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.

Just before the July 4 holiday, Fireman’s Fund, which launched the green building property insurance market back in 2006, released what it is calling its “next generation” of green building policy endorsements. Calling it a “significant enhancement to what’s currently available in the marketplace,” Fireman’s Fund’s Steve Bushnell also introduced a “Green Financial Incentive Coverage” policy that provides policyholders with protection from the loss of green building-related financial incentives, including tax credits and deductions, utility rebates, and loan discounts, for a period of two (2) years after the loss.

According to Mr. Bushnell, the new endorsement evinces Fireman’s Fund’s “deeper understanding of evolving green building construction and insurance issues.” David Cohen, the company’s senior director of real estate, called the policy “a powerful incentive as many new green buildings are built with these cost savings factored in. Every day, new incentives are introduced – both from the utilities and the government at the local, state and federal level – incenting property owners to build green and losses could get in the way of that.”

This latter point, of course, is one we make frequently here at GRELJ in the context of design and construction agreements and leases; the pace of regulatory activity continues to make translating legislative requirements into contract documents a major challenge. The new endorsement also appears to be – at least implicitly – an acknowledgment of the $600,000.00 in lost tax credits which the developer suffered in the Shaw Development litigation, though it is unclear whether – under the terms and conditions of the endorsement – the developer’s loss would have been covered.

In addition to the new endorsement, Fireman’s Fund simultaneously announced that it has made further refinements to its existing line of green building coverage, including:

• Broadening eligibility for post-loss green upgrades to include all real and personal property that more efficiently uses energy or water, improves human health or reduces environmental impact (such as alternative energy generating equipment and water systems or green roofs);

• Combining four of its endorsements – three commercial and one manufacturing – into a single endorsement, which also includes coverage for building commissioning;

• For certified buildings, coverage now allows the insured to attain certification at one level above the certified green building level that the insured had prior to the loss or damage (i.e. LEED Gold instead of Silver);

• Vegetated roof coverage has now been extended to vegetated swales and other vegetation that reduces the heat island effect, including vegetated walls. This coverage now applies to both certified and traditional buildings (previously it was only for certified buildings); and

• Coverage has also been expanded to include porous paving – water permeable paving that allows water to drain into the ground to help manage water flow.

Perhaps what’s most interesting about the press release is Fireman Fund’s acknowledgement that, to date, approximately 1500 commercial property insurance policyholders have purchased one of the company’s green building endorsements (though there is no information on how many claims have been asserted against those policies).  It goes without saying – as always – that you should review your policies of insurance – property, professional liability, builder’s risk, or otherwise – with heightened scrutiny in connection with your green construction project to confirm exactly what additional insurance – if any – you may need to procure.

We’re back here at GRELJ after a break for the July 4 holiday. I hope you enjoyed yours as much as I did; my wife and I spent a very relaxing long weekend down in southwestern Virginia with her family.

The night before we left town last week, I sat on a green leasing panel here in Midtown that was sponsored by the Greater New York Chapter of the International Facility Management Association’s Sustainability Committee. In addition to discussing some general issues – legal and otherwise – arising out of the green leasing process, there was significant input from the brokers in attendance about the state of the local green leasing market. More particularly, the discussion focused on how smaller tenants (in the 10,000 to 20,000 square foot range), who do not have the leverage of some of the larger companies (like Deutsche Bank, represented on the panel ) which have successfully demanded green concessions from potential landlords, might nevertheless be able to insist on similar provisions in their leases. Although the panel stressed both landlord and tenant education as what will ultimately drive green practices into these smaller leases, we did not reach any real practical consensus on how green leases might gain more traction in this context.

I point this out in light of a recent report from Portland, Oregon that two small commercial tenants have signed green leases with Unico Properties at the historic 13-story Commonwealth Building, located downtown at 421 SW 6th Street between Washington and Stark Streets. The Northwest Energy Efficiency Alliance (“NEEA”) and Green Building Services (“GBS”) took 20,000 and 10,000 square feet, respectively. According to a Unico press release, “[b]oth NEEA and GBS required green lease provisions which contractually bind both tenant and landlord to choose green products and practices. Green leases are relatively new in the Portland market and they include . . . following strict sustainability LEED-CI guidelines for tenant improvement projects.” In the release, Unico’s general manager for its Portland portfolio, Brian Pearce, said that “[a]lthough Unico does many of these things voluntarily, we want our tenants to know that sustainability is not an option for us- we are fully committed to it.”

