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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

  • 1. Suretyship and Green Building Chris Cheatham, LEED AP, Esq. www.greenbuildinglawupdate.com
  • 2. 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
  • 3. [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
  • 4. [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
  • 5. [TITLE OF PRESENTATION] Suretyship 101 Three parties - tripartite agreement: Creditor Debtor Surety Chris Cheatham - www.greenbuildinglawupdate.com
  • 6. [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
  • 7. [TITLE OF PRESENTATION] Suretyship 101 But what if Debtor fails to pay or perform? Creditor Debtor Surety Chris Cheatham - www.greenbuildinglawupdate.com
  • 8. [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
  • 9. [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
  • 10. [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
  • 11. [TITLE BondsPRESENTATION] OF in Construction Surety and Construction: Developer Guy Contractor Guy Surety Guy Chris Cheatham - www.greenbuildinglawupdate.com
  • 12. [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
  • 13. [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
  • 14. [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
  • 15. [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
  • 16. [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
  • 17. [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
  • 18. [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
  • 19. [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
  • 20. [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
  • 21. [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
  • 22. [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
  • 23. [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
  • 24. [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
  • 25. [TITLE OF PRESENTATION] Suretyship and Green Building Arlington County has successfully required and released two bonds. Developer Guy and Surety Guy Happy!
  • 26. 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
  • 27. Suretyship and Green Building Want to learn more? www.greenbuildinglawupdate.com chris@greenbuildinglawupdate.com Chris Cheatham - www.greenbuildinglawupdate.com