As sustainable development becomes a greater focus of the real estate industry, it becomes necessary to structure the relationship between landlords and tenants in a way that will enhance sustainability over the long term, giving incentives for both parties to do the environmentally responsible thing. As a result, industry professionals are increasingly turning their attention to the concept of a “Green Lease,” which incorporates environmental standards of conduct for both the landlord and tenant in the initial buildout and throughout the term of the lease, affecting such areas as energy efficiency, water efficiency, and waste minimization.
Typical commercial buildings are energy hogs. While this may have been an acceptable cost of doing business for landlords and tenants in the past, energy costs have forced efficiency to the forefront. Some analysts anticipate that President Obama’s energy efficiency initiatives will entail more stringent building standards, such as making new buildings carbon neutral and improving existing building efficiency. Yet regardless of legislation, both landlords and tenants are starting to demand Green Leases as industry standards evolve.
While no two leases are exactly alike, certain principles of sustainability cut across a variety of commercial leasing contexts. Below are some issues to consider when contemplating a Green Lease:
- LEED Standards.
Leadership in Energy and Environmental Design (LEED) stan- Green Strategies Client Bulletin No. 02-07 Green Strategies Client Bulletin dards and accreditation, which impose certain efficient design fundamentals, are important to many tenants when seeking to lease space. The tenant may require certain levels of certification and the landlord can use these certifications as a product differentiator, and possibly obtain higher base rents.
- Tenant Responsibilities for Operations.
A Green Lease may require the tenant to operate the premises in a sustainable manner. For example, a Green Lease could establish rules and regulations that govern the sustainable aspects of the building and the premises. These rules might address, for example, the types of chemicals a tenant is allowed to use in the Premises, or building standards for the sorting and recycling of waste products. Each tenant’s utility usage also needs to be monitored to avoid unnecessary waste. Even if the tenant is willing to pay for utility usage as additional rent under the lease, incentives can be put in place to help meet both business and energy efficiency goals. For instance, additional charges can be imposed (or carbon offsets can be required) if a tenant’s employees are careless in their use of energy, or use of non-energy-efficient lighting or appliances (i.e. space heaters, etc.). Such charges can provide an incentive for tenants to monitor their employees’ energy use.
- Landlord Responsibilities.
If the tenant is required to follow stringent standards, then the landlord must agree to play by the same rules. Thus, a Green Lease may also require the landlord and its contractors to use environmentally responsible cleaners and products when providing services to tenants. In addition, all maintenance and repairs of the building should meet the same standards.
- Buildout of Premises.
Many of the key decisions which determine the sustainability of the Premises are made during the initial buildout. In a LEED building, this buildout will need to be done in accordance with LEED standards for commercial interiors (which will include standards for removal of construction waste, maintenance of indoor air quality during construction, efficiency in water use, etc.) and the professionals involved should be LEED accredited.
Tenant turnover can result in a large amount of waste if tenant fixtures are not recycled. A Green Lease may contain options for recycling tenant improvements for use by the next tenant so as to reduce this waste.
- Ongoing Capital Improvements.
Since typical leases are long term, technology is bound to change over the span of the lease. A Green Lease should allow the landlord to respond to changes, and invest in efficient technologies that will allow the building to sustain green building standards. For example, if a landlord installs energy conservation or labor-saving devices to reduce operating expenses, the landlord may be allowed to recoup the amortized cost of such improvements over several years through a charge to the tenant’s operating expenses.
- Behavior of Tenant Employees/Visitors.
A Green Lease may provide incentives for the tenant’s employees and visitors to reduce their impact on the environment. As a possible incentive to promote carpooling or use of public transportation, a Green Lease could provide that the tenant will receive a rent reduction if average daily parking is below a certain percentage of the tenant’s employees.
Is It Greener?
Since green buildings involve unique costs and rewards, a Green Lease can help allocate the costs involved in constructing and maintaining green building space and serve to distribute the benefits that follow from that energy-efficient design. With a Green Lease, a landlord and a tenant can partner to promote sustainability and conserve energy costs—and that will be in everyone’s interest over the long term.