I had the opportunity to speak with Mr. Pearce about the green obligations in each of the two leases. Interestingly, NEEA actually approached Unico about inserting certain green provisions into its lease, including dedicated recycling space, access to bicycle storage, changing rooms, and showers, and a definition of building operating expenses that allows Unico to recover the costs of any capital improvements to the building which increase the tenant space’s energy efficiency. “The $65,000 question is whether any other tenants come along like NEEA,” Mr. Pearce said. Unico has also set LEED-CI certification as a “green benchmark” for all of its tenant improvements. “LEED-CI certification is important to these types of tenants, so baiting them with Certified spaces made sense for us,” he noted, “but if tenants want to go beyond Certified, that’s on their nickel.” Mr. Pearce also explained that although Unico has – in other deals – provided allowances to certain tenants for various levels of LEED certification or other green improvements, the two leases in the Commonwealth Building were turn-key. During our conversation, I was particularly interested to hear that both NEEA and GBS also asked Unico to commit in their leases to pursuing a LEED-EB rating for the property, but for many of the legal reasons which we have stressed here at GRELJ previously, Unico refused to make that representation. “Certification is handed down by a third-party entity over which we have no control,” Mr. Pearce said.

The property itself is now 75 percent leased; other tenants include the National Fish and Wildlife Foundation, IMAGINiT Technologies, RAND Worldwide Company, and Element Power which recently earned LEED-CI Gold for its interiors space. Notwithstanding Unico’s concerns about third-party certification, the Commonwealth Building should earn a 2010 Energy Star label and is pursuing formal LEED-EB certification. Unico recently upgraded its HVAC system, installed submeters in individual tenant spaces (including NEEA’s and GBS’s), and the tower is located adjacent to the Portland light rail line. Colliers International represented NEEA in the transaction, Cushman & Wakefield represented GBS, and Pacific Real Estate Partners represented Unico.

Just as a brief aside, the Commonwealth Building was designed by Pietro Belluschi and constructed between 1944 and 1948, debuting as the Equitable Building and headquarters of the Equitable Savings and Loan Association. It was added to the National Register of Historic Places in 1976 for its place in architectural history as one of the first glass box towers ever built; it actually predates Gordon Bunshaft’s seminal Lever House here in Manhattan and was the first building in the country to feature double-glazed windows and be fully sealed and air-conditioned.

Early last week, the Newark (Delaware) City Council postponed a vote on proposed amendments to Newark’s building codes that would require new construction to earn 25 points under either LEED 2009 for New Construction or LEED 2008 for Homes. In addition to the typical green building regulatory concerns relating to costs and red tape which were raised by local designers, builders, and developers, one architect who participated at the City Council session suggested that – as drafted – the ordinance might violate the copyrights which USGBC holds in its various LEED systems. According to the Newark Post, the city’s staff has contacted USGBC and is investigating the issue, and expects resolution at another council meeting shortly.

The first question I asked myself when I saw this story is whether a state or local government enjoys immunity from suits for copyright infringement, which must be brought in federal court pursuant to 28 U.S.C. § 1498. (Of course, whether USGBC would choose to assert a claim against a government which has allegedly infringed one of its copyrights is a totally different question). Although local governments (towns, cities, counties, etc.) are not immune from suits brought under federal law, the answer is not straightforward with respect to state immunity. (The federal government, on the other hand, has expressly waived its immunity from claims for copyright infringement, though the only available remedy is money damages and not injunctive relief.)

Section 511 of the Copyright Act was adopted by Congress in 1991 in the aftermath of BV Engineering v. University of California at Los Angeles, where UCLA successfully defended a copyright infringement claim on the basis that it enjoyed sovereign immunity under the Eleventh Amendment. 858 F.2d 1394 (9th Cir. 1988). Section 511 states clearly that “[a]ny State . . . shall not be immune, under the Eleventh Amendment of the Constitution of the United States, from suit in Federal court . . . for a violation of any of the exclusive rights of a copyright owner.” 17 U.S.C. § 511. (Just a reminder that the Eleventh Amendment immunizes states from suits for money damages or equitable relief without their consent).

Despite this seemingly clear statutory provision, two Supreme Court cases from the late 1990s suggest that Section 511 might not allow a copyright infringement claim to proceed against a state government. In Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 119 S.Ct. 2219 (1999) (patent) and College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 119 S.Ct. 2199 (1999) (trademark), the Court rejected patent and trademark infringement claims against the state of Florida that were purportedly authorized by similar provisions in the patent and trademark statutes (35 U.S.C. § 271(h) and 15 U.S.C. § 1125(a)(2), respectively). Justice Stevens suggested in a footnote in the patent decision that Section 511 might nevertheless receive different treatment, but some brief follow up research did not identify any subsequent cases in this line which confronted the Copyright Act. It is also worth noting that the Court’s holding in both cases was grounded in Congress’s inability to enact statutes that effectively circumvent constitutional protections.

