Negotiating a Green Lease from the Tenant’s Perspective

by CoyDavidson on March 1, 2010

Protecting Your Green in a Green Office Lease

“Sustainability” and “Green Building” initiatives garners a lot of attention in commercial real estate these days. All most every day we hear of a new or renovated commercial office building achieving some level of LEED certification.

In order for an office building to achieve the most in the objective of sustainability, the landlord and its tenants must cooperate in the effort to achieve these initiatives.

  • Initiatives for reduced consumption of energy, water, and other natural resources;
  • Initiatives for minimizing waste and diverting both construction and operational waste from landfills
  • Initiatives for creation of superior indoor and exterior environmental quality; and
  • Data collection, sharing and use as between landlord and tenant

The governing document in the landlord-tenant relationship is the lease. A green office lease encourages landlords to compete for tenants by designing, building, renovating and managing sustainable buildings while maximizing the landlord’s return on investment primarily based on the reduction of operating costs.

The Elements of a Green Lease

  1. Gross lease structures with an appropriate escalation clause and expense base provision to reward landlords for high performance building operations.
  2. Appropriate operational procedures and building management systems for tenant reimbursement of excessive and after hours energy consumption, supported by appropriate lease language.
  3. A comprehensive and equitable definition of building operating costs in the lease to protect the interest of both the landlord and tenant.
  4. As part of the definition of building operating costs, the lease should contain language that allows the landlord to amortize the cost of projects that will reduce operating costs and treat those amortization costs as operating costs, as long as they do not exceed savings.
  5. Right to Audit – This lease clause protects the tenant from overcharges and outlines the procedures of the audit process to protect the landlord from frivolous audits.
  6. Hazardous Materials – A clause that defines what it is and that neither the landlord nor any tenant violates laws or regulations regarding the hazardous materials.
  7. Green Cleaning Specifications – This lease exhibit should define the materials, procedures and protocols for cleaning the building in a sustainable manner.
  8. Building Rules and Regulations – This lease exhibit stipulates a building-wide recycling program.
  9. Tenant Workletter Agreement – This lease exhibit defines sustainable product requirements and construction practices.
  10. Tenant Manual & Development Guidelines – A guide to explain the building’s sustainable features and benefits, procedures and operating parameters that should provide insights into how to maximize the building’s features to create a sustainable workplace.

If the landlord and the tenant agree that the property subject to the lease should be constructed, operated and occupied in a sustainable fashion, that should be reflected in the lease.

However, lease language related to green and sustainability issues is still relatively new and  evolving to customary market practices. Since, most all leases are  typically drafted by the Landlord’s legal counsel, there are the some potential issues in “Green Leases” from the tenant’s perspective.

Operating Expense Pass-Throughs

(Sample Language)

Operating Charges shall also include: (i) all costs of maintaining, managing, reporting, commissioning, and recommissioning the Building that was designed to conform with Energy Star® or LEED rating system, and (ii) all costs of applying, reporting and commissioning the Building to seek certification under Energy Star® or LEED; provided however, the cost of such applying, reporting and commissioning of the Building or any part thereof to seek certification shall be a cost capitalized and thereafter amortized as an Annual Operating Charge under GAAP.

Issues for the Tenant

  1. What benefit is LEED certification to the Tenant?
  2. Where are the controls to prevent Landlord from overspending?
  3. What are “costs of maintaining” the LEED rating?
  4. Could equipment purchases be included within this provision?

Solutions for the Tenant

  • Determine whether the Tenant would benefit – if not, then seek to have the costs placed back on the Landlord.
  • Add a “cap” – either a dollar limit or percentage
  • Clarify that the costs are for services and application fees, not to purchase equipment

General Sustainability Requirements

(Sample Language)

Tenant shall use proven energy and carbon reduction measures, including energy efficient bulbs in task lighting; use of lighting controls; daylighting measures to avoid overlighting interior spaces; closing shades on the south side of the building to avoid over heating the space; turning off lights and equipment at the end of the work day; and purchasing ENERGY STAR® qualified equipment, including but not limited to lighting, office equipment, commercial and residential quality kitchen equipment, vending and ice machines; purchasing products certified by the U.S. EPA’s Water Sense® program.

Issues for the Tenant

  1. Who determines whether the Tenant’s measures are “proven”?
  2. What is the penalty for the Tenant’s non-compliance?
  3. What if ENERGY STAR® rated equipment is not available or is unsuitable?

