Posted by: lcowie | December 29, 2009

LEED’s First Lawsuit

Southern Builders v. Shaw has surfaced as one of the first major lawsuits regarding LEED certification. The suit illustrates the critical importance of clear contract language for each stakeholder on a green construction project.

The lawsuit concerns the construction of a $7.5 million, 23-unit condominium project in Crisfield, Maryland, called the Captain’s Galley, which was completed back in 2006. The development includes a number of green design features that were intended to garner enough points to receive a LEED Silver rating.

Southern Builders foreclosed on the project. Shaw Development then countersued, partly because the building did not receive the expected LEED rating it was supposed to, which meant that Shaw lost green-tax credits under Maryland’s green building program.

Maryland offers state tax credits of up to 8 percent of a project’s total cost for buildings greater than 20,000 square feet. Only LEED projects are eligible to apply for the credits. The program requires applicants to first submit an Initial Credit Certificate Application to the Maryland Energy Administration. MEA then reviews the application and issues an Initial Credit Certificate, which sets forth the project’s maximum credit amount and sets an expiration date by which the project must receive a Final Credit Certificate.

Projects can only apply for the Final Credit Certificate upon receiving a certificate of occupancy after construction is complete, and a LEED AP must submit an Eligibility Certificate to MEA stating that the building meets the criteria necessary to receive the tax credit (i.e., it meets the requirements to qualify for a LEED Silver rating). However, if the Initial Credit Certificate expires prior to the project obtaining its Final Credit Certificate, the available credits are put back into the program’s pool, the project slides back in line, and must reapply to MEA.

It does not appear that there was language in the contract documents obligating Southern to secure any formal certification from USGBC. With respect to the tax credits, Southern was required to deliver a Certificate of Occupancy within 336 calendar days from the date of the agreement.

In the countersuit, Shaw alleged claims in both negligence and breach of contract against Southern for, among other failures, the contractor’s failure to “construct an environmentally sound ‘green building’ in conformance with the LEED rating system.” However, there was no detail in Shaw’s papers describing precisely how Southern was responsible for the $635,000.00 in lost tax credits.

Presumably, Southern failed to deliver the project to Shaw such that the latter could obtain a certificate of occupancy by the date specified in the Initial Credit Certificate; according to Shaw’s papers, the project remained incomplete “[n]early nine (9) months after the required completion date” (i.e., the 336 calendars specified in the A101).

The total amount in damages that Shaw sought was approximately $1.3 million. The damages it sought for the lost tax credits were the largest under any of its claims.

Though the Circuit Court judge did set the case for trial sometime in August of 2007, it appears that the matter has since settled out of court. Since no official decision was made, a precedent has not been set.

The critical lesson from the lawsuit is that there is no one-size-fits-all form agreement for a green construction project. What was needed here was a thorough understanding of existing state legislation. This legislation, when properly upheld, leads to tax credit in the case of a LEED project. Note to all contractors and project managers: do your research on any state or local legislation that requires a particular order of events prior to LEED certification. You will want to follow the necessary steps to achieve your certification, tax credit, or any other incentive.


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