Leases in 'green buildings' will require some fresh thinking

Green leases for commercial buildings are becoming more common as real estate operators begin to realize the benefit of making sustainability part of an overall commercial building investment strategy. Many developers are building new LEED-certified buildings as well as seeking LEED-EB certification for existing buildings. Many tenants, too, are now seeking to reduce their carbon footprints and meet corporate sustainability reporting requirements. Thus, green leases are becoming more common in the commercial leasing environment.

Requiring the landlord and tenant to act responsibly in terms of the most efficient use of materials and resources often results in lower operating costs to both parties. It has been estimated that a dual-incentive lease, a lease in which both parties have incentives to strive for lower energy and operating costs, may result in a 20 percent to 40 percent reduction in energy demand for a commercial green building. Green leases are also appealing to landlords because buildings with LEED certifications can translate to improved marketability and higher rents. In addition, the pressure on building owners to provide sustainable buildings will increase in coming years. Regulatory requirements are going to increasingly mandate green buildings. Moreover, tenants are increasingly going to demand green buildings.

The demand for green building starts with some basic assumptions. It is generally assumed that green buildings are "better" buildings. Green buildings are generally thought to minimize energy use, improve indoor air quality, maximize building comfort, reduce water consumption and minimize waste. What this means to landlords in general is a higher asset value, higher net operating income, lower operating and occupancy costs, potentially higher rental rates and lower turnover and vacancy rates. What this means to the tenant is lower operating costs, spaces that are more comfortable, more productive employees, marketing and branding value.

A green lease can provide a framework for landlord and tenant to work together to achieve green goals. A green lease assumes that tenant and landlord have an equal interest in reducing operating expenses. Green leases are nothing more than standard leases modified to remove barriers to sustainability, communicate shared environmental standards and goals, and provide greater assurance that these standards will be met by both parties. A successful green lease is one that motivates the parties involved to invest, operate, and work in a building that is environmentally friendly. A traditional lease becomes green by defining environmental standards and incorporating those standards into the related lease terms to ensure that everyone in the building is working to achieve predetermined levels of energy efficiency, water conservation, recycling, indoor environmental quality, and the use of environmentally preferred products and materials.

In order to develop an effective green building lease, an operator must preemptively create a lease structure that contains both negotiable and non-negotiable terms that are designed to impact a building's energy and environmental goals. For example, the lease may incorporate a compliance standard to require building occupants to recycle according to the building's green waste management and recycling standard. These standards may be more stringent than local codes. The lease may go so far as to require tenants to furnish their own recycling containers to keep costs equitable. The truly successful green lease must further define a failure to follow the recycling program as a material breach of the lease and impose consequences.

There are many ways in which to ensure that a green lease has a definite and positive impact for the landlord and the tenant. First, the parties should define the commercial green operating standard that they are seeking to achieve and draft the terms of the commercial lease in a manner that is consistent with achieving, or maintaining, that standard. Also it is important to define common area maintenance (CAM) pass-through costs and recoverable operating expenses to include the costs of green building expenditures, repairs and maintenance related items in commissioning. Next, an effective green lease will use lease terms which contemplate incorporating smart lighting techniques such as motion sensors, daylight sensors, timers and other ways to reduce unnecessary electricity use for lighting. Further, it will be beneficial to include environmental terms such as "carbon tax," "carbon offset credits," "renewable energy credits" and other specific terms in the standard lease language. Finally, it is critical to develop clearly defined recycling programs that are convenient and easy for tenants to follow.

Because the green lease is a relatively new concept, it is important for the landlord to distinguish new green language added to standard leases so that such terms do not come as a surprise. The green lease terms need to be clearly set forth in the Lease Agreement and there should be concise language spelling out the responsibilities both parties will meet in an effort to enforce the various green lease provisions. As always, communication of the terms of the lease and particularly the landlord's expectation of the tenant involved in a green lease is critical.

Green leases are going to become more common in the coming years. With clear and specific lease terms and communication between the parties, green leases will lead to a more sustainable building and better working environment for all.

Caryn S. Tijsseling is a partner in the law firm of Lewis and Roca LLP in Reno. Contact her at 321-3426 or CTijsseling@LRLaw.com.