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In Focus: What Color Is Your Lease? "Green" Leases for Business

Craig Henderson, Attorney, Goodman & Associates (Apr/May 09)

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A green building uses energy efficiently, reduces environmental impacts, and protects the health of its occupants. A “green lease” incorporates some or all of these goals into the contract. The parties to a green lease agree on the goals, allocate the costs of achieving those goals between the parties, and assign the parties tasks or covenants. Buildings owners are finding that some tenants are willing to pay a premium for green space.

There are a number of key provisions that may be included in a green lease; some of them are outlined below.

Green goals. Either in the body or as a separate attachment, and often called a Green Management Plan; the parties need to agree on the goals toward which they are working. The two primary certification programs for buildings are ENERGY STAR, a joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy that tests and rates the energy efficiency of products and practices; and LEED-EB, a rating system for existing buildings administered by the U.S. Green Building Council under the Leadership in Energy and Environmental Design program. Using these rating programs, while not necessary, can make it easier for the parties to set measurable goals. The language in the lease could be as broad as the following: “Landlord and tenant shall mutually agree to work towards LEED-EB certification.” Or more specific language could be used, such as: “The parties will work together to achieve an ENERGY STAR rating of 75 no more than 18 months after the Commencement Date.”

Improvement costs. In a standard triple-net lease, the landlord pays for capital improvements while the tenants pay the utility bills. A green lease, from a pro-landlord perspective, permits the landlord to pass through to tenants any capital costs that result in lower total operating costs. The costs associated with maintaining, managing, and reporting on the building to conform to a rating system would also be passed through to the tenant. From a pro-tenant perspective, a green lease would ensure that the tenant only pays for the share of the capital improvements that will directly reduce the utility bills paid for by the tenant.

Water use. The lease should set the compliance standards to maximize water efficiency. For example: “Landlord shall limit flow rates to 2 gallons per minute (gpm) for lavatory and multipurpose faucets and 2.5 gallons per minute (gpm) for kitchen faucets.”

Recycling. A green lease often requires that the landlord provide all labor and receptacles for collection, storage, and disposal of paper, glass, plastics, etc. Requiring the tenant to use the receptacles is appropriate, and often required by local law.

Alternative transportation. If so inclined, the tenant could require that the landlord provide bicycle racks to reduce pollution from automobile use.

What happens if the tenant or landlord fails to achieve the states goals or fails to perform green-oriented tasks? It is possible to make such failure a default under the lease. It may be more appropriate to require both parties to use commercially reasonable efforts to achieve the goals.

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About the Author

Craig Henderson, Attorney, Goodman & Associates
Craig Henderson is a real estate attorney with the Sacramento, California-based firm Goodman & Associates. He has more than 10 years of experience in complex real estate and corporate transactions representing developers, investors, and businesses in a variety of matters, including green building and leasing issues. He can be reached at (916) 801-2496 or chenderson@goodman-law.com.

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