Build Green into Your Lease
Build Green into Your Lease
As green commercial buildings proliferate, it's critical to spell out in the lease the landlord's and tenant's responsibilities for making and keeping a building green, say Ron Grais, a partner at Chicago's Jenner & Block, and Michelle Neumann of Jordan Schrader Ramis PC in Portland.
The initial step in a successful green lease negotiation should occur even before leasing gets underway, Grais says: "The landlord has to decide what the environmental goals are for the building. How green do you want the building to be? Do you want it to have a LEED Platinum certification, or do you simply want to introduce programs for recycling and lower energy consumption? These goals will determine what and how much needs to be included in the lease document."
The next step in negotiating a green lease is to specify the level of obligations for each party, especially in areas such as operating expense pass-throughs that are likely to be affected by green programs.
For example, says Neumann, leases should address who benefits from any cost savings realized from improved energy efficiencies. Both parties should have incentives for reducing expenses built into the lease.
Other clauses that warrant negotiation include use clauses, which prohibit business activities that might cause the premises to fail to meet the landlord's sustainability goals, allocations of costs for green capital improvements, and provisions that address the requirements for constructing tenant improvements using environmentally friendly practices.
Each affected provision of the lease also needs to include how the parties will verify that agreed-upon green practices are being followed, Neumann says.
For example, if a tenant agrees to use low-VOC paints and sustainable materials, how would the landlord verify that materials met these criteria and what are the consequences under the lease if they don't?
It's important to spell out the remedies each party has if obligations to stay green aren't met, Grais says. He recommends including a dispute-resolution process, such as mediation, limited to the interpretation of green lease provisions.
While few landlords would want to terminate a lease—especially these days—remedies could include self-help and reimbursement, rent reductions, and monetary penalties against the tenant.
Even if a building owner isn't ready to implement green technologies yet, making provisions in a lease can be a smart idea, advises Grais. Otherwise an owner may have to wait five or more years for leases to expire before implementing green initiatives.
One of the challenges in negotiating green leases is that there isn't much precedent, says Neumann. She notes that the new BOMA's Guide to Writing a Commercial Real Estate Lease, Including Green Lease Language from the Building Owners and Managers Association is one place to look for model language to negotiate your own green lease.