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COMMERCIAL LEASES - GOING THE EXTRA (GREEN) MILE

By Brock Johnston with Michal Jaworski    October 7, 2008

Businesses all over the world are coming to terms with the societal and economic value of going green. While implementing a green strategy can be costly up front, the costs can frequently be recouped over time—the result being long-term benefits to those who go green but also to society at large.

Commercial real estate is one of the key battlegrounds in the fight to reduce greenhouse emissions, conserve resources and reduce the amount of waste going into landfills. On the construction side, many new projects are being built to meet LEED™ standards or equivalents and many institutional owners are setting sustainability targets for new construction. For instance, see the University of British Columbia's Residential Environmental Assessment Program and the B.C. government's Climate Action Plan.

On the commercial leasing side, commercial landlords and tenants are now becoming aware that not only are their buildings inefficient in terms of energy and water usage, they are also a significant source of greenhouse gas emissions. National Resources Canada reports that in 2005, building heat and electricity from the commercial/industrial sector accounted for roughly 13% of Canada's total greenhouse gas emissions.

There are a wide variety of measures that businesses are taking to reduce the environmental impact of their leased premises and demonstrate leadership in environmental stewardship. For just a couple of examples, see, Clark Wilson LLP's Green Program, and Townline's Down to Earth initiative. However, any effort to improve the environmental performance of leased premises requires a high level of cooperation between the landlord and tenant and necessitates each party's plans being reconciled with its lease.

Doesn't my lease already deal with this?

Many commercial leases allow the landlord to pass along to tenants the proportionate cost of capital repairs, and sometimes, improvements that are of benefit to all tenants in a building. If a lease so permits, it will usually provide that such costs are amortized over their useful life and the amortized costs are included in operating expenses. The lease may also provide that the outstanding, unamortized costs bear interest at the landlord's cost of borrowing and that this interest can also be included in operating costs. Many commercial leases also address the handling of hazardous materials and contaminants. However, in most cases, these provisions are not robust enough to capture the multitude of issues that landlords and tenants face when deciding to go green. A landlord who tries to pass along such costs, no matter how worthwhile the purpose, is likely to encounter tenants who will not agree to pay. Commercial leases, with terms measured in years and, with renewal periods, in decades, can be a real impediment to change, even if both parties agree in principle that change would be a good thing.

Over and above the many downsides of most existing, non-green leases, is their failure to address the following issues:

  • Who will incur the costs of going green and how the costs are to be shared?

  • How will the landlord and tenant identify the particular goals to work towards, and how will they measure achievement?

  • How will the landlord and tenant incentivize or otherwise, counter-act the disincentives inherent in every lease so as to encourage positive action?

  • What aspects of the plan will be compulsory and what aspects discretionary and how will disputes be resolved?

  • How will carbon credits be allocated? (This will become relevant if a credit system is put in place in British Columbia.)

Cooperation between the landlord and tenant is necessary to achieve positive change, so it is vital to establish a clear and enforceable agreement between the landlord and tenant that permits effective individual and joint action.

Transitioning to a green lease

A landlord will need to engage building managers, tenants and sustainability consultants to articulate and quantify appropriate green goals for each building. Once goals are established, the landlord will need to review its standard form of lease to determine whether it provides sufficient flexibility and protection to implement and achieve its green goals.

The easiest way to introduce a green lease is from the first tenant onwards. Landlords completing a new development have the opportunity to establish a new green standard form of lease, and can establish a green policy which can be put into effect immediately and applied consistently thereafter. The Real Property Association of Canada (REALpac) has recently published a version of its standard form office lease that has been converted into a green lease. The REALpac green office lease provides a good starting point for a discussion about how to modify standard form leases to accommodate green goals, provided it is understood that, like every lease, it should be tailored to the particular needs of the landlord and the building.

Where there is an existing lease, the landlord and tenant have little opportunity to amend the lease until the lease expires. However, if the landlord is considering a retrofit or major renovation, the landlord may be able to use such a process as a carrot to reopen the lease. In the case of a renewal, some leases provide that the renewal will be on the landlord's then current standard form lease, which will provide a great entrée for introducing green lease provisions. Even if the landlord nor the tenant has a legal right to insist on the implementation of a green strategy, they may nonetheless set their own green goals and take action on matters that are strictly within their control and otherwise work together constructively to achieve mutually agreeable green goals.

It would be ideal if the landlord and tenant could agree on how best to mutually achieve green goals and amend their lease accordingly. However, without such agreement, the provisions of the lease govern, and the landlord and tenant will have to meet their green goals within the bounds of their existing lease.

If a landlord in a multi-tenant building turns the standard lease into a green lease, the landlord may be in an awkward position during the transition phase, when some tenants are under the old lease and some are under the green lease. Tenants' obligations will vary from tenant to tenant and some tenants may end up taking the benefit of positive changes and cost savings related to green policies, without sharing in the costs. Aside from facilitating the transition to a new green form of lease by entering into a lease modification agreement with each tenant, which may be unworkable, the landlord will need to be creative. For instance, under the terms of the existing lease for the landlord may be able to allocate operating costs disproportionately on the basis of unequal consumption.

Taking stock and getting green

Greening a business premises involves taking stock of its operations planning for further positive changes, and then putting those plans into action. The terms of a green lease will assist the landlord and each tenant in coordinating their efforts and give a framework for planning, acting and evaluating their progress as they move to more sustainable business practices.

Landlords and tenants have no choice but to work closely together to meet their green goals. The success of one depends on the agreement of the other and therefore it is critical that both the landlord's and the tenant's legal rights and obligations relating to green issues are clearly articulated in the lease.

Brock Johnston with Michal Jaworski

 

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