In an era of depleting natural resources, growing global climate change, corporate social responsibility and demands for environmentally friendly solutions, several businesses are increasingly committed to developing and implementing sustainable development projects, including in the area of real estate.
The Ottawa-based Canada Green Building Council estimates that buildings account for the use of a third of Canada’s energy production, 50 per cent of the extracted natural resources, 25 per cent of landfill waste, 10 per cent of airborne particulates, and 35 per cent of greenhouse gases. Yet, the council maintains, the inefficiencies of conventional construction and property-management practices are such that new environmentally sustainable standards and practices could reduce the contribution of buildings to global climate change by as much as 70 per cent, at the same time benefiting tenants and landlords, not only by cutting costs, but also by improving people’s working and living environments.
The decision to develop green buildings is not only a sign of the times but it also represents a timely business decision and a good investment. Among other things, green buildings are considered more efficient and more suited for the people who will occupy them. But the construction of green buildings is only part of the solution for a better environment. Green leases provide the ability to further improve the environment over the course of the life of a building, while also benefitting both landlords and the tenants who occupy them.
Green Lease – A Definition
Generally, a green lease is a lease that incorporates ecologically sustainable development principles to ensure that the use and operation of a building minimizes the impact on the environment. The Real Property Association of Canada (REALpac) defines a green lease as follows: “A lease that seeks to remove disincentives in a commercial lease to reduce energy, water and raw material consumption, increased recycling, as well as the use of sustainable materials in tenant improvements, and encourages sustainable practices by both the landlord and the tenant. A green lease works to ensure that tenants and landlords are required to adopt environmentally friendly practices.”
The Current Situation in Canada
Although green leases and initiatives are not as wide-ranging in Canada as in Australia who is a world leader in green buildings, green building initiatives are on the rise in Canada. As part of its Sustainable Development Strategy, Public Works and Government Services Canada has been developing green lease standards ever since 2004. Up until now, government departments and agencies have applied these standards to over 70 new leases or lease renewals.
In March 2008, Bentall Capital, a Canadian-based industry-leading real estate advisory and services organization, launched the “ForeverGreen” brand to support its sustainability initiatives. Although it does not represent a green lease per se, the new “ForeverGreen” brand will be used to identify initiatives that relate directly or indirectly to responsible property management at more than 600 Bentall-managed properties across Canada and in the United States. In addition, Bentall has developed a Tenant Green Design Guide to offer to tenants, although it is not compulsory.
On June 1, 2008 the Real Property Association of Canada (REALpac) released a precedent Green Lease based on National Standard Office Lease Q4 07. According to REALPac, “the lease provides landlords and tenants with the ability to set targets for energy, water, indoor-air quality, and recycling, and enables landlords to carry out “green” renovations to existing building stock.”
Other important initiatives include BOMA’s “Go Green” and “Go Green Plus” programs, that were launched in 2005. The Go Green programs were designed solely for existing and occupied buildings, and recognize those buildings where environmental best practices had been implemented into the operations, including the following components: identification of a “best practices” benchmark for professionally managed buildings; recognizing buildings that meet or exceed the requirements inherent in the benchmark with a “Go Green” designation; and assisting buildings that cannot meet the requirements. Since launching the programs, BOMA certified over 800 commercial buildings. Recently, BOMA has updated these programs and combined them into a streamlined certification program called BOMA BESt. The new BOMA BESt program integrates the GO Green programs to provide a better program that has four possible levels of certification for participants.
Components of a Green Lease Agreement
The main components of a green lease agreement include the following:
- An Environmental Management Plan in which targets and benchmarks for both landlord and tenant are set out to ensure environmental performance. The plan must also include provisions to issue penalties for any failure to meet the targets and incentives when targets are exceeded.
- Rules, regulations or principles regarding energy use, indoor air quality and materials used in a building.
- Dispute resolution mechanisms to govern disputes between landlord and tenant regarding the targets and benchmarks included in the Environmental Management Plan.
