The plaintiff in Drew George & Partners, Inc. v. Farmer et al. (Case No. 37-2011-00101909) has filed an 8-count complaint againts two of its former employees and their new green building consultancy for, among other things, unfair competition and breach of contract. DGP is a LEED consulting and commissioning firm, and the allegations in its complaint are relatively straightforward: it claims that two former employees diverted business opportunities to their new company while still in DGP’s employ.

Of particular interest, the complaint also alleges that the defendants misappropriated the plaintiff’s proprietary “LEED Scorecard:” an “approximately twenty-page document that DGP, at substantial time and expense, created in order to manage all technical aspects of LEED consulting assignments” which “consolidates the information typically included in meeting minutes and/or status reports into one project status tracking tool.” While still employed by DGP, the defendants allegedly “devised a plan to set up a competing LEED consulting firm and to rapidly acquire new business by raiding [the plaintiff's] current and prospective clients.”

The suit was filed on December 2, 2011; no additional details appear presently available but we’ll follow up if anything else of interest arises in connection with the matter. A copy of the complaint is available upon request.

A malfunctioning geothermal heating and cooling system at the Sussex County Emergency Operations Center in Georgetown, Delaware has officials scrambling for a temporary solution before the summer heat begins in earnest.

The $13 million, 18,000-square-foot facility opened in 2008 and was heralded as energy-efficient green building that could respond to large emergency events even during dangerous weather. The structure was designed to withstand wind loads of up to 120 miles per hour. But the facility is now in danger of its air conditioning shutting down and the oppressive Delaware summer damaging its millions of dollars of state-of-the-art electronics equipment.

To function properly, that equipment needs constant air conditioning which is provided by the geothermal system. The closed-loop system uses groundwater as its starting point, the temperature of which should range from 60 to 70 degrees Fahrenheit. But in recent weeks the water in the system’s 24, 600-foot-deep wells has ranged from 80 to 85 degrees. On more than one occasion it has even even topped 95. If the temperature reaches 100 to 105, the building’s air conditioning system will shut down. $2 million in county equipment and $2 million in state equipment could be in jeopardy.

Earlier this month, Sussex County approved a temporary generator to operate the building’s cooling systems while the problem is investigated (at a cost of $14,000 through Labor Day). Digging more wells or installing a permanent cooling tower would cost approximately $200,000. The county is also seeking advice from geothermal experts. More ominously, the county “will try to determine whether an engineering or design flaw contributed to the problem and, if any are found, will try to recover any costs.” Already the county engineer has publicly speculated whether the project’s designers factored in that the building would always need to be cooled “because of the amount of heat generated by equipment in the EOC. Possible litigation could center on that.”

Hopefully the issue can be resolved without any significant damage to the EOC or litigation. But as more green buildings that opened during the mid- to late-00s continue to operate, the odds that similar problems with other advanced building technologies could manifest themselves will increase.

We’ll keep an eye on the Suffolk County Emergency Operations Center as the summer proceeds and experts weigh in on possible solutions to the geothermal system’s woes.

An interesting green building litigation that was filed last fall last fall in Cook County (Illinois) Circuit Court has flown under the radar. Though details are slim and the only papers I have been able to pull thus far are the complaint, I thought it was worth mentioning here at GRELJ in the context of how ordinary green building projects – as opposed to the maligned Destiny USA mega-development – can still present additional risks for project teams.

The project – profiled here – contemplated the gut renovation of 5354 North Paulina Street in the Andersonville section of Chicago, a 3-story former farmhouse that dates from 1883 (pictured). The owner of the 2200-square-foot house, Laurie Bain, was aiming for a LEED Certified rating from USGBC under LEED for Homes. Vertex’s design earned accolades for its tight building envelope and was touted as “a fantastic example of how LEED can be done affordably.” Total projected construction costs were less than $100 per square foot; the design took advantage of cross-ventilation and other passive energy techniques to avoid the installation of any costly renewable energy systems.

According to the complaint, “the stated objective of the Architectural Contract was to ‘create a sustainable green modern single family home.’” The form agreement the parties used was the B105-2007 (or its predecessor B155-1993), which is the AIA’s standard form of agreement for a residential or small commercial project. (Vertex also served as the general contractor for the project, though there are no specific allegations relating to LEED for Homes certification arising out of the firm’s construction phase services).

The LEED-related allegations are contained in the first cause of action for breach of the architect’s agreement. Bain claims that, among other breaches, the architect “failed to pursue and obtain for the Project certification from the USGBC LEED for Homes Program.” Although the architect’s specific responsibilities under the agreement and its accompanying scope of work are unclear, this allegation is, as far as I can tell, the first to be included in a civil complaint against a design professional (or a contractor) where an owner has alleged breach of contract for failure to pursue and/or obtain LEED certification as required by the contract documents. Note that we will need to wait to review the actual contract language, including the scope of work, before making a more definitive assessment of the parties’ respective obligations and how and what might have gone wrong.

