December 1, 2009

How Green Is My Lease?


Winter 2009

Many commercial landlords are now dealing with the challenge of modifying existing office space leases to incorporate green concepts, while still maintaining the appropriate economic allocation of costs and expenses between landlord and tenant. Little guidance currently exists as to exactly what a green lease should say. Ultimately, the language of any lease should allocate costs, benefits, rights, and obligations between the landlord and the tenant in a manner consistent with the parties' business agreement. The problem then becomes one of identifying those new costs, benefits, rights, and obligations arising from green requirements, such as LEED certifications, carbon taxes, expanded recycling programs, and green building codes. Because these new requirements are emerging so rapidly, keeping track of them and analyzing the impact of each is a significant task in itself — not to mention trying to forecast additional requirements that may arise during the lease term.

How, then, should landlords and tenants start to think about modifying existing leases to fit into this new business environment? Below are several questions to ask when reviewing or revising a commercial office lease with green requirements in mind:

  1. Does the building have a LEED certification, or will the building owner be seeking a LEED certification?

    Existing buildings, not just new construction, can obtain a type of LEED certification. Landlords will want to know what is needed from both the landlord and tenant in order to achieve and maintain certification. Do the existing lease provisions allow the landlord to enter the leased premises to retrofit water fixtures with new, more efficient models? Will the tenant, when renovating or altering its space, agree to comply with LEED requirements which may require low VOC paints and floor coverings or energy-conserving appliances? The specific certification requirements should be carefully analyzed in connection with the leases for the building, and a plan should be formulated. After that, the process of communicating with tenants about the certification process can begin.

  2. What right does the tenant have to require a landlord to maintain a certain LEED certification?

    If a building has achieved a LEED certification, the tenant may want some form of assurance that the landlord will maintain that certification. But determining a remedy for failing to maintain such a certification is a problem. A tenant may not want to terminate the lease but may want to be compensated for the loss of this status. In theory, a green building is less likely to be adversely impacted by future regulatory requirements, such as carbon taxes, or higher energy prices. This has sometimes been referred to as future-proofing. To the extent that such future-proofing shields the tenant from possible additional pass-throughs, green status can be seen by the tenant as a valuable benefit.

  3. Which party should receive the benefit of lower operating costs resulting from green practices?

    If the landlord and tenants can successfully work together to implement green practices and procedures that reduce operating costs, which party should benefit from the reduction in costs? Separate utility meters for each tenant's premises may benefit a tenant that implements its own internal practices to reduce energy usage. Is the situation different if the landlord makes a capital investment in new, more efficient building systems or bears the cost of replacing incandescent light bulbs with energy-efficient bulbs? What part of these costs should be or can be passed through to the tenant under the lease? Which party bears the burden of any penalty if the building fails to meet any mandatory recycling requirements?

  4. What if LEED standards change or if another certification system emerges to take the place of LEED?

    It is difficult to predict exactly how standards may change or what new standards may emerge. The U.S. Green Building Council has already announced that changes to LEED standards are in store for 2009. While the specifics may not be known at this time, green standards will certainly evolve, and a landlord may want to add provisions to its standard form lease that attempt to address the effect of such future changes. Even if form leases or existing leases are not modified or amended in connection with green requirements, an overhaul of the building's rules and regulations may be in order.

There probably is no single "right way" to draft a green lease. The key is to make sure that legal requirements and sustainability goals are determined and that the business agreement between the parties with respect to associated costs and benefits is understood. From there, the parties can work to document that agreement.

For more information on this topic, please contact or call (888) 598-7070.


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