A standard or a model green lease agreement will often set out provisions that are considered beneficial or necessary to both the landlord and tenant. The two parties often require that buildings be operated in environmentally responsible ways, particularly when the companies involved have made sustainability a key part of their business plan. The provisions to which the landlord and tenant mutually agree on often include the following:
- A list of environmentally preferable or environmentally friendly products (e.g. tenant amenities and equipment, janitorial or maintenance services, etc.)
- Water conservation measures (e.g. low flow toilets, rainwater catchment, waste water reuse, etc.)
- Energy conservation/efficiency targets
- Indoor air quality standards
- Permissibility of solar or wind applications
- Recycling rooms and practices
In addition, a model green lease agreement may include clauses that allow a landlord to amortize the costs related to a project in order to reduce any environmental impact as long as these costs do not exceed savings. The agreement should also include strong hazardous materials clauses to make sure that neither the landlord nor the tenant violates any laws or regulations in this regard. A clause, that would allow the landlord to enter the premises to verify environmental compliance and conduct audits, should be added to the green lease agreement. The creation of a “Green Initiatives” Landlord-Tenant Committee should also be encouraged to ensure the proper implementation of the green lease agreement.
Advantages of a Green Lease for the Landlord and Tenant
A well-thought out and properly implemented green lease entails several advantages for both the landlord and tenant. A green lease will, among other things, help a landlord maximize its long-term return on investment – and therefore profitability – as a result of reduced maintenance costs. It will ensure longer life cycles for commercial buildings. A green lease will also enhance the landlord’s reputation, which will in turn translate into positive public relations. Considering the fact that green buildings command prices that are usually 30% more than ordinary buildings, the landlord would benefit from higher property assessments (although in Ontario, this usually results in higher municipal property taxes).
As for the tenant, the benefits associated with a green lease are no less significant. It enables the tenant to attract and retain talented and key employees because of an improved work environment. As is the case with the landlord, a green lease will enhance the tenant’s reputation and promote positive public relations. The tenant’s rent should also be reduced because of increased efficiency in green building operations. The implementation of a green lease will help improve employee productivity and well-being. It will also reduce potential liability regarding occupational health and safety claims.
Difficulties in Implementing a Green Lease
Despite the advantages it entails for both the landlord and tenant, implementing a green lease is easier said than done. In other words, there may be several hurdles or barriers, which hamper the initiatives of a landlord who wishes to make his building more energy, water and resource efficient. Here are a few examples of such barriers:
- A green lease does not adapt well to a "net" lease environment where there is little incentive for the landlord to conserve.
- When negotiating a lease, the emphasis is still put on "base-rent", which means that reductions (or potential reductions) in additional rent are not considered important in the decision to enter into a lease of a specific site.
- There are usually long pay-back periods for some type of improvements.
- There is generally little, if any, leadership, compulsion or incentive from governments.
- No clear measurement systems are in place to accurately determine efficiencies in terms of water, natural gas or electricity.
- A lack of skill or knowledge regarding achievable targets by either the landlord or the tenant.
- A lack of available capital.
- Restrictions in current leases or individual master lease documents make it hard to adapt it into a green lease.
Best Case Scenario
Green leases work best and are efficiently implemented when certain specific elements are included in the lease documents or agreed upon by both the landlord and tenant, such as the following:
- Reasonable and achievable targets and benchmarks in terms of objective measures to help ensure the environmental performance of the building, whether these measures relate to water an energy reduction, waste reduction, or waste and water recycling.
- There is a shared sense of involvement in achieving sustainability between the landlord and tenant, and they fully cooperate in that regard.
- Well designed performance standards are included in the lease documents to help measure environmental performance.
- There are only a few related organizations in the building with shared interest, which in turn helps reduce the risks of conflicts or disputes.
- The green lease includes an Environmental Management Plan and a Green Lease Schedule.
The Time is NOW
When should we start implementing a green lease structure in Canada? The answer is as concise as it is clear-cut: the time is NOW! The crucial role that green building standards and energy conservation measures can play in addressing global warming is now well documented and generally accepted by landlords and tenants. Putting in place green leases for existing buildings may take some time to implement so the sooner landlords and tenants discuss “green” initiatives, the sooner green leases will become the standard.