Key Elements for Landlords and Tenants to Consider When Incorporating Green Provisions in Your Lease

Date: February 3, 2010

With the increasing impetus behind the movement to "go green," owners of commercial buildings should be cognizant of strategies for incorporating green provisions in lease renewals and new leases. Even if the owner is not currently in the process of obtaining LEED certification, they should be mindful of when and where green lease provisions should be incorporated.

Furthermore, many office and retail tenants are now actively seeking space in green buildings or planning to build out the interiors of their leased premises to LEED for Commercial Interiors certification in order to achieve specific corporate goals, hire and retain talented employees and, in the case of retailers, attract shoppers to their stores.

Unlike the introduction years ago of hazardous materials compliance and ADA provisions which could be handled in a single section of the lease, green provisions cover several distinct lease covenants. While there are a variety of green lease provisions that commercial building owners and tenants should consider, some of the fundamental issues which should be addressed include the following:

(i) DEFINITION OF OPERATING COSTS. Landlords will need to refine the definition of "operating costs" to ensure that costs of obtaining LEED certification, including costs of upgrades HVAC, mechanical and other building systems, are not deemed to be capital items and may be passed through to tenants. Likewise, tenants will want to limit the pass through of the costs of green upgrades to only those that have the effect of reducing operating costs. Alternatively, tenants may also be able to negotiate a cap on annual increases in the cost of green upgrades.

(ii) TENANT IMPROVEMENTS AND MAINTENANCE OBLIGATIONS. Regardless of whether the tenant is building its space to LEED Commercial Interiors certification, building owners will want to require tenants to construct alterations and maintain their premises consistent with the LEED certification that the building may be seeking, dispose of demolished construction materials in an environmentally friendly manner, contract only with landlord-approved green power providers, and participate in recycling programs. Tenants need to be mindful that the costs of the recycling programs will likely be passed through as an operating cost.

(iii) COMMON AREAS/PARKING LOTS. It is beneficial for both parties to attach as an exhibit to the lease a manual specifically detailing the standards under which the property will be maintained. For example, tenants who require the availability of a bicycle racks or priority parking for car poolers need to be specific and should not rely on a simple statement that the property will be maintained to LEED certification standards. The same theory applies to landlords who may want to define the sparse landscaping that is inherent in green movement goal of decreasing water usage; the obligation to resurface the parking lot only once every nine years rather than the former five to seven years; and the reduced time that parking lot lighting remains on after hours.

(iv) INSURANCE. This is a very new area but insurance companies are offering green insurance products now. Both parties will want to require the other party to carry green endorsements on their property insurance policies. There are insurance products that will rebuild to green standards after a loss, including time delays in obtaining green materials.

(v) JANITORIAL SERVICES. For office buildings, landlords may want to change the time that office cleaning takes place from after hours to during normal business hours so as to conserve electric energy at night. Tenants with concerns may want to require cleaning hours with only low noise level equipment (high noise equipment must be at night), requiring no cleaning in certain offices, and requiring that cleaning crews have security clearances.

(vi) ASSIGNMENT. Landlords will want to reserve a right to withhold consent to an assignment or sublease to any party that may impair the building's ability to conform to LEED certification.

(vii) ENFORCEMENT. The chosen type of enforcement mechanism will depend in part on whether the green objective is aspirational or critical in nature. If it is an aspirational objective, then consider requiring the party to use commercially reasonable efforts to provide the specific standard. If it is a critical objective, then the party may want to be able to exercise self-help or seek injunctive relief if the standard is breached. It is advisable to list in the lease violations of green standards and ascribe a specific penalty to each.

These are only a handful of the provisions that owners and tenants should consider in drafting green leases. The key to devising a successful green lease is clear communication and a cooperative effort by both building owners and tenants to achieve their respective goals. As the green movement evolves, there will undoubtedly be a variety of additional lease provisions aimed at protecting the parties' commitment to environmental responsibility and resource efficiency.