Regardless of where the law currently stands on the interplay between sovereign immunity and Section 511 of the Copyright Act, it’s unclear here exactly how Newark’s proposed amendments could violate USGBC’s copyrights because the text of the proposed amendments does not incorporate any language from the rating systems directly. Nevertheless, it’s an interesting and important consideration for state and local governments that do, in fact, pull relevant sections from third-party rating systems directly into proposed legislation, and a good reminder that a broad range of legal issues exist for policymakers to analyze as they consider and ultimately craft legislation.

Late last week, CBRE Investors’ CBRE Capital Partners investment entity originated $61 million in first mortgage financing for the LEED Gold-hopeful Riverhouse condominium project in Battery Park City. The mortgage is backed by the 77 units that remain available at the 262-unit, 31-story building, and is for a three-year term with a one-year extension option, putting to bed some of the rumors that have been swirling for the past year about the project’s financial difficulties and poor unit sales performance. The news is also interesting because of the backdrop it provides to the fledgling Gidumal litigation, which we first reported here at GRELJ a couple of weeks ago.

In terms of the project’s somewhat sordid financial history, the Riverhouse was originally developed by Lehman Brothers and the Sheldrake Organization pursuant to a $282.4 million senior mortgage from Helaba Bank and a $74 million junior loan from the AFL-CIO trust. Although the former loan was paid off, the developers defaulted on the junior loan at maturity in November of 2009, resulting in a $48 million lis pendens filing against the property in February. Just before the filing, the Lehman entity alleged that Sheldrake had misappropriated over $12 million in funds from Helaba which had been earmarked for ground lease payments and construction expenses by submitting falsified invoices to the lender. Lehman served Sheldrake with a Notice of Removal (from its capacity as the development team’s day-to-day manager of the project), and Sheldrake unsuccessfully sought an injunction in Supreme Court barring its removal.

Afterwards, what was left of the development team hired CBRE to sell the junior note, but CBRE ultimately decided to originate the financing itself. According to Frank Scavone, COO at CBRE Capital Partners, the Riverhouse “exemplifies an otherwise successful development project in need of additional time to realize full sell out.” Affidavits submitted earlier this year in connection with Sheldrake’s application for injunctive relief indicated that 17 additional sales contracts have been signed, with another 7 out for signature – positive signs that the project is back on track.

It would be purely speculative to consider whether any of Riverhouse’s issues – at least indirectly – led to the allegations set forth in the Gidumal complaint; indeed, intra-development team power struggles are relatively common and don’t typically impact unit purchasers in any meaningful manner. However, this is the first time we’ve heard – at least publicly – these types of allegations on a green building or LEED project; whether they impacted the overall quality of Riverhouse’s construction or the performance of its building systems is the type of question mark which the Gidumal litigation could shed light on if the lawsuit proceeds through discovery.

As a final side note, the Riverhouse has yet to receive formal LEED certification; it registered with USGBC in June of 2005 under LEED for New Construction Version 2.1.

It’s been a wild ride recently for the green building legal community; in the past week we’ve witnessed the country’s first reported green condominium litigation and another challenge in federal court to a state-level green building program. Now (over the weekend), the Northland Pines appellants have announced that they dispute USGBC’s denial of their challenge to the LEED Gold certification of the Northland Pines High School, publicly released the documents on which USGBC’s decision was based, and are calling on the green building industry to review the materials and draw their own conclusions about the merits of USGBC’s decision.

After a preliminary review over the past few days of the materials which the appellants sent to me (and many others across the industry), what strikes me as most interesting is the opening paragraph to the Executive Summary prepared by Taylor Engineering, one of the independent consultants which USGBC engaged to evaluate the challenge, in response to the appellants’ allegations. Taylor states that “there were several violations of Standard 62.1 and Standard 90.1 requirements in the design as originally documented. As such, the original design did not meet IEQ Prerequisite 1 and EA Prerequisite 2 of LEED NC version 2.1.”

Taylor also notes that revisions were made to the school’s energy model on December 10, 2009 – well after the energy models on which the disputed prerequisites were submitted to USGBC for consideration. As the appellants point out in their response to Taylor, “the independent consultant indicates that the original model at the time of the USGBC application . . . is not correct. Making revisions to the energy model 4.5 years after the design should not and cannot be the basis for compliance with this prerequisite.”

These details – though technical – require that the green building industry – including policymakers – review the challenge and supporting documents released by the appellants with scrutiny. However, if the project did, in fact, fail to satisfy these prerequisites, but was certified anyway, and the USGBC’s decision essentially stands behind ex post facto revisions to the energy model, the appellants’ contentions throughout the challenge and response documents that the LEED certification process itself is flawed become all the more compelling.

I am sure that there will be much more to say about all of these materials moving forward but, to get you started with your review, here’s the public statement which the appellants prepared as an introduction to the package of documents which they have released for review and comment:

Appellants’ Statement – June 5, 2010

What is all the ruckus about Northland Pines?

