GREEN LEASING A LEGAL PERSPECTIVE
Dec 14, 2015
GREEN LEASING
A LEGAL PERSPECTIVE
Overview• Green Building & Evolution of Green Lease
– What is “Green Building”?– Who Determines if a Building is “Green”?– What is LEED?– What is a Green Lease, and Why Do We Need It?– Green Lease Drafting Issues– Barriers to Green Leases
• Salient Green Leasing Issues– Regulating Behavior– Cost Recovery & Benefit Allocation– Compliance, Risk Allocation, Remedies & Dispute Resolution
• Green Leasing in LEED – EB Context• Summary & Conclusions
Green Building & Evolution of Green Lease
• What is “Green Building”– “The practice of increasing the efficiency with which buildings use
resources – energy, water and materials – while reducing building impacts on human health and the environment during the building’s lifestyle, through better siting, design, construction, operation, maintenance and removal.” – EPA
– “Design and construction that uses building techniques that minimize environmental impacts and reduce the energy consumption of buildings while contributing to the health and productivity of the occupants.” – USGBC
Green Building & Evolution of Green Lease
• Who Determines if a Building is “Green”?– Currently, no federally-legislated definition
– Voluntary rating organizations:
• USGBC – LEED
• Green Globes
• Energy Star
– Local ordinances (often by reference to rating organization standards)
Green Building & Evolution of Green Lease
• What is LEED?– Voluntary, consensus-based national
standard for developing and operating high performance sustainable buildings
– 9 rating programs (including pilots)• Most relevant: NC; CS; EB; CI• Inter-Relationships of Rating
Systems– Leading third party certification
program in U.S. (standard for many current and proposed governmental ordinances)
Green Building & Evolution of Green Lease
• Green Lease – What is it?– Lease which has additional provisions set out within it, whereby the
Landlord and Tenant undertake specific responsibilities and obligations with respect to the sustainable operation of a building (e.g., energy efficiency measures, waste reduction/management and water efficiency).
Green Building & Evolution of Green Lease
• Green Lease – Why do we need it?– New level of necessary behavioral regulations & control, as each
party’s actions or inactions impact performance of building and the ability to achieve/maintain LEED certification
– New cost & benefit allocation issues
– Risk Allocation
– Compliance, Default, Remedies & Dispute Resolution
Green Building & Evolution of Green Lease
• Green Lease – Drafting– Must define “Green”, and properly allocate responsibility for achieving
and maintaining sustainable objectives. Which LEED?
– Deal and building specific by nature, so doesn’t lend itself to a “form” lease, although some are starting to appear (e.g., BOMA)
– Approaches:
• Paternalistic: Obligations for reduced consumption of energy or resources, and environmentally responsible behavior, are mandated by Landlord or Tenant.
• Cooperative: Mutual objectives are set out in Lease for both parties to achieve, leading to responsibilities and liabilities for both parties.
Green Building & Evolution of Green Lease
• Barriers to Green Leases– Landlord Barriers
• Long pay-back periods for certain improvements
• Lack of skill or knowledge; risk aversion
• Indifferent tenants; lease restrictions (lighting; materials; building improvements)
• Inability to pass-through “green” costs
Green Building & Evolution of Green Lease
– Tenant Barriers
• Lack of skill or knowledge
• Fear of unfair rent increase based on “green cost” pass-throughs
• Inability to produce, or procure from Landlord, premises – specific water & energy consumption data (submeter)
• Energy & water costs assessed on p.s.f. basis, rather than direct consumption, so no savings incentive
• Lease restrictions (alterations; inability to compel recycling or energy management programs; inability to compel record-keeping)
Salient Green Leasing Issues
• Regulating Behavior– Importance
• Critical to achieving/maintaining LEED certification
• Direct impact on building performance (operating costs; building value)
• Ancillary impacts (tenants; financing; tax abatements or other incentives; reputation)
Salient Green Leasing Issues
– Tenant Behavioral Controls• Build-Out; Future Alterations,
Improvements & Repairs– Enhanced need to restrict and control
Tenant’s build-out, and future alterations and repairs, to ensure compliance with green standards of building
• Construction waste management• Adherence to green features
(low-VOC paints; energy efficient appliances; water efficient fixtures; HVAC & lighting controls; energy management program)
Salient Green Leasing Issues
– Ensuring Compliance
• Approval over Tenant’s plans & specifications
• Approval over Tenant’s design & construction team/contracts (LEED expertise/experience)
• Must use Landlord’s contractor (liability issue?)
