Exploring the legal aspects of LEED

By Beth Jacobs and Jennifer Vallier

The U.S. Green Building Council established the Leadership in Energy and Environmental Design rating system in 1999.

It has become a benchmark for distinguishing green from conventional buildings by measuring and documenting sustainable practices for new construction projects and offering evaluation programs for existing buildings, commercial interiors, retail, core and shell, neighborhood development and residential homes.

Local, state and federal governments promote sustainable development through financial incentives and regulatory mandates. Gov. Jim Doyle signaled his commitment to sustainable development in Wisconsin by signing Executive Order 145, which requires sustainable design, construction, operation and maintenance practices for all state buildings based on LEED principals. While green development is voluntary for private projects in Wisconsin, additional regulatory measures and government support are anticipated.

Developers, architects and contractors embracing sustainability and developing expertise in green design and construction techniques will benefit from new business opportunities.

But such increased demand for sustainability may impose new liabilities on the industry and lead to more jockeying among service providers to shift that risk.

LEED point categories include sustainable site features, water and energy efficiency, materials, indoor environmental quality and innovation in design. Before committing to a particular LEED standard, one must investigate feasibility given the project site, building use and other factors.

The degree to which a party can control the project features that determine LEED points will be a key factor in contract negotiations. For example, a tenant may insist on Italian tile rather than a local product, giving up LEED points for materials sourcing.

If a tenant has leverage to require LEED certification in its lease, it is reasonable for the developer to require the tenant to comply with LEED standards in materials selection. In a multitenant building, the core and shell certification is an attractive option, eliminating the obligation to certify tenant improvements.

Once a developer commits to achieve LEED certification, there is a strong incentive to impose a contractual obligation on the architect and contractor to fulfill the sustainable design, construction methodology and documentation obligations.

Similarly, architects and contractors will want to pass such obligations on to their consultants and subcontractors. This might also impact the negotiation of other key contract provisions, including substantial completion, payment procedures, liquidated damages, limits on liability and warranties.

Imagine a project seeking gold LEED certification where the contractor completes the building on time and in accordance with specifications, but the LEED documentation has not yet been submitted to USGBC. Has the contractor achieved substantial or final completion? Can the owner withhold payment until certification is awarded? If the project receives only silver status, does the owner have claims against the architect or contractor? Will the economic loss doctrine apply in this context? Can the owner require an appeal of USGBC’s decision or a building modification for gold certification?

The answer to all of these questions is possibly. It depends on the language of the contract and how it is interpreted under applicable law.

If a developer desires green features but doesn’t require LEED certification, the parties may sidestep the increased liability issue by keeping the contract simple.

The architect conducts value engineering for sustainability, incorporating into the project only features selected by the owner.

This might not always be suitable, in particular for high-profile projects or where LEED certification is required by an anchor tenant or is a condition attached to public funds. When pursuing a LEED project, carefully negotiate the contract documents and exercise control over the variables governing LEED status where possible. It’s also advisable to submit documentation in phases throughout the project and target more LEED points than necessary for the desired certification, hedging against possible points rejection.

Green development is here to stay. Evaluating the risks and addressing them through contract negotiation will help you minimize liability and take advantage of your expertise in greendevelopment.

Jennifer Vallier and Beth Jacobs are attorneys with the Real Estate Practice Group in the Milwaukee office of Godfrey & Kahn. For additional information, contact them at 414-273-3500 or jvallier@gklaw.com, bjacobs@gklaw.com.