In 2004, the voters of Vilas County, Wisconsin voted to approve the sale of $28,535,000 worth of bonds to finance a new high school for the Northland Pines District.

The appellants in this case all served on the Building Committee for the new school and each brought specific talents and experience in the design and construction of large buildings. Each was dedicated to the proposition of creating the most efficient structure possible.

The design team and school board discouraged any outside input and set forth to design and construct the school as they saw fit. As the design developed, the appellants questioned whether the facility would indeed meet the prerequisites for LEED Certification and were told that it would despite what appeared to be glaring shortfalls with respect to those requiremetns. The appellants retained the service of two highly regarded consulting engineers to review the plans. Both of them determined that the facility as deisgned would not qualify for LEED Certification.

In December 2008, the appellants filed an appeal with the USGBC challenging the award of the Gold Certification given to Northland Pines. Some 16 months later, the appellants were notified that the USGBC had looked into the matter and found everything to be fine. They based this on reports from two or more consulting engineers who said that the building did not meet the prerequisites but concluded that “pretty close” is close enough. When the appellants’ engineers asked for the backup data to the USGBC reports, they were told that they were pretty busy and would address that request when they have time. Time has passed and the requested materials have not been forthcoming. Why?

On behalf of the taxpayers of Vilas County who would like to know with certainty whether they got what they paid for or not, we ask the engineering community to look at this file and tell us, did we miss something here? How can it be all right to certify a building that doesn’t fully comply with the rules set forth by the body that is doing the certifications?

We would love to hear what you think. We are only in search of the truth which ultimately will be what is best for Northland Pines.

(An interesting procedural sidenote is whether the appellants could have appealed USGBC’s denial of their challenge rather than distributing the complaint . Under the Certification Challenge Policy, GBCI’s Board of Directors serves as the appeals body, and the appeal must be requested within twenty-five (25) business days of the underlying decision (meaning the appellants would have had until June 2 to file their request based on an April 27 decision from USGBC). However, at least with respect to this challenge, you will recall that USGBC General Counsel Susan Dorn explained in a email message that the Northland Pines proceeding was reviewed by USGBC as a legacy project under the rules which applied when USGBC – and not GBCI – was handling LEED certifications, and that future challenges would be reviewed under the GBCI policy.)

In any event, the full set of documents is available from Larry Spielvogel (spielvogel@comcast.net) or Mark Lentz (mlentz@lentzengineering.com) upon request and includes an original copy of the appeal which was submitted to USGBC in December of 2008, as well as the appellants’ reactions to each of the conclusions as reached by USGBC’s consultants and other supporting documentation.

A copy of the Executive Summary of the appellants’ response to the denial of their challenge (which was prepared by Spielvogel and Lentz) is available for download here.

The action is noteworthy because of its similarities to AHRI – where a decision on the plaintiffs’ application for a preliminary injunction remains pending in the District of New Mexico – and the potential it suggests for other similar litigation over state- and local-level green building legislative implementation on the horizon. However, what’s most interesting about the complaint is its level of detail, particularity, and emphasis on the legislative history behind the applicable federal statutes regulating energy efficiency and energy use standards for the residential HVAC and plumbing products which the plaintiffs manufacture.

Filed in United States District Court for the Western District of Washington, Building Industry Association of Washington et al. v. Washington State Building Code Council alleges that certain amendments to the Washington State Energy Code that were passed back in November and slated to take effect on July 1 are preempted by various federal regulations, including the National Appliance Energy Conservation Act of 1987 and the Energy Policy Act of 1992, on the basis that they require homes to have HVAC, plumbing, or water heating equipment whose efficiency exceeds the standards set by the federal government in applicable legislation.

The specific amendments to the Washington code at issue in BIAW propose that single-family residences earn at least 1.0 credits from a list of 9 options that range from 0.5 to 2.0 credits. The complaint alleges that – as drafted – it is not possible to earn 1.0 credits from the 9 options without selecting those options which require higher efficiency equipment. According to allegations in Paragraph 46 of the complaint, the table “outlines a set of false choices. In effect, the ‘options’ in this table mandate the installation of products with efficiency standards in excess of federal standards.”

The economic essence of the preemption argument as alleged in both AHRI and BIAW is also articulated well in Paragraphs 22 through 24 of the BIAW complaint. These allegations are important to consider from an overall policy perspective with respect to why other industry groups may be inclined to spend the time and resources necessary to attack similar legislation in other jurisdictions:

“Plaintiffs, in reliance on the federal energy efficiency and energy use standards, have valuable investments in inventories of equipment and home designs which comply with federal standards but which do not comply with the [disputed amendments to the state energy code]. The state code will disrupt sales of HVAC products, water heaters and plumbing products intended for use in the state due to confusion of manufacturers, distributors and contractors about which standards they must adhere to. Distributors and contractors in neighboring states which have not adopted the same regulatory provisions challenged in this action will not suffer the same or similar adverse effects on their businesses. Those effects place Washington distributors and contractors with a uniquely affected class harmed by the regulations challenged here.”

