February 2012

Green Leasing: Top 10 Tips

Landlords and tenants are beginning to realize there are significant benefits from going green. For landlords,  these include savings in operational and maintenance costs, increases in tenant retention rates and a general competitive advantage in today’s challenging real estate market. For any real estate occupier, leasing space in a green building is one aspect of a comprehensive sustainability program designed to reduce energy and resource consumption, carbon emissions and waste. However, the greening of buildings raises unique issues between landlords and their current and future tenants.

1. Set the standards
In the most basic sense, a green lease is any lease to which some sustainability concepts have been added. Accordingly, in order to achieve a meaningful green lease document, there needs to be a clear understanding of the specific “green objectives.” It is strongly recommended that, before commencing a green leasing initiative, both parties develop a set of the specific sustainability standards they wish to achieve. These will guide the lease negotiations, stipulating both the requirements and how they are to be implemented.

2. A balancing act
To achieve the desired sustainability goals for its property, a tenant will often want the building it occupies to  meet specific standards throughout the lease term (such as the EPC rating, the availability of renewable energy, a building-wide recycling program, a green travel plan). For landlords, however, although it is critical to be specific about what sustainability standards have to be achieved, it is vital to avoid being so prescriptive that the standards become outdated or irrelevant during the lease term.

It is also essential that newly added or revised provisions relating to green issues work in harmony with the other non-green provisions in the lease documents. These provisions must be tailored to match the specific design and operational characteristics of the particular property.

3. Certify it
Achieving independent certification is likely to add to the lease’s green credentials and attract tenants seeking green leases. From a tenant’s perspective, it is desirable that the building achieves BREEAM or other sustainability certification. As there are a number of ways to achieve certification, the agreement for lease or development agreement will need to specify, in detail, the standards to which the building is to be built (or refurbished). The certification process is complex and requires considerable lead time; accordingly, the agreement should establish realistic milestone dates with which the landlord or developer must comply in applying for and achieving certification.

4. Capture it
In order to measure system performance that ensures that the sustainability standards for the building or premises are being met on an ongoing basis, it may be necessary to install, maintain and operate special monitoring and data collection equipment. Smart meters which allow the remote measurement of energy use on an hourly or half day basis are a good example. The allocation of both the obligation and cost of doing so is a negotiable item, but tenants will need to ensure they have access to the data either on a continuous basis or via periodic reports and in an agreed form.

5. Encouraging cooperation
Having green buildings can give a landlord a competitive advantage in the market, both in terms of the attractiveness to potential tenants as well as the possibility of cost savings (for example, through reduced energy use). Leases may, therefore, incorporate provisions requiring tenants to cooperate with the landlord’s sustainability practices. Tenants should bear in mind the need to ensure that any such obligation is specifically set out in the lease or any apportionment is allocated fairly between the landlord and tenant.

6. Commit to carbon reduction
Both government regulation and private markets are creating sustainability incentives, such as carbon offset and tax credits. These can become important financial factors for any green building or lease. For example, In April 2010, the Carbon Reduction Commitment Energy Efficiency Scheme (CRC) was introduced in the UK by the Department of Energy and Climate Change, in partnership with the Scottish government, the Welsh Assembly and the Department of Environment in Northern Ireland. Landlords may seek to capture credits and incentives or seek discretion over their allocation. Tenants, on the other hand, may also wish to capture these credits and incentives to the extent they relate to their premises and have been generated by their own efforts to achieve sustainability. The CRC is likely to become a key factor to consider in green lease negotiations.

7. Sustaining sustainability
As the performance of equipment degrades over time, the landlord may take the view that they can only guarantee the high standard of performance required by typical sustainability standards either at the beginning of or during the warranty period for any new equipment. This is unlikely to be acceptable to tenants who need to achieve their own sustainability goals throughout their period of occupancy. The issue can often be resolved by permitting the landlord to include, in its annual operating expenses, the amortized cost (over its useful life) of replacing the equipment that no longer meets the higher standards, if normal maintenance and calibration of such systems cannot produce the required performance levels.

8. Check the back door
It is common for the rules and regulations that are attached to a lease to address matters including sustainability, which have been negotiated in the body of the lease. Be sure that any rules and regulations that are redundant or in conflict with the lease itself are deleted or conformed.

9. A broad approach
For landlords, updating lease documents so that they govern relationships with future tenants addresses only part of the challenge of green leasing. For years to come, most of a building’s leases will consist of older, nongreen lease documents.

To fully achieve green objectives, it is critical for the existing leases to be made as green as possible. Each of the existing and prior lease forms in use at a building should be examined with the goal of determining the most
favorable approach to pursue:

• To the extent the existing or prior lease form does not fully accommodate the building’s newly instituted green measures, an appropriate form of green lease amendment should be created so that, as and when significant changes are made to existing leases in the future (such as renewals, relocation and expansions), such occasions can become opportunities to fully green existing leases.
• Some existing leases may be able to accommodate new green measures with very little adjustment. It is important to be advised as to what actions, if any, are appropriate for a specific lease and the pros and cons of allowing leases to remain unchanged.

For real estate occupiers, leasing space in a green building is just one aspect of a comprehensive sustainability program. For tenants keen to reduce their energy and resource consumption, carbon emissions and waste, thought needs to be given to information gathering and analysis programs and metering so that progress towards such goals can be measured.

10. An expert eye
This briefing outlines some of the more salient issues that need to be addressed in negotiating a green lease that truly meets the sustainability goals of sophisticated landlords and tenants. To successfully draft and negotiate a green lease that will achieve such goals needs forward-thinking lawyers with both an expert knowledge and hands-on experience of sustainability issues.

This article was written by Paul Jayson, a partner in the London office of DLA Piper, and Sally Whitney is an associate with the firm. It originally appeared in in BDO USA, LLP's "Real Estate Monitor" newsletter (Winter 2012). Copyright 2012 BDO USA, LLP. All rights reserved. www.bdo.com. Somerset is a member of the BDO Seidman Alliance, a nationwide association of independently owned accounting and consulting firms.