Green Leases Empower Environmental Action Plans: New Template to Guide Canadian Landlords

July, 2008

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By S. Michael Brooks
 
With increasing concern over environmental sustainability and increasing focus on green buildings, it was inevitable that the actual lease between landlords and tenants would have to take this new operating environment into account. Taking the lead in this initiative, the Real Property Association of Canada (REALpac) has released a National Standard Green Office Lease built on the precedent of its National Standard Office Lease, which has been around for almost six years.

The REALpac National Standard Green Office Lease was developed by a committee of in-house lawyers from REALpac