In Paragraph 53, the complaint also describes in detail the two ways in which a state or local government can avoid federal preemption if legislation does include equipment or products with higher energy efficiencies.

First, as was discussed in AHRI, the state or local government can obtain an express waiver of preemption from the federal government. (An interesting note here is that no state has ever received such a waiver). Alternatively, under the 42 U.S.C § 6297(f) “building code exception,” state and local governments are permitted to set energy efficiency targets for new construction which can be reached with equipment or products whose efficiencies exceed federal standards, provided the enabling legislation also includes other means to achieve the targets with products that do not exceed the federal standards. As the complaint also notes in Paragraph 55, the legislative history to the building code exception states that the “flexibility provided to states in this provision is limited, to ensure that performance-based codes cannot expressly or effectively require the installation of covered products whose efficiencies exceed the applicable federal standard.”

The building code exception’s preemption analysis is performed under what some have described as a “convoluted” 7-part test that is outlined in 42 U.S.C. § 6297(f)(3). That test will be the focus of the Western District’s analysis when it evaluates the merits of the plaintiffs’ application for (i) a declaratory judgment finding that the amendments are preempted and (ii) an injunction preventing the state from enforcing the amendments as drafted.

These preemption issues are fascinating, particularly given the specific allegations in BIAW relating to the building code exception and the amendments’ failure to satisfy the 7-part test. Undoubtedly, similar issues will be raised again in other jurisdictions as additional green building legislation takes effect in 2010 and beyond. As always, we’ll follow up on BIAW here at GRELJ as the litigation moves forward.

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.

In a two-part series that was published last weekend, Diana Zlomislic of the Toronto Star reviews the green building landscape in Ontario and concludes that although “[s]hoddy building is not unique to the green sector . . . with governments aggressively promoting green construction and green building still an emerging practice, consumers who opt for more eco-friendly homes and renovations are more vulnerable.” Zlomislic specifically identifies the over $1 billion in financial incentives that have been distributed to date by Canada’s provincial and local governments as having “few quality-control standards to protect consumers from incompetent ‘eco experts’ looking to cash in on the booming [green building] industry.”

For example, Zlomislic tracked down 26 homeowners who paid over $600,000 in deposits to a now bankrupt geothermal contractor. Several of these homeowners saw their energy bills double after the geothermal system was installed, while many others never even received a completely operational system. Among other things, Zlomislic points to the contractor’s rush to sign up customers and capitalize on a $10,000 provincial and federal rebate for qualifying HVAC replacement systems as a basis for the contractor’s misrepresentations.

Of particular interest to us here at GRELJ, Part 1 also identifies a pending lawsuit in the Ontario courts against a developer who 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. In a litigation that alleges fraud, the purchasers of the units seek over $900,000 in damages from the developer for the project’s failure to satisfy certain Ontario building codes, including those for its geothermal system – a highly publicized green selling point for the project.

Part 2 of the series starts out by concluding that Canadian governments “have created what some describe as a ‘Wild West’-like situation by urging homeowners to go green when they renovate or build from scratch. Green government grants and other incentives have boosted the building sector but few guidelines or quality-control standards exist, and those that do are not policed.” In support of her conclusions, Zlomislic profiles a Toronto-area couple who retained an architect that drastically overstated her green building design expertise, recommended a “green builder” for their 2200-square-foot renovation project, and left the couple with a house that’s only 60 percent complete and still contains over 60 individual building code violations.

What I found so interesting about these two articles is that they suggest a different type of risk growing out of government activity, while simultaneously shedding light on how that that activity has created an opaque regulatory structure on both sides of the border. The articles also build on many of the green building-related insurance claims which Frank Musica reported almost 3 years ago at the 2007 AIA National Convention in San Antonio. I also think that the Toronto fraud litigation is a major shot across the bow for owners and other marketing professionals who fail to accurately represent a project’s green features; this is one specific area of green real estate risk which continues to be insufficiently addressed by many industry professionals.

In any event, Zlomislic’s two pieces are must-reads and demonstrate practical applications of the many theoretical green building risk issues which have been discussed here at GRELJ and elsewhere over the past few years. Part one is here; part two is here.

One area of the property insurance market which has seen an increase in green building policy endorsements over the past year is the builder’s risk market. This article will take a look at exactly what builder’s risk is meant to insure, and then review some of the available green building endorsements to such policies that are currently available.