Solutions for the Tenant

  • Qualify the obligation to one of “use reasonable efforts to …”
  • Use ENERGY STAR® rated equipment only if available, cost-effective and suitable
  • Clarify that there is no penalty if the Tenant fails to comply

Contractor Rules and Regulations

(Sample Language)

All construction and maintenance  methods and procedures, material purchases, and disposal of waste must be in compliance with minimum green building standards and specifications as defined in these Contractor Rules and Regulations and the latest version of the U.S. Green Building Council’s Existing Buildings Reference Guide.  Where there is a difference between the two, the more restrictive shall prevail.

All projects shall be reviewed for potential impact to reduction targets and environmental programs. For any project over [$10,000], Contractor agrees to engage a third party LEED Accredited Professional or similarly qualified professional to oversee and validate that the project has met the standards for Landlord’s sustainability practices.

[Numerous provisions regarding erosion control, indoor air quality, water use efficiency, energy management, purchasing, waste removal, etc.]

Issues for the Tenant

  1. Green construction regulations can dramatically increase the cost of build-out
  2. Hiring a LEED Accredited Professional will add to construction costs
  3. Who is benefiting from these regulations?  Is the Tenant seeking LEED certification for its build-out?
  4. Construction regulations may not be part of the Lease; they may be furnished later
  5. Landlord’s attorneys draft the construction regulations without an appreciation for the costs involved

Solutions for the Tenant

  • Have a contractor thoroughly review the construction regulations
  • Identify wasteful, costly and redundant practices or requirements
  • Have the cost of the LEED AP covered by the Landlord unless the Tenant is seeking LEED CI certification

Recycling and Waste Management

(Sample Language)

Tenant covenants and agrees, at its sole cost and expense:

(a) to comply with all present and future laws, orders and regulations of the Federal, State, county, municipal or other governing authorities, departments, commissions, agencies and boards regarding the collection, sorting, separation, and recycling of garbage, trash, rubbish and other refuse (collectively, “trash”);

(b) to comply with Landlord’s recycling policy as part of Landlord’s sustainability practices where it may be more stringent than applicable law;

(c) to sort and separate its trash and recycling into such categories as are provided by law or Landlord’s sustainability practices;

(d) that each separately sorted category of trash and recycling shall be placed in separate receptacles as directed by Landlord;

(e) that Landlord reserves the right to refuse to collect or accept from Tenant any waste that is not separated and sorted as required by law, and to require Tenant to arrange for such collection at Tenant’s sole cost and expense, utilizing a contractor satisfactory to Landlord; and

(f) that Tenant shall pay all costs, expenses, fines, penalties or damages that may be imposed on Landlord or Tenant by reason of Tenant’s failure to comply with the provisions of this Section.

Issues for the Tenant

  1. The Tenant’s exact obligations are not clear
  2. “Landlord’s sustainability practices” could be anything the Landlord dreams up
  3. The Landlord could claim that the Tenant’s non-compliance resulted in significant damages

Solutions for the Tenant

  • Limit to requirements of existing legislation
  • Tie to a specific standard (e.g., LEED-EB: O&M)
  • Specify single stream recycling or that the Landlord will supply all labor and receptacles for collection and sorting

Purchase of Green Power

(Sample Language)

Landlord reserves the right to change electricity providers at any time and to purchase green or renewable energy.

Issues for the Tenant

  1. Green or renewable energy could be substantially more expensive
  2. No benefit to the Tenant
  3. Only helps the Landlord to attract new tenants (i.e., a marketing expense)

Solutions for the Tenant

  • Limit to situation where the Tenant is paying the electricity provider directly
  • Specify exact information to be reported and have limits on the Tenant’s costs
  • State that it is being provided for informational purposes only

Over time, the nuances of “Sustainability” and “Green Issues” as it pertains to the lease agreement will likely develop into a widely accepted framework of legal language and business terms that is acceptable to both Landlords and Tenants. The marketplace will ultimately dictate that framework. However until this framework evolves, the Tenant’s brokers and legal counsel should pay careful attention these issues when negotiating  these provisions in the lease agreement.

Sources:

  • Model Green Lease, B. Alan Whitson, RPA, www.Squarefootage.net
  • Jackson Walker L.L.P.
  • U.S. Green Building Council
  • BOMA

 

 

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