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Thursday, May, 22, 2008

S. Michael Brooks (Counsel, Aird & Berlis LLP; CEO, Real Property Association of Canada) examines the "green" lease

PLI: So what makes a "green lease"?

S. MICHAEL BROOKS: There seem to be at least two (2) approaches to a green lease:

(i) A "paternalistic" approach where the obligations for reduced consumption and environmentally responsible behaviour are mandated by either the tenant or the landlord within the lease; and

(ii) A "co-operative" model, where mutual objectives are set out in the lease for both parties to achieve, leading to responsibilities and liabilities for both parties.

A tenant-paternalistic lease may be the case where government or a corporation with a strong green brand is a tenant, has internal "green" targets it is subject to, and wishes to force the Landlord to do its part to assist in compliance.

PLI: So what makes a "green lease"?

S. MICHAEL BROOKS: There seem to be at least two (2) approaches to a green lease:

(i) A "paternalistic" approach where the obligations for reduced consumption and environmentally responsible behaviour are mandated by either the tenant or the landlord within the lease; and

(ii) A "co-operative" model, where mutual objectives are set out in the lease for both parties to achieve, leading to responsibilities and liabilities for both parties.

A landlord-paternalistic lease may be the case where a landlord wants to green its portfolio, or engage in carbon-trading, or be seen as environmentally responsible, and wants its tenants to toe the line in achieving certain environmental goals.

A co-operative model lease may be the case where both parties buy into the need to green an existing building and want to ensure each is doing their part to achieve the joint goal.

All three models may end up in the same place over time.

The following are some of the main elements of existing green leases:

Targets and Benchmarks – the inclusion of targets, expressed either as a percentage reduction or an absolute target in terms of objective measures (eg petajoules) for the environmental performance of the building to include water and energy reduction, waste reduction, and waste and water recycling.
Ecologically Sustainable Development¹ (ESD) Principles and Regulations – this may include indoor air quality standards, and rules governing the use of materials and the recycling of products.
Performance Standards – these may include specifications as well as procedures as to how environmental performance is measured
Dispute Resolution Mechanism – these may apply in the event of a disagreement between the landlord and tenant as to why a particular target or objective prescribed by the lease is not achieved. For example, this mechanism could outline those ramifications taken in the event that a tenant exceeds an energy use target or fails to comply with ESD principles set out in the lease.
Environmental Management Plan (EMP)² and a Green Lease Schedule (GLS).³ These components are commonly found in those green leases developed in Australia. An EMP is often featured within a GLS.

A green lease may specifically detail:

Environmentally preferable products;
Water conservation measures;
Comprehensive landlord and tenant procurement guidelines;
Energy conservation/efficiency targets;
Requirements for natural or low water consumption landscaping;
The permissibility of solar or wind applications on-site;
The ability to specify higher cost but sustainable energy sources;
Indoor air quality standards;
Construction period recycling;
Life-cycle costing;
Day lighting, and the usage of screens to shield the sun's rays;
Recycling room and practices;
Efficient appliances and fittings;
Waterless urinals and low flow faucets and taps;
Efficient thermal control systems, and potentially operable windows;
The use of Energy Star rated photocopiers that reuse paper, or print double sided;
An energy or operations standard, such as LEED, Green Globes, BREEAM, AGBR, Energy Star, or other rating system;
Ventilation and fresh air requirements;
Allowable cooling, heating and humidity;
Cost apportionment of capital costs of new equipment;
Incentives to invest in new equipment;
Heating, ventilation and air conditioning specifications;
Environmentally friendly leasehold improvement materials, or LEED CI requirements; and
Dispute resolution procedures and references to third party experts.⁴

To the extent that the parties feel that technical goals need to be defined in a lease document or schedule (such as target kilowatts per square foot per year, or reduced water consumption to a target of litres per square foot per year) either or both the landlord and tenant may need technical consultants available to them to advise on the legitimacy and attainability of those technical goals in the particular building to which the green lease would apply. The same technical expertise would also need to be available to determine compliance or to provide audits from time to time potentially for both parties.

Of course, there are usually many open questions. How much ought one to reduce energy usage, water consumption, material usage, material sent to a landfill? What is the objective target? Who pays? How? When? What if the changes negatively impact the tenant's operations or sales? How can a conservation-minded landlord convince a skeptical tenant to go along with a green lease and vice versa?

While various NGOs have identified targets for reduction of energy, greenhouse gas emission causation, water consumption and solid waste creation, there is no single consolidated national goal for any of these resources in either Canada or the United States. The Canadian Government had in 2007 a soft target of 20% reduction of the 2007 levels of greenhouse gas emissions by 2020, a target derided by many pundits as too low. Canada has no national water consumption reduction target, and no national solid waste reduction target. Until such time as those targets emerge, both landlords and tenants need to be guided by international targets, the requirement of credible third party certifications (such as LEED) and their own consciences.

It has been repeatedly said that building a green building costs more. However, the more experience that is gained, the more that premium seems to be dropping. The current range seems to be 1.5 to 3% for large buildings, (i.e. over 500,000 sq feet), but possibly higher for smaller buildings. It was also thought that greening an existing building can be expensive; but current wisdom suggests that 10% reductions in energy consumption can be achieved in most buildings with minimal or no capital improvements. The extent to which significant further gains can be achieved in energy reductions in any one building will depend on that building, and a variety of local factors. Each landlord can sequence potential upgrades, ranked from greatest impact to least, on a building by building basis.

Green leases may be considered as 'partnerships' or 'alliances' requiring greater cooperation between landlord and tenant than traditional leases. It is nevertheless important to ensure the lease clearly defines the obligations of each party and the consequences of breach. See Brooks, R., Hill, T., and Moore, L., How Green is Your Building? Australia: Investa Property Group (2007).

It is also important to mention that poor performance within any particular tenancy will have the capacity to influence comfort and performance in other tenancies in a multi-tenant building. The underlying notion is that what one tenant does or does not do, could ultimately impact other tenants in the same building.

The value proposition of a green building and green lease for both the landlord and the tenant must not only be commercially viable, but positively attractive for both parties when compared to non-green alternative. The value proposition of a green building and green lease for both the landlord and the tenant must not only be commercially viable, but positively attractive for both parties when compared to non-green alternative. See Freehills, Lease Arrangements for Green Commercial Buildings, in Freehills Publications [database online] (2004). (Link information in Green Leases: The Next Step in Greening Commercial Buildings available below). Otherwise tenants are likely to pursue other options.

The multiplicity of "what green might mean" requires parties aiming for green outcomes to agree and be clear on what it is they are seeking to protect and achieve. Different parties may describe 'going green' in different ways – there may not always be a consensus. See Australian Green Building Council, Green Leases: The Past, The Present, The Future, in Australian Green Building Council [database online] (2006). (Link information in Green Leases: The Next Step in Greening Commercial Buildings available below).

Most landlords and tenants will want to avoid accusations of half-hearted or insincere attempts at "greening" their operations: called "greenwashing".⁵ Greenwashing can damage brands and credibility, dishearten employees, and increase costs over the long term. The references to and achievement of credible third party certifications is a key method of establishing the credibility of any attempt at greening a building or operations, and avoiding the greenwashing label.

Download Foonotes.

Download Green Leases: The Next Step in Greening Commercial Buildings.

Posted at 11:06AM | Permalink | Comments (0)

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