Because the risks for property damage, loss, or destruction are quite different for a building under construction versus a building that’s already been built, standard property insurance policies will not provide coverage for damage to or destruction of the former. This is because the owner’s insurable interest is constantly changing; title to material and equipment may change daily, and the overall value of the actual project itself increases from zero as the building itself takes shape, which makes it more or less impossible for the insurer to determine the appropriate premium. Enter builder’s risk insurance, which generally refers to a property insurance policy that will remain in place while the project is under construction. Unless specified by endorsement or otherwise, once the project is completed, builder’s risk coverage terminates, and the owner will need to make sure that a standard property insurance policy is in place to cover accidental losses, damages, or even total destruction of the building or property in question. Determining exactly when that termination takes place can be tricky, and is a good reason to review both the terms and conditions of the construction contract, as well as the terms of the policy and law of the controlling jurisdiction.

Considering the purchase of various endorsements is important because standard commercial builder’s risk coverage will insure only one thing: the building under construction, and not associated soft costs (such as those incurred with third-party green building certification). Standard builder’s risk policies will cover damage or losses to the building’s foundations, scaffolding, construction forms, other temporary structures at the project site, fixtures, machinery and equipment used to service the building and intended to become part of it, and materials and supplies at the site which will also become part of the building. Typical endorsements include those for “floater” coverage; i.e., damage to equipment used to build the project, or materials and supplies in transit from point of manufacture or supply to the project site, as well as the costs and expenses that the owner may incur if completion of the project is delayed.

According to the most recent Marsh survey (from December of 2008), several insurers now offer specific green building endorsements to traditional builder’s risk policies which owners and their contractors should consider carefully on green construction projects of any size. Fireman’s Fund, for example, offers a “Delay of Occupancy or Use – Green Amendment” to its builder’s risk product. The endorsement provides coverage for the soft green building-related costs that an owner may incur after a covered loss, such as the recycling of construction debris, flushing out the reconstructed space with clean air, commissioning repaired or reconstructed building systems, and re-registering the project with USGBC to continue pursuit of LEED certification. In addition, the policy may provide coverage for the owner’s loss of net earnings from alternative energy or water efficient installations if those systems were operational prior to the loss. Travelers, Zurich and Ace now offer similar endorsements to their builder’s risk policies as well.

As new construction starts (hopefully) increase as the economy slowly lurches around, look for more comprehensive endorsements to builder’s risk policies from a broader range of insurers to emerge; as always, we’ll be keeping an eye on such trends and follow up here at GRELJ accordingly. In the interim, if anyone out there has purchased any of the available endorsements, I’d be interested in getting your feedback in the comments.

One topic we discuss with particular frequency here at GRELJ in the green lease context is the obligations within the lease – imposed upon either landlord or tenant – to operate the demised premises, or the base building and common areas as the case may be, in a sustainable manner. The roadmap for that operation is generally found in an environmental performance objective clause, or in other provisions that may not explicitly set forth green building requirements but are instead merely aspirational. One interesting legal question that could arise in this context is exactly how a court would construe such aspirational clauses in the event the parties dispute exactly how “aspirational” those clauses should be. For example, consider the following form clause from the Model Green Lease:

Environmental Performance Objective Clause: Landlord will “operate and maintain the Building and the Premises to minimize (i) direct and indirect energy consumption and greenhouse gas emissions; (ii) water consumption; (iii) the amount of material entering the waste stream; (iv) negative impacts upon the indoor air quality of the Building and the Premises.” Landlord will “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.”

In the event that – at some point in the future – litigation arose out of this type of clause’s aspirational requirements, how might a trier of fact construe the landlord’s “reasonable efforts” and obligation to “operate and maintain” the building in a sustainable manner? The same question exists if the landlord places those same aspirational requirements on its tenants. There are no decisions (which I have been able to identify through a Westlaw search) that directly address this topic. However, at least under New York law, use restrictions in commercial leases will be strictly construed, although courts will construe leases in their entirety in order to ascertain the intent of the parties as to the demised premises’ use. It is therefore arguable that an aspirational green lease clause could be – in the event of a dispute – considered to be a requirement rather than strictly aspirational. Landlords and tenants considering green lease implementation should therefore consider the law of the jurisdiction governing the lease in order to appropriately assess how other clauses throughout the document may impact a court’s construction of their respective obligations.

An illustrative New York case is Qwakazi, Ltd. v. 107 West 86th Street Owners Corp., 123 A.D.2d 253, 506 N.Y.S.2d 162 (1st Dep’t 1986). There, the Appellate Division held that a commercial lease’s restrictions on the tenant’s use for a particular purpose had to be strictly construed under New York law. The lease clause in question was that the “Tenant shall use and occupy demised premises for sale of comic books, toys, posters, books solely.” Nevertheless, the tenant proceeded to sell video cassettes. The Appellate Division noted that “[a] landlord has a legal right to control the uses to which his building may be put by appropriate lease provisions, which to be effective must be enforced.” The court also stated that the tenant “was aware of the growing video cassette industry when it negotiated its present lease but did not include the sale and rental of video cassettes in the agreement as a permitted use. [The tenant] should not now be permitted to engage in a use of which it was aware but failed to include in its agreement.”

