shutterstock_207665953.jpgA green commercial building benefits not only the environment, but landlords and tenants. The promises of lower utility costs, better indoor air quality, higher property value, improved employee morale, and good will that go along with aiding the planet have pushed so-called green leases toward the mainstream. In the wake of the COVID-19 pandemic, which has frequently pitted commercial landlords and tenants against one another as the demand for commercial space has teetered, green leases have the potential to unite tenants and landlords toward a common goal of making their space more sustainable. 

Green Leases

A green lease is a rental agreement in which landlords and tenants commit to certain sustainable practices. The agreement may provide financial incentives to tenants for decreasing their energy usage, conserving water, recycling, or engaging in other sustainable actions. Green leases also detail who will pay for energy efficiency renovations and how tenants and landlords will benefit from the savings. 

Rather than a specific type of document, a green lease refers to a series of provisions that can be added to a standard lease document. Like any lease, it can be tailored to the needs and goals of the landlord, tenant and building. When negotiating a green lease, the landlord and tenant must come to a consensus on their sustainability goals, how they will measure progress, and what will happen if either party fails to live up to their end of the bargain. Below are some common elements of a green lease. 

Pass-Through Clauses

Green leases are particularly effective at creating change because they align the incentives of landlords and tenants to make environmental improvements and operate more efficiently. With traditional net leases, landlords pay for capital expenses, such as upgrades to HVAC systems, while tenants pay for utilities and other operating expenses. This creates little financial incentive for landlords to invest in energy-efficient upgrades, since the tenants would reap most of the cost savings. On the other hand, with a full-service or gross lease, in which the landlord covers the utility costs, the landlord is incentivized to improve energy efficiency, but the tenant derives no financial benefit from limiting consumption.  

Designing the lease so that the landlord and tenant share the costs of the energy-efficient upgrades and the benefits of the lower utility bills will create a win-win for both sides. A pass-through clause could be incorporated to allow the landlord to pass all or part of the costs of the upgrades to the tenant as operating expenses, provided the costs are lower than the tenants’ expected savings. 

Material Purchasing Provisions

The lease can include a provision stating that the landlord and tenant will adhere to purchasing environmentally friendly products, such as Energy Star-qualified or other efficient office equipment and appliances; products containing Forest Stewardship Council-certified wood; products sourced from within a certain number of miles of the property; low- or no-VOC paints, furniture and carpeting; and nonhazardous cleaning materials.  

Operational Clauses

Operational clauses, which focus on operational parameters for buildings, can be used to support the sustainability goals of the landlord and the tenant. For instance, an operational clause can outline formal building operating hours and acceptable temperature ranges during those hours and outside those hours. Operational clauses can also specify how landlords and tenants will collaborate on recycling and water conservation programs. 

Measuring and Reporting Data

The lease can also specify how data on energy and water usage and progress toward goals will be measured and shared between the landlord and tenant.

As with any commercial real estate lease, it’s crucial that green leases clearly spell out which party is responsible for which obligations in order to minimize the risk of litigation during the lease’s term.  Depending on the situation, it may be advisable to consult with other experts, such as design and construction professionals with expertise in sustainable building practices. 

Novack and Macey LLP represents real estate developers, owners, brokers, landlords, tenants, buyers, sellers, national retailers, portfolio managers, property and facilities managers, REITs and other industry players in a wide range of commercial real estate disputes. To contact the author, please email Brian E. Cohen at bcohen@novackmacey.com or call 312.419.6900.