – whenever the alleged fraudulent conduct is such that the Attorney General would be authorized to bring a statutory action against the same defendant under the Martin Act. See, e.g., Kramer v. W10Z/515 Real Estate Ltd. Partnership, 44 A.D.3d 457, 844 N.Y.S.2d 18 (1st Dep’t 2007). In other words, if representations in an offering plan about a project’s green features or pursuit of third-party certification turn out to be inaccurate, the sponsor and/or developer of the project may be exposing itself to liability.

For your reference, the 31-story, 264-unit Riverhouse development is located at One Rockefeller Park in Battery Park City and continues to seek LEED Gold under New Construction Version 2.1. Specific green features that the project promoted in its pursuit of LEED Gold were a geothermal heating and cooling system, photovoltaic cells, low-E double-pane windows, a green roof, Energy Star appliances, recycled-content and locally-sourced building materials, a $1 million wastewater treatment plant, and a 60kW microturbine installation. It has faced financing and other problems, but celebrity purchasers Leonardo DiCaprio and Tyra Banks have made the project somewhat of a media favorite over the past two years and – after significant price cuts earlier this year – the building is reportedly 75 percent sold out.

We’ll keep an eye on this lawsuit and follow up here at GRELJ if it eventually becomes a full-blown litigation, or if it spawns other similar lawsuits at other green condominium buildings.

As an increasing number of Canadian governments are considering the merits of LEED-driven legislation, Canada’s contractors are speaking out about the increased costs and associated red tape on projects that pursue third-party green building certification. A recent article in Western Canada’s Journal of Commerce reports that – in particular – LEED certification is “burdensome for some trades people,” and notes that the time and expense from identifying the amount of recycled content in certain building materials, the manufacturing proximity of those materials, their transportation details, and other facts are “adding up for contractors who barely have enough of the books to keep their crews working.”

The article starts out by hinting at the potential for trades to underbid LEED projects because they fail to understand the necessary paperwork and administrative components of the certification process. For example, according to Kitchener, Ontario-based Kirlen Construction project manager Stephen Harris, “[a] lot of trades bid the job and then don’t really have the resources to do it [the third-party certification process] properly.” Low bids, of course, can lead to change orders, impact a project’s schedule, and ultimately result in claims or even litigation.

With respect to contractor and subcontractor education about green building practices and processes, Harris also describes the importance of an integrated approach for project teams, particularly where the LEED application is targeting credits related to recycling materials and managing construction debris. “It’s not just a regular building where everyone just shows up and does their job,” he tells the Journal of Commerce.

At the same time, Canadian contractors are also concerned that the costs of third-party certification are eroding their bottom line in a business model where profit margins are already incredibly tight. For example, Ken Turner, principal of Vancouver-based wall and ceiling contractor Turner Brothers, believes that third-party certification is “too time consuming, trying to put together everything about recycled content, where the material comes from, where it was manufactured. We are the end-user. All the technical information is online. I don’t know why they are coming to us.”

Interestingly, Turner suggests that the fragmented nature of green building regulation is responsible – at least in part – for increasing contractors’ costs of doing business.

“If all buildings were going to be [LEED-certified] that would be one thing, but when only half the players are playing and we are trying to fight for information, with no extra money to administer it, it’s harder. Jobs are so cheap right now, the extra work just comes right off the bottom line. It would be a lot easier if we could just give our suppliers a list of our materials and they could provide the information.”

The Journal of Commerce article is important because it emphasizes one of the consistent themes here at GRELJ: that green building regulations – notwithstanding their decidedly non-uniform implementation – have outpaced industry’s own adoption of green building practices and corresponding knowledge base. Last summer’s Marsh report (Green Building: Assessing the Risks, Feedback from the Construction Industry, 2009) echoes this conclusion; for example, the risks arising from consultants and subcontractors with inadequate training and expertise were specifically identified as one of the top 5 green building risks during Marsh’s forums with A/E/C executives in New York City and Washington, D.C.

In any event, as the economy slowly turns around and new construction starts increase, I expect that we will see similar remarks from an increasing number of contractors on both sides of the border with respect to these perceived additional burdens. Of course, as more contractors and subs participate on green building projects, and more suppliers provide building materials to green building projects, many of the concerns raised in the piece should – in theory – diminish.

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)