Suretyship and Green Building

Suretyship and Green Building Chris Cheatham, LEED AP, Esq. www.greenbuildinglawupdate.com

Suretyship and Green Building What will you learn? 1. Surety enters into three-party contract with owner, contractor 2. Performance bond guarantees contractor will build to plans 3. Bonds can be used to enforce green building requirements Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OF PRESENTATION] Suretyship and Green Building Agenda • Suretyship 101 • Bonds in Construction • A Surety’s Role in Green Building • Bonds as Enforcement Mechanism Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OF PRESENTATION] Suretyship 101 Mandatory, unintelligible deﬁnition: Suretyship is a “contractual relationship whereby one person engages to be answerable for the debt or default of another.” -Sterns, The Law of Suretyship 1 (1951) Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OF PRESENTATION] Suretyship 101 Three parties - tripartite agreement: Creditor Debtor Surety Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OF PRESENTATION] Suretyship 101 Two key surety rules: (1) Debtor is responsible to satisfy obligation to pay or perform Creditor Debtor Surety Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OF PRESENTATION] Suretyship 101 But what if Debtor fails to pay or perform? Creditor Debtor Surety Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OF PRESENTATION] Suretyship 101 Two key surety rules: (2) If debtor fails to pay or perform and another party, who has previously promised to pay debt or perform obligation satisﬁes the debt, then performing party can receive reimbursement for payment. Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OF PRESENTATION] Suretyship and Green Building Suretyship 101 Two key surety rules: (2) Debtor fails, Surety performs, Surety reimbursed by Debtor Creditor Debtor Surety Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OF PRESENTATION] Suretyship and Green Building Suretyship 101 What does surety get? 1. Premium paid by debtor 2. Debtor’s duty of reimbursement (indemniﬁcation agreement) Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE BondsPRESENTATION] OF in Construction Surety and Construction: Developer Guy Contractor Guy Surety Guy Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE BondsPRESENTATION] OF in Construction Surety and Construction: surety is answerable, Developer Guy through bond, for debt or default of contractor to owner. Contractor Guy Surety Guy Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE BondsPRESENTATION] OF in Construction Three types of surety bonds for construction: 1. Payment Bond 2. Bid Bond 3. Performance Bond Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE BondsPRESENTATION] OF in Construction Payment Bond • Guarantees owner that subcontractors will be paid monies due by contractor Bid Bond • Guarantees owner that contractor will honor bid and sign contract Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE BondsPRESENTATION] OF in Construction Performance Bond • Surety guarantees satisfactory completion of project by contractor • Contractor must build according to plans and speciﬁcations • Otherwise surety must (1) complete project or (2) allow owner to complete, surety pays costs Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OFRole in Green Building A Surety’s PRESENTATION] 1. Green Roof Leaks 3. Surety Pays 2. Contractor Developer or Defaults Rebuilds Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OFRole in Green Building A Surety’s PRESENTATION] Fact: Sureties are already bonding green building projects Fact: Sureties are just now assessing inherent green building project risks Fact: No major surety has speciﬁc green building bond Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OFRole in Green Building A Surety’s PRESENTATION] How Underwriters Can Assess Surety’s Risk in Green Building: 1. Is it a green building project? 2. Did contractor guarantee certiﬁcation? 3. What green strategies involved? 4. What green regulations apply? 5. Is compliance achievable? Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE as Enforcement Mechanism Bonds OF PRESENTATION] • Green building regulations require enforcement mechanisms • Entities using bonds as enforcement mechanisms: • Washington, D.C. • Arlington County Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE as Enforcement Mechanism Bonds OF PRESENTATION] Washington, D.C. - Green Building Act of 2006 Section 4 - starting January 1, 2012, private projects • greater than 50,000 square feet must be LEED certiﬁed “(b) On or before January 1, 2012, all applicants for • construction governed by section 4 shall provide a performance bond” “(g) All or part of the performance bond shall be • forfeited to the District and deposited in the Green Building Fund if the building fails to meet the veriﬁcation requirements described in sections 3 and 4.” Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE as Enforcement Mechanism Bonds OF PRESENTATION] Surety and Fidelity Association of America and Surety Bond Producers: Letter to Government of D.C., August 13, 2007 • “The new law incorrectly uses the term ‘performance bond.’ In • short, the performance bond assures that the construction contract, and therefore, the project will be completed.” The bond in the Green Building Act “seems to function more in • the manner of a license or compliance bond, which typically guarantees compliance with a law or code.” Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE as Enforcement Mechanism Bonds OF PRESENTATION] “Surety groups fear risks in D.C. green building act” Washington Business Journal, December 12, 2008 • “Alan Heymannn, a spokesman for the D.C. Department of the • Environment, said his agency has formed a working group with the Department of Consumer and Regulatory Affairs to address the surety industry’s concerns.” Surety Guy is Happy! Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE as Enforcement Mechanism Bonds OF PRESENTATION] Arlington County - Bonus Density Program • Developer declares intent to achieve LEED certiﬁcation • Developer applies for FAR variance • .15 - certiﬁed • .25 - silver • .35 - gold/platinum Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE as Enforcement Mechanism Bonds OF PRESENTATION] Arlington County - Bonus Density Program • Enforcement Mechanism: Bond • Bond = Bonus Space * Rental Rate • Developer posts when 75% complete • Bond released upon certiﬁcation Chris Cheatham - www.greenbuildinglawupdate.com

[TITLE OF PRESENTATION] Suretyship and Green Building Arlington County has successfully required and released two bonds. Developer Guy and Surety Guy Happy!

Suretyship and Green Building What did you learn? 1. Surety enters into three-party contract with owner, contractor 2. Performance bond guarantees contractor will build to plans 3. Bonds can be used to enforce green building requirements Chris Cheatham - www.greenbuildinglawupdate.com

Suretyship and Green Building Want to learn more? www.greenbuildinglawupdate.com chris@greenbuildinglawupdate.com Chris Cheatham - www.greenbuildinglawupdate.com

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Suretyship and Green Building

by Chris Cheatham

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