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Real Property & Development Review

Potential Legal Effects of LEED Lawsuit

Posted in Environmental

As published in the Daily Journal of Commerce

Last month, Henry Gifford, a “building design and construction professional” and frequent critic of LEED certified buildings, filed a class action lawsuit in the United States District Court for the Southern District of New York against the U.S. Green Building Council, claiming $100 million in damages. The USGBC is a nonprofit organization that developed the Leadership in Energy and Environmental Design certification system for rating “green buildings.”

Gifford’s suit makes several allegations, but perhaps the most shocking is his claim that the council committed fraud by intentionally omitting information about the energy efficiency of LEED certified buildings. Gifford also alleges that the LEED rating system actually harms the environment, because it leads consumers away from proven methods of saving energy.

The USGBC and its LEED rating system have always had their critics. Fraud, however, is a serious allegation. But fraud also is a tough legal standard to meet.

The key to any successful lawsuit based upon a claim of fraud is for the plaintiff to prove that the defendant intended to mislead the defendant. While there is no general consensus on the long-term cost benefits of LEED certified buildings, there are several published studies that show they have numerous benefits, including reduced energy consumption. It seems unlikely to us, then, that the USGBC intended to mislead consumers into thinking that LEED certified buildings are energy efficient when they’re not.

The question we’ve been asking ourselves, however, is this: if Gifford succeeds with his lawsuit, what legal effects will this have on the green building industry, LEED certified buildings, and project owners seeking LEED certification?

There are several legal hurdles, however, that must be cleared before the lawsuit can be heard.

Fred Burnside, an attorney in Davis Wright Tremaine’s Seattle office who represents clients in class action lawsuits, says it will be nearly impossible for the class to be certified. In order to proceed as a class action lawsuit, the plaintiff must show that on a class-wide basis, each of the individuals sought LEED certification for the same exact reason.

It is probably true that many building owners are motivated to seek LEED certification because of concerns about energy costs. However, many seek LEED certification for other reasons, such as desiring to attract green-conscious tenants or receive government incentives tied to using renewable energy.

Legal effects of a successful lawsuit would most likely be minimal. The main issue could be effects on building owners or developers who received tax credits or deductions based on LEED certification.

Brian Todd, a tax attorney in the Seattle office of Davis Wright Tremaine, believes that even if Gifford’s lawsuit were successful, governments would be unlikely to ask building owners to disgorge any such incentives. More likely, however, would be revisions of regulations to include energy auditing, which could lead to penalties. Or we might see changes similar to the claw-back provisions for other tax incentive benchmarks.

Gifford’s lawsuit is not likely to impact the LEED certification process. It should, however, act as a wake-up call to the industry. Tenants have a significant impact on the energy efficiency of a building. If they are unaware of such features, the result may be higher-than-anticipated energy bills and less-than-happy tenants.

Landlords should be vigilant in choosing property managers familiar with energy-saving practices, and should retain qualified legal counsel to negotiate leases that include specific energy-saving rules and regulations. Carefully drafted management contracts and leases can help shift the risk burden to the property manager or tenants if energy-efficiency standards are not met.

As a specific example, individual space heaters are generally inefficient and their use is often prohibited under commercial leases. A violation of this rule is usually considered a general default of the lease, and remedies are usually inappropriate (e.g. termination of the lease).

However, landlords can include “green defaults” with specific remedies that fit the violation and shift the financial burden of failing a post-certification audit onto a tenant. These considerations would be prudent even if Gifford’s lawsuit had not been filed, since the USGBC, in its latest version of LEED, has incorporated post-completion energy auditing requirements, and may even consider revoking LEED certification from buildings that do not perform up to standards.

Time will tell if Gifford’s lawsuit is a harbinger of troubles for the USGBC and LEED, or if this is merely a speed bump in the industry’s race to construct buildings with greater energy efficiency.

  • Thank you for putting this article together. I’ve been working as a property manager for a few years now. I should spend more time keeping up with laws like these that will directly effect my job. I wasn’t aware of this one though. Thanks!