The second cause of action in Vertex is for breach of the construction contract (the AIA’s standard form of agreement between owner and contractor for a residential or small commercial project, the A105-2007, which was also attached as an exhibit). Both causes of action seek damages in excess of $50,000. According to the court’s docket, it appears that the architect has served an answer to the complaint that includes a counterclaim, and the sides are in the middle of exchanging written discovery.

The Cook County Circuit Court docket number for Bain v. Vertex Architects, LLC is 2010-L-012695. We’ll follow up if and when more details about the action become available. Until then, the suit should serve as an important reminder to architects, engineers, contractors, and owners that LEED-related risks are real and must be managed by, among other things, paying careful attention to the scope of work agreed to by contract.

I am pleased to announce that an article I co-authored with Professor Darren Prum of Regis University has been published as the lead feature article in Volume 23, Issue 2 of the Loyola Consumer Law Review. The pinpoint citation is 23 Loy. Consumer L. Rev. 113 (2010).

Green Building Contracts: Considering the Roles of Consequential Damages & Limitation of Liability Provisions begins by tracing the development of the legal concept of consequential damages at common law through modern decisions applying those concepts to construction disputes. It proceeds to analyze the competing concerns of construction project participants when negotiating consequential damages and limitation of liability provisions, underscoring those that are particularly salient for green building projects. The article then considers those concerns in the context of pertinent provisions in various AIA, EJCDC, ConsensusDOCS, and Design-Build Institute of America form documents. It concludes by providing a set of recommendations for owners, design professionals, contractors, and consultants to consider when negotiating similar provisions, most of which are relevant for any type of construction project whether green or not.

A copy of the article is available for download here; Professor Prum and I look forward to any feedback in the comments below.

Last week, Canada’s Daily Commercial News and Construction Record published an article suggesting that Canada’s green building experience to date has largely avoided any legal repercussions arising out of green building projects. The article’s conclusions rest on the fact that, at least according to a Toronto-based green building consultant, there are no construction-related green building insurance or surety products that “specifically target” projects seeking LEED certification.

According to the Record,

“[t]o date, no Canadian projects have failed to achieve the LEED status they were aiming for, either due to contractor or project team errors. But south of the border, several lawsuits have been launched against builders and developers because green features allegedly failed to perform as promised, or because a project failed to achieve the level of LEED certification the owners expected. “

Here, the Record appears to be referring to the Gidumal litigation in Battery Park City, as well as some of the insurance claims that were reported back in 2007 by Victor Schinnerer’s Frank Musica. What the article misses, though, are the issues that were raised by the Toronto Star earlier this year in its two-part piece about Ontario’s regulation of the local green building industry. As you’ll recall, that series included a discussion of a pending lawsuit in the Ontario courts against a developer who had converted a century-old building in downtown Toronto into a 4-unit, mixed-use building that was touted as one of the city’s top green building projects in 2006 by Now magazine. The developer is currently defending a suit for fraud brought by the purchasers of the units, who are seeking over $900,000 in damages for the project’s alleged failure to satisfy certain Ontario building codes, including those for its geothermal system.

(Also, and just for the record once again, if one of the suits the Record is referring to here is Shaw Development, the allegations there were not that the project failed to earn an anticipated level of LEED certification, but that it failed to capture state-level green building tax credits by receiving a certificate of occupancy by a certain fixed date under the program).

I mention this because I think it’s important to note that the liability issues associated with green building extend beyond LEED – and could ultimately be far more broad. Indeed, just because there are no insurance products currently available for purchase on the Canadian markets does not mean that there is no risk. In fact, what’s most interesting about the article is that it fails to even mention two major sources of risk that could result in LEED-related liability: the LEED 2009 Minimum Program Requirements and individual prerequisites under the various LEED rating systems. (For example, the lynchpin of the appellants’ allegations in the Northland Pines challenge was that the high school had failed to satisfy IEQ Prerequisite 1 and EA Prerequisite 2 of LEED NC version 2.1.)

Nevertheless, one of the reasons why Ian Theaker, the consultant quoted in the article, believes there have not been any Canadian insurance products released to date is that “the LEED process has been specifically set up to make planning decisions that avoid problems down the road.” According to Mr. Theaker, “the best insurance to achieve LEED certification is to actually overshoot the LEED guidelines by a few points. You can’t guarantee any particular number of points will be recognized by the CaGBC, so if you shoot higher than your goal, you can afford to miss one or two points along the way.”

While this may be true, I think these remarks miss the broader impact of the Northland Pines proceeding. Although we have yet to see a rash of litigation over projects’ failure to earn third-party certification on account of missing targeted credits, and although translating third-party goals will continue to remain a critical design and construction contract consideration, Northland Pines suggests that the more imminent risks may arise out of challenges that projects have failed to satisfy applicable LEED prerequisites and/or Minimum Program Requirements. Although it’s unclear after Northland Pines whether GBCI/USGBC will ever decertify a project, that risk still exists, particularly because there appears to be no limitation on who has standing to initiate a certification challenge under GBCI’s Certification Challenge Policy.

