The time is ripe for green leases

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Commercial buildings are enormous users of natural resources. Experts figure that such buildings account for over 70 percent of electricity consumption, almost 50 percent of energy use, and approximately 20 percent of drinking water consumption in the United States. Commercial buildings also have a significant impact on our environment. In 2007 they emitted 18 percent of all U.S. carbon dioxide emissions. By comparison, cars and light trucks combined produced 22 percent of carbon dioxide pollution that year.

Most commercial buildings in this country are leased to tenants using either “gross” or “net” leases. Gross leases typically require the landlord (in return for a higher rent from the tenant) to pay the property’s expenses, including utilities, operating expenses, maintenance costs, etc., while net leases (because of a lower rent to the landlord) require the tenant to pay its share of such expenses. The problem with these two primary lease forms is that, in the former case, tenants have no financial incentive to conserve resources since those resources are paid for by the landlord, while in the latter case landlords have no reason to do so since they can pass through the entire cost of resource consumption to their tenants. On top of these problems is the fact that commercial leases are long-lived agreements, often having combined initial and renewal terms in excess of 20 years, which means that they have the potential to impact the environment for decades to come.

It’s time for a more flexible — and greener — lease structure that provides an incentive to engage in sustainable practices over the long term. Putting aside the moral obligation, there are economic and public-relations reasons for landlords and tenants to go green.

According to a recent national study, commercial buildings that are certified as green (by Leadership in Energy and Environmental Design (LEED), for example) or energy efficient (such as by the federal government’s Energy Star program) command higher rental rates, have higher occupancy rates, and enjoy higher resale prices than their non-certified peers — great news for the landlord. On the other side of the coin, a tenant’s commitment to sustainability and improving the work environment — measures such as enhancing indoor air quality and increasing daylight — has been proven to increase employee productivity and satisfaction. Supporting responsible environmental practices may also enhance a landlord’s reputation as a good corporate citizen and enable a tenant to more easily recruit and retain employees.

So how do we make leases greener? Anyone seriously interested in the issue should take a look at the two most widely accepted green lease forms currently in use, BOMA’s Guide to Writing a Commercial Lease, Including Green Lease Language, published by the Building Owners and Managers Association, and the National Standard Green Office Lease for Single Building Projects 1.01-2008, published by the Real Property Association of Canada. Another useful resource is the “Model Green Lease” that was recently released by the Corporate Realty, Design & Management Institute based in Portland.

Generally speaking, green leases are little more than standard commercial leases that have been modified to remove barriers to sustainability by incorporating environmentally sensitive requirements into all relevant lease clauses. Some examples of such requirements include moving toward longer-term leases to reduce the environmental impact of frequent tenant changes; requiring natural or low water consumption landscaping; mandating indoor air quality standards; requiring recycling and waste management in accordance with a written plan; requiring cleaning staff to use safe, non-toxic cleaning materials; fairly allocating the cost of energy-efficient systems, and reducing the hours signage and buildings are illuminated.

Beyond the goodwill earned on both sides of the lease, green leases ultimately result in lower operating costs for parties. Just as importantly, such leases have the potential to drastically reduce the resources consumed by commercial buildings, which benefits the community at large. Concerns about sustainability and global warming aren’t going away and will undoubtedly result in increased regulation in the future. The time for landlords and tenants to exercise good business judgment by becoming proactive and embracing the concept of green leases is now.

Bob Horvat is an attorney with Buckley LeChevallier P.C. who specializes in transactional real estate, business and financing law.