A "Green" Lease? Some Things To Consider For Multi-Tenant Commercial Buildings.

Everyone supports a clean environment and conservation of resources, don’t they? Well, if you ask a landlord or tenant in a multi-tenant, commercial building, the answer may likely be, "it depends." For the past several years, there has been an effort to introduce and incorporate terms into leases that address environmental conservation and stewardship. This "greening" effort, while worthwhile to pursue, can sometimes be a challenge to implement. This article will provide examples of the manner in which a commercial lease can be made "green," or at least "greener," as well as the challenges of doing so.

A "green" lease is one that incorporates various incentives, standards, penalties, covenants, representations and warranties to achieve and allocate responsibility for environmentally friendly use of leased property. Common areas of emphasis in green leasing include reducing energy and water consumption, using alternative on-site energy sources (e.g. solar or wind), maximizing recycling, integrating waste management practices, and creating a healthy internal environment (e.g. improvement of indoor air quality).1

Before a green lease can be drafted, or before an existing lease can be "greened," the landlord and the tenant must share a similar "vision" as to what the "green" terms will be and how they will be implemented. Provisions that could be included in a "green" lease depend on the goals the parties expect to achieve. For instance, if the goal is to increase energy efficiency (decrease energy usage), a lease could provide terms that address the following:

  • Require the landlord to replace existing equipment and systems in the tenant space or building with more energy efficient heating, air conditioning and ventilating equipment, water heaters and other similar equipment.
  • Limit the tenant's access to the building after hours or on weekends to discourage overusage of the utilities and building services.
  • Require the tenant to maintain regular, routine maintenance on the systems and equipment located within the tenant's space to maximize efficient equipment operations.
  • Prohibit the tenant from making alterations to the tenant's space that would lower energy efficiency, such as removing water flow restrictors or installing non-CFL lighting fixtures.
  • Require that each tenant's space be submetered to monitor each tenant's energy usage and/or make the tenant responsible for payment of its own energy usage rather than passing the costs on to all building tenants by way of common area maintenance or "CAM" charges.

If the goal is to increase recycling of waste in tenant occupied spaces, a lease could provide terms that address the following:

  • Require the landlord to provide waste removal service providers that include recycling programs.
  • Require the landlord to provide, and the tenant to utilize, recycling containers designated for recycling of waste materials such as glass, metals, paper and plastic.
  • Require the landlord to provide, and tenant to utilize, secure disposal systems for sensitive or confidential documentation that can be shredded by a qualified disposal service provider for recycling.
Of course, the implementation of any program to "green" a lease does not come without cost. Reaching agreement on the terms of such a program, including target levels, who pays, and how much, can be challenging. For example, if submetering of utilities is to be implemented, who will pay for installation of the submeters? Will the landlord and tenant share the cost, will one party absorb all of it, or will there be a tiered payment allocation depending upon the success or failure of the efficiency efforts? As for the energy efficiency targets themselves, what will those amounts be and what will the rewards or penalties be for meeting or not meeting the targets? And for the maintenance contracts, if the contractors charge higher fees for performing their work in accordance with the required energy efficiency standards, who will pay that premium?

In addition to these types of issues, the manner in which a lease is structured could have built in incentives or disincentives to both the landlord and the tenant when it comes to implementing environmentally sound practices. For instance, under the terms of a "gross" lease, the tenant pays a fixed amount each month to the landlord for rent that covers all expenses which the landlord incurs in connection with operation of the building in which the tenant's space is located, including real estate taxes, insurance and CAM expenses. The landlord would have no incentive to install expensive high efficiency equipment in a building with gross leases unless the cost savings in energy usage by tenants of the building would exceed the amortized costs of the improvements. Conversely, a tenant would have no incentive to improve energy efficiency because overusage would not result in increased rental costs to the tenant. In a "pass through" lease, the tenant pays a designated base monthly rent, but is also responsible for its proportionate share of insurance, taxes and CAM incurred by the landlord. In that instance, the landlord may have no qualms about installing energy efficient equipment because the landlord can pass through the amortized cost to the building tenants. The tenant only benefits if the energy savings included in CAM charges of the landlord exceed the landlord's amortized cost of the equipment.

These are examples of the issues that must be addressed in connection with the "greening" of any tenant lease. Our firm represents both landlords and tenants in the negotiation and preparation of commercial real estate leases, including "green" leases. If you have questions regarding a commercial lease, or questions concerning any other real estate issues, please contact William M. Brennan or any of our other experienced real estate attorneys to assist you.

1Perkins Coie, Green Leasing: Addressing Sustainability in Your Lease (May 2009)

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