In brief - Lease documents should take a cooperative approach to green provisions

It is essential that landlords and tenants discuss openly what the expectation of each party is with respect to environmental issues and that the lease document contains a co-operative approach to identifying and dealing with environmental issues and concerns.

A green lease should set out each party's requirements but also allow for flexibility

Both landlords and tenants are increasingly considering environmental issues as a key ingredient for incorporation into lease terms and negotiations.

Whilst parties should define the requirements and position of each party at the outset of the lease, the lease needs to be flexible to allow for inevitable changes throughout the term of the lease, particularly brought about by emerging technologies and trends for dealing with environmental issues.

Green leases have benefits for both landlord and tenant

In September 2012, the Council of Australian Governments issued the Green Lease Handbook which is meant to assist parties in considering environmental matters relating to the leasing of premises.

It is quite clear that having regard to environmental issues in the context of leasing obligations can lead to economic benefits for both the lessor and the lessee, as well as enhancing the corporate image of those parties by boosting their environmental credentials.

How do you monitor and measure environmental outcomes?

One of the essential ingredients the parties need to consider is benchmarking and what the appropriate measures are that need to be adopted for measuring the achievement of environmental outcomes.

Essential to having effective green lease provisions is co-operation between the landlord and the tenant to work towards common goals, with flexibility as to both outcomes and timeframes to allow for changes in circumstances.

An effective green lease provision needs to ensure that there is open and frank communication and sharing of information by the parties and co-operation with respect to monitoring and reporting and, where necessary, external assessment of outcomes.

Who pays for environmental provisions in a green lease?

Obviously, introducing green initiatives costs money. The landlord needs to discuss the allocation of the costs frankly. To a degree this allocation relates to the expected benefits to each party.

For the landlord, the benefits are that the costs of operating the building are reduced, the building is more attractive to tenants and the landlord's reputation and the desirability of its product are enhanced in the marketplace.

For the tenant, the benefits are the enhancement of its reputation in terms of corporate social responsibility, the provision of a better working environment with resulting better morale amongst staff and a reduction in building outgoings, potentially leading to reduced fees payable by the tenant.

Collaborative approach to achieving green targets

In negotiating green lease provisions, both parties must be cognisant of the fact that the non-achievement of green lease provision targets should not be tantamount to a normal breach of lease leading to termination or other draconian effects.

There should at least be notice and some sort of collaborative approach to resolve any non-achievement of green targets, with some form of mediation then being embarked upon.

Landlords particularly motivated to include green provisions in leases

Influencing the trend towards green lease provisions on the part of the landlord are the following factors:

  • Some tenants (particularly government departments) will not lease premises which do not meet certain green targets.
  • Under the Building Energy Efficiency Disclosure Act, sellers and landlords of commercial properties of at least 2,000m² are obliged to disclose NABERS energy ratings when offering the premises for sale or lease.
  • Both landlords and tenants are focused on reducing costs, particularly perceived increased costs by virtue of the introduction of the Australian carbon pricing mechanism from 1 July 2012.

Focus on specific aspects of building usage in green leases

The most commonly targeted areas for trying to achieve efficiencies are the following:

  • water usage
  • energy consumption
  • reusing materials or using recycled materials
  • reduction in emissions

Both parties need to give thought as to what type of rating mechanism should be used, and whether the NABERS system or the voluntary Green Star system (or both) may be appropriate.

Green leases can enhance landlord/tenant relationship and boost reputations

Consideration of green lease provisions is an emerging and increasing trend. Focusing on a collaborative approach is what serves the parties best in negotiating and implementing provisions of this type.

The outcomes will enhance not only the relationship but also the reputation (both internally and externally) of landlords and tenants.