Suretyship and Green Building

Chris Cheatham, LEED AP, Esq.www.greenbuildinglawupdate.com

Suretyship andGreen Building

http://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]Agenda

• Suretyship 101

• Bonds in Construction

• A Surety’s Role in Green Building

• Bonds as Enforcement Mechanism





[TITLE OF PRESENTATION]Suretyship 101


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)

Mandatory, unintelligible definition:

[TITLE OF PRESENTATION]Three parties - tripartite agreement:

Suretyship 101


Creditor

Debtor Surety



[TITLE OF PRESENTATION]Two key surety rules:

(1) Debtor is responsible to satisfy obligation to pay or perform

Suretyship 101


Creditor

Debtor Surety



[TITLE OF PRESENTATION]But what if Debtor fails to pay or perform?

Suretyship 101


Creditor

Debtor Surety




(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.

Suretyship 101





(2) Debtor fails, Surety performs, Surety reimbursed by Debtor





Creditor

Debtor Surety



[TITLE OF PRESENTATION]Suretyship and Green Building




What does surety get?

1. Premium paid by debtor

2. Debtor’s duty of reimbursement (indemnification agreement)

[TITLE OF PRESENTATION]Bonds in Construction


Developer Guy

Contractor Guy Surety Guy

Surety and Construction:

[TITLE OF PRESENTATION]Bonds in Construction


Developer Guy

Contractor Guy Surety Guy

surety is answerable, through bond, for debt or default of contractor to owner.

Surety and Construction:

[TITLE OF PRESENTATION]

Three types of surety bonds for construction:

1. Payment Bond

2. Bid Bond

3. Performance Bond

Bonds in Construction




[TITLE OF PRESENTATION]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





[TITLE OF PRESENTATION]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





[TITLE OF PRESENTATION]Performance Bond

A Surety’s Role in Green Building


1. Green Roof Leaks

2. Contractor Defaults

3. Surety Pays Developer or

Rebuilds



[TITLE OF 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





[TITLE OF 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?





[TITLE OF PRESENTATION]• Green building regulations require

enforcement mechanisms

• Entities using bonds as enforcement mechanisms:

• Washington, D.C.

• Arlington County

Bonds as Enforcement Mechanism




[TITLE 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.”





[TITLE 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.”





[TITLE 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!



[TITLE 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





[TITLE OF PRESENTATION]Arlington County - Bonus Density Program

• Enforcement Mechanism: Bond

• Bond = Bonus Space * Rental Rate

• Developer posts when 75% complete

• Bond released upon certification





[TITLE OF PRESENTATION]Suretyship and Green Building

Developer Guy and Surety Guy Happy!

Arlington County has successfully required and released two bonds.


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





Want to learn more?

www.greenbuildinglawupdate.com

[email protected] Cheatham - www.greenbuildinglawupdate.com



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Date post:	20-Oct-2014
Category:	Business
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