 These types of risks need to be fully vetted before the insurance industry – in Canada or elsewhere – can fully assess them. The Record quotes Mr. Theaker as stating that “insurance companies may find it initially challenging to evaluate the risk associated with novel building materials and building techniques, but that the market soon catches up as they become mainstream.” As Northland Pines suggests, considering novel building materials and techniques is only one small slice of a comprehensive green building risk management strategy.

Finally, notwithstanding a perceived lack of Canadian green building risks, the Record also reports that Chartis intends to introduce its Green Reputation Coverage product – which covers legal costs and crisis consulting to manage the adverse publicity that may arise if a building fails to earn third-party green building certification – to Canadian markets sometime in the near future. This is a product which we have not discussed previously here at GRELJ, but would “cover the legal cost of defending a lawsuit in which the insured’s reputation would be damaged for failing to achieve a promised green standard,” according to Chartis vice president Joseph Fobert.

So, does the Canadian construction industry face a lower risk profile when building green? If so, why? I look forward to your thoughts in the comments.

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.

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)

Much like the rest of the green building industry, green leases contain a collection of legal risks that landlords and tenants have not previously had to consider. This article considers a small sample of such problems, specifically in relation to certification requirements, cost issues, insurance provisions and green product issues.

Many companies and government agencies require their space to satisfy an applicable LEED for Commercial Interiors certification level. These entities look for a lease to specify that the space will meet such standards. Landlords are not generally in the position to guarantee such certification level. The project architect, general contractor, subcontractor and USGBC all have a much greater impact on whether the space meets the required certification level. The landlord will thus need to make sure it is working with contractors and architects that understand the issues and are able to work towards achieving the necessary certification levels. It will need to protect itself in its applicable project contracts. The landlord and tenant must work together in attempting to craft a lease that adequately protects each of their respective interests and avoids liability outside of either of their control. Crafting lease incentives such as free rent periods or rental abatements are the best way to incentivize a property owner to deliver a green lease space without undue penalty for items outside of its control.

In addition, green building is generally more costly and timely than the standard building process. Landlords and tenants must realize this when determining the tenant improvement allowances detailed in the lease. Although green space is obviously important for a company, having a finished space is a far more important issue.

The improvements must also be are properly insured. A party entering into a green lease must carefully consider the increase in both (a) the replacement cost and (b) the rebuilding period following a casualty event, due to specific green building issues. As detailed above, the cost of green building products are generally more expensive than standard materials. There will also be additional costs incurred if the space needs to re-obtain its LEED certification level following a casualty event. It is important that each of those points is considered when determining replacement value and how that is detailed within the lease. If the casualty event is not the fault of the tenant, the lease should also consider who will be responsible for the costs of the LEED re-certification. The rebuilding of the space will also take longer due to both (i) the installation of many energy efficient systems and (ii) the LEED re-certification process following the casualty event. Such issues must be considered in the sections of the lease detailing the rebuild obligations of the parties following a casualty event.

The use of certain green products can also create unforeseen issues for both the landlord and the tenant. Some specific examples were detailed in Frank Musica’s “Don’t Let Green Design Cause Red Ink” presentation at the 2007 AIA National Convention in San Antonio.

The first example to consider is one in which a design firm specified cork flooring in kitchen areas. Unfortunately, this product had not been properly tested for use in high traffic kitchen areas. As a result, the cork flooring eventually saw growth of mold created by the high traffic and water spillage of the kitchen area. Another example was a tenant that provided the government with military systems designs and terrorism identification systems. The tenant invested in green design and extensive daylighting systems, including skylights and large window systems. Upon inspection of the new space by the government, it was determined that the tenant was putting confidential information at risk. The tenant faced a threatened revocation of its contractor’s security rating and cancelation of existing contracts. These outcomes show why tenants must work with their landlords in the installation of green building products and systems within their spaces in order to avoid potential liabilities that may have been unforeseeable for the landlord, contractor or architect.

In conclusion, green leasing, much like the green building movement itself, is here to stay. There are a multitude of new legal issues and risks that both a landlord and a tenant must consider if they elect to lease green space. These potential risks are further reasons to work with the most skilled professionals in the green building and leasing industry, whether that is an architect, contractor or attorney in site selection, plan preparation, lease negotiation and the final build-out of the space in connection with a green lease.

Geoff White is a Senior Associate in the Commercial Transactions and Real Estate Group at Frost Brown Todd. He is a contributing author to Green Real Estate Law Journal. He also oversees the Green Building Series on the Frost Brown Todd’s Construction Law News website. Mr. White is licensed to practice law in Kentucky and Ohio and is a member of the Kentucky Chapter of the U.S. Green Building Council. Learn more about Geoff at http://www.frostbrowntodd.com/geoffwhite