• General compliance with certain LEED rating system
• Specify green standards & requirements in lease or in attached work letter
• Approval over all Tenant alterations, improvements and repairs (caution: carveouts for deminimus work)
• If casualty, Tenant must rebuild to certain LEED standard
Salient Green Leasing Issues
• Operations
– Landlord must ensure tenant participation in any green measures applicable to the building
• Recycling/Energy Management Programs
• Energy conservation measures
– Utilities
• Landlord right to purchase green or renewable energy
• Ability to measure consumption, charge for overconsumption, regulate consumption
Salient Green Leasing Issues• Record-Keeping/Reporting
– Tenants must be required to provide the necessary energy/IAQ/water use data to Landlord for purposes of Landlord’s reporting requirements
• Rules & Regulations
– Landlord must have the ability to ensure tenant compliance with the “green” rules and regulations for the building
Salient Green Leasing Issues– Landlord Behavioral Controls
• Benchmarks & Targets
– Tenant must ensure “green” benchmarks and targets are clearly defined in lease.
• Performance Standards
– Specifications & procedures for measuring environmental performance should be set forth in lease.
– Caution in using of old standards to define Landlord obligations – e.g. “first class operations” or “reasonable landlord” standards
• Operation & Maintenance Obligations
– Landlord’s ongoing operation & maintenance obligations with respect to green features should be specified.
Salient Green Leasing Issues• Green Programs
– Any tenant-required green programs for the building should be set forth in lease.
Salient Green Leasing Issues
• Cost Recovery & Benefit Allocation– Cost Recovery
• Breadth of Operating Expenses– Green features (e.g., vegetated roof, water
collection system)– Amortized costs of green equipment/systems
and operational enhancements– Costs related to LEED certification
• Lease Economics– Net Lease vs. Gross Lease– Allocation of benefit/risk of reduced
operating costs– Base year issues
Salient Green Leasing Issues– Benefit Allocation
• White Tags & Carbon Offset Credits
• Energy Savings
• Tax Rebates
• Reduced Insurance and Financing Costs
Salient Green Leasing Issues
• Compliance, Risk Allocation, Remedies & Dispute Resolution– Compliance
• Specific obligation to obtain/maintain targeted LEED certification
• Definition/measurement of success
• Time period for performance
• Obligation of each party to perform
Salient Green Leasing Issues– Risk Allocation
• Failure to achieve targeted LEED certification
• Performance and durability of new technologies
• Insurance
– Coverage for green features
– Coverage for recommissioning & recertification fees
– Endorsement for upgrading conventional to “green”
– Available products:
• Fireman’s Fund – “GreenGuard” Insurance Program (Green upgrade coverage; Green certified building coverage; Building commissioning coverage)
• AON – “Green Building Property Program” (Green replacement and upgrade coverage; Covers costs to hire LEED-AP design professionals; Covers LEED certification costs)
Salient Green Leasing Issues– Remedies
• Termination of lease
• Self-Help
• Rent Reduction or Abatement
– Alternative Dispute Resolution
• Expedites resolution of disputes over why a particular target or objective is not being met (lack of compliance with policies & regulations; excessive energy use; failure of green features or technologies)
Green Leasing in LEED – EB Context
• 9 Prerequisites; Minimum 34 Points Required for Certification
• Applies to Whole Building, Including Tenant Space
• Building Must Be At Least 75% Occupied for 12 Months
Green Leasing in LEED – EB Context
• Credit Categories:– Materials In
– Materials Out
– Building Administration
– Green Cleaning
– Site Management
– Occupant Health & Safety
– Energy Metrics
– Operational Effectiveness
Green Leasing in LEED – EB Context
• Must File for Recertification At Least Every 5 Years– Must be able to demonstrate adherence to environmental policies &
procedures
– Must track occupants purchasing and waste streams to verify performance goals
– Must maintain minimum required occupancy, and track occupant satisfaction
Green Leasing in LEED – EB Context
• At Least 28 Points (Maybe More) Require Some Level of Tenant Participation (Excluding Cost Allocation Issues):– Alternative transportation– Light pollution reduction– Water efficiency– Sustainable purchasing– Solid waste management & reduction– Occupant comfort– Tenant construction IAQ and waste– Daylighting & views– Green cleaning
Summary & Conclusions
• Growing Need for Green Leases– Rising costs of energy, water, materials and insurance, as well as
increased governmental environmental and air quality regulation, will drive green buildings
– Tenants seeking to reduce carbon footprints and meet corporate sustainability reporting requirements
– Tenants and Landlords seeking to manage energy consumption costs
– Tenants need assurance that Landlords will provide what they need to meet green objectives, and vice-versa
Summary & Conclusions
• Green Lease is a Double-Edged Sword– Increased regulation & expense pass-throughs = share in cost savings
and additional remedies (cooperative approach)
– Should achieving higher levels of certification = higher rents?
– Landlord and Tenant held to higher standards with respect to features and performance of building
• Green Leases are Property and Transaction Specific; No Single Form Works for Every Deal
Robert E. Stanley, Esq. 1170 Peachtree Street, Suite 750
Atlanta, GA 30309(404) 835 - 6201
[email protected] www.seblaw.com