The scenario I imagine is where a tenant – who may not share the same green goals as the landlord – or vice versa – moves into space and doesn’t follow the environmental performance objective clause with any real precision. In the event of a dispute, how would a court construe the parties’ obligations? I’m also struck by the Appellate Division’s language in Qwakazi; if a tenant knows that leases are beginning to incorporate green requirements but fails to expressly incorporate them into its lease, that failure could be the basis for the landlord to argue that such uses are simply not permitted – even if they are included within broad, aspirational language.

For example, this issue recently arose tangentially in my practice where a developer client – whose project is seeking LEED for Core and Shell certification – decided that it wanted to require potential tenants to sign some sort of green lease. One potential tenant resisted, and our client approached us asking whether that tenant might jeopardize the client’s ability to earn its desired level of LEED certification (compelled, incidentally, by a corporate commitment to building all of its facilities to a predetermined level of LEED certification). As we discussed with the client, while potential tenants will have little impact on a LEED-CS application, if the building were to ongoing certification under LEED-EB:OM, an uncooperative tenant might play a role in impacting the project’s application – which could have serious consequences if the project seeks tax incentives or must otherwise comply with other emerging regulatory requirements. For that reason, we suggested precise lease language that identified the tenant’s specific obligations rather than broad aspirational strokes that might eventually leave the landlord without remedy in the event that its goals for third-party certification went unrealized due to circumstances created by the tenant.

These concepts are still largely legal theory at this point, but until aspirational green lease clauses are interpreted by the courts or more fully analyzed by legal scholars, landlords and tenants alike may be treading in dangerous waters when it comes to lease provisions that fail to specifically allocate the parties’ rights and responsibilities. These dangers are more acute in situations where the parties have competing visions and objectives when it comes to sustainable goals for the demised premises.

Article 1 of the Exhibit – Project Goals – allows the parties to describe the project’s green building aims with specificity and align their expectations from the beginning; as many insurers have observed, “claims begin with violated expectations.” Article 5 addresses some of the insurance claims which have been reported to date, and includes language that aims to manage the risks that may arise from the use of experimental products, designs, or building systems. (Note that “aggressive design” was one specific risk identified by Marsh in its report last summer about green building-related risks perceived by A/E/C executives).

However, Article 4 – Remedies, is the provision which I think deserves the most attention. It offers the owner and its design-builder a menu of options to choose in the event that the project fails to earn the anticipated level of LEED or other third-party certification, or other green building project goal that may be described elsewhere in the Exhibit. Critically, though, the obligation for determining whether any green building regulatory requirements exist with which the project must comply rests not with the design-builder, but with the owner. More on that in a moment.

With respect to how potential remedies are organized in Article 4, the owner can first expressly agree that a failure is not a breach of contract, and simply waive any claims against the design-builder arising out of the project’s failure “to satisfy or achieve LEED certification at any level or other sustainable standards.” If the owner’s green goals for the project are purely aspirational, this may be a viable request for the design-builder or contractor to make during negotiations. Of course, if third-party or other certification is required by code or other legislation, such a provision will likely be unacceptable to the owner.

Alternatively, the parties can agree to a fixed dollar amount as liquidated damages in the event of a failure. In this provision, the owner also provides the design-builder with a waiver of claims for other related damages, including consequential damages. As we have discussed here at GRELJ previously, this may be problematic for a variety of reasons. From a legal perspective, whether a liquidated damages provision in this context would be considered a penalty rather than a legitimate estimate of the damages the owner would stand to incur is still a question mark. It will likely be a significant period of time before we have a court opinion weighing on this critical issue.

Finally, the Exhibit includes what I believe to be the most interesting approach to allocating risk in Section 4.3. There, the parties can choose to impose a limited obligation to cure the project’s failure on the design-builder. This obligation is “to cure the situation through the addition, replacement or correction of materials, configurations, systems or equipments in order to obtain the level of LEED certification indicated above and/or to satisfy or achieve other sustainable standards as are identified, or as required by the Legal Requirements [defined in Article 3 of the Exhibit].”

However, the extent of the curing costs for which the design-builder will be responsible is limited to: (i) any remaining funds in the construction contingency (typically a percentage of the overall cost of the work that exists to cover unanticipated construction expenses, which requires the builder to obtain the owner’s prior written approval before accessing it); (ii) the design-builder’s share in the savings if the cost of the work comes in less than the design-builder’s guaranteed maximum price of the work; or (iii) a fixed sum agreed to by the parties.

What is also important to note about the Exhibit is that it places the obligation for determining the Legal Requirements (again, as defined in Article 3) squarely on the shoulders of the owner. In other words, the party which is generally in the least adequate position to determine what those legal requirements might be is actually responsible for them by contract. This makes little sense, and I cannot imagine an owner agreeing to carry that burden, particularly in the current regulatory climate which is changing so rapidly and varies so widely depending on the particular jurisdiction. It seems like an odd approach, and I am curious if anyone has any insight or feedback as to why DBIA crafted Article 3 in this manner.

The entire Exhibit is certainly worth reviewing in detail, but one other provision that I want to draw your particular attention to is Section 6.2, which states clearly that “[i]n no event shall the dates of Substantial Completion and Final Completion be contingent on any certification of the Project to meet any level of the USGBC’s LEED rating system or other similar system.” This is critical, particularly where project schedules are tight and other penalties – liquidated or otherwise – may begin accruing if substantial completion is not reached as required.

One other final thought – it’s also interesting to me that the first green building contract addendum – the AIA’s B214-2004 – purely addressed scope when it debuted three years ago. Notwithstanding the inherent limitations with form contracts and exhibits, and the fact that scope documents such as the B214 do remain useful tools for project teams, the industry clearly perceives risks arising out of green building projects. I anticipate that we will see more organizations developing and promoting similar consensus documents with risk management provisions as we continue to move forward in 2010.

We’ll start with the Lighting Upgrade Law, which amends Chapter 3 of title 28 of the New York City administrative code (i.e. the Building Code) and adds articles 310 – Required Upgrade of Lighting Systems – and 311 – Installation of Electrical Submeters in Tenant Spaces.

Article 310 of the Lighting Upgrade Law requires owners of all buildings larger than 50,000 square feet to upgrade the building’s lighting systems to energy efficient systems that comply with the standards for new lighting systems set forth in Section 805 of the New York City Energy Conservation Code (“NYCECC“) by January 1, 2025. Section 805 is actually part of the part of the Energy Conservation Construction Code of New York, which sets standards for the energy performance of buildings throughout the State of New York. (NYCECC, which we will discuss in much more detail in a subsequent article here at GRELJ, incorporates the state energy code by reference). Section 805 covers lighting system controls, the connection of ballasts, the maximum lighting power for interior applications, and minimum acceptable lighting equipment for exterior applications, but specifically excludes lighting within residential buildings from its purview.

Required upgrades are accomplished pursuant to Article 310 by installing or modifying the lighting system to comply with NYCECC’s standards for new systems for the following lighting elements: (i) lighting controls (including interior lighting controls, light reduction controls, and automatic lighting shutoff); (ii) tandem wiring; (iii) exit signs; (iv) interior lighting power requirements; and (v) exterior lighting. Owners must file a report with the Department of Buildings prepared by either a registered design professional or licensed master or special electrician certifying that the upgrade has been completed and that the work is in compliance with the technical standards of the New York City electrical code.

Upgrades are not required for (i) an element of a lighting system that is already in compliance with NYCECC; (ii) lighting power densities in any space bounded by permanent floor-to-ceiling partitions and/or closable doors that are in compliance with NYCECC; (iii) lighting systems within low-rise residential units (R2 or R3) or spaces that serve such units, including, but not limited to, hallways, laundry rooms, or boiler rooms; and (iv) lighting systems within houses of worship.

In addition, Section 311 of the Lighting Upgrade Law requires that, by January 1, 2025, owners or lessors of commercial buildings that are larger than 50,000 square feet measure the electrical consumption of certain covered tenant spaces by installing submeters. “Covered tenant spaces” are (i) individual tenant spaces larger than 10,000 square feet on one or more floors; or (ii) a floor that is larger than 10,000 square feet which consists of individual tenant spaces that are let or sublet to 2 or more tenants. For the latter, each individual tenant space can have its own submeter, share a submeter with the other tenant spaces on the floor, or share one submeter that covers the entire floor.

From a green leasing perspective, although submeters must be installed as set forth in Section 311, the Lighting Upgrade Law does not require the landlord to apportion the cost of electricity among the building’s tenants or subtenants in any particular fashion. However, the landlord is required to provide each tenant or subtenant within a covered tenant space with a monthly statement showing the amount of electricity measured by the submeter for each tenant or subtenant during the month, and any amount charged to the tenant or subtenant for electricity. If the covered tenant space is a floor with multiple tenancies (as described above), and the tenant’s submeter covers other tenant spaces, the statement for that tenant must show the electrical consumption for the area covered by the submeter and the percentage of that area which is leased by the tenant. As Model Green Lease Task Force head Alan Whitson frequently observes, “what gets measured gets improved,” a mantra which is clearly the basis for this provision within Section 311.

Next we’ll take a look at NYECC and some interesting legal aspects of the legislation that are making some of Gotham’s building owners and facility managers nervous about what could be coming next from the City Council.