Negotiating Green Leases: Top Issues for Tenants
There are many reasons a company might find itself a tenant in a green lease: corporate policy initiatives for more environmental responsibility; a preferred location which happens to be in a LEED building; or governmental incentives influencing facilities decisions. The greening of the U.S. commercial real estate portfolio is widespread and coming from all directions, and green leases – leases of space designed to minimize environmental impacts—are becoming standard. This movement has taken hold very quickly, and even experienced real estate lawyers are still learning in this area. At the same time, building owners and tenants have yet to identify routinely troublesome issues – let alone develop standard solutions.
That said, there are some best practices that have emerged so far:
1. Early Assessment of Sustainability Requirements. Most green leases require the tenant to comply with sustainability requirements (similar to building rules, but tailored to each project’s specific design and operation, and therefore unique) and green construction guidelines. Because this is an evolving area with widely varying landlord practices, tenants should ask for and review these guidelines early in the leasing process. The sustainability requirements may not exist, or may be difficult or expensive to comply with—issues that are best uncovered sooner than later.
2. Plan for Changes to Sustainability Obligations. It’s an obvious fact that bears mentioning: leases are long-term commitments. It can be risky to make these commitments in a business environment that is as uncertain and ever-changing as the law of climate change and sustainability is today. Savvy landlords address this uncertainty by maximizing flexibility at minimal cost. Leases that thoughtfully handle these issues give the landlord rights to adopt, modify and even terminate sustainability programs; require the tenant to comply with new legal requirements as well as the landlord’s own sustainability program; and allocate virtually all costs to the tenants. Compliance may include non-obvious obligations, such as specialized reporting and reimbursement of penalties assessed against the landlord.
Managing uncertainty is perhaps the most difficult issue in green leases today. Some standard solutions—caps on expenses; amortization of capital items—work in this context. But other issues—like managing liability arising from changes in laws—are more difficult to resolve. There are no easy solutions. The best advice is to be alert to the potential for dramatic change, and strive for as much flexibility as possible.
3. Operating Expenses. Typical multi-tenant buildings allocate operating costs among tenants in proportion to the size of their particular space. In these cases, tenants taking steps to conserve utilities may end up paying for more than they actually consume—a problem easily solved by submetering.
Tenants should take a fresh look at operating expense exclusions generally, as in most cases the negotiation will start with sustainability-related costs (e.g., LEED accreditation) being passed through to tenant.
Less common (and less obvious) is the treatment of revenue-generating activity. The solution here is simply that revenue should follow expenses. For example, if a building generates and sells power through an on-site wind turbine, then the costs of maintaining and operating the turbine should be excluded from operating expenses, or the revenue should be applied to reduce project operating expenses.
4. Services. Tenants should have the ability to opt in and out of building standard services. For example, an office tenant may want to opt out of building janitorial service (which is done at night) and arrange for its own cleaning services, which may be done less often or during daylight hours (reducing electricity consumption). By the same token, some tenants may want the right to request and pay for additional services. If a tenant has particular services in mind at lease negotiation, then those should be called out in the lease.
5. Relocation Space. Relocation clauses should require the landlord to ensure that replacement space meets or exceeds the green build out of the original space. That could be as much as getting the same or better LEED rating, or little as using particular construction materials or energy saving devices.
6. Environmental Performance Report. This concept is similar to an operating expense audit, and may appeal to tenants who have a particular interest in measuring the performance of their space or the building overall. The concept is straightforward: after the end of each year in the lease term, the landlord delivers an environmental performance report to the tenant. The lease can specify particular items that should be covered (e.g., water consumption) or it can just speak to environmental performance generally. As with operating expense reconciliations, the tenant may seek rights to audit the landlord’s records regarding the items covered in the report, and even to recover the costs of its audit if mistakes over a specified threshold were made.
Real estate is not an area where change occurs fast or often, and that is one reason why the green movement is so exciting now. But the long-term nature and expense of typical real estate investments can make green leases a little daunting. Using these strategies will help mitigate many typical concerns.
Andrea Carruthers is a partner in the real estate group at Faegre & Benson. She can be reached at firstname.lastname@example.org or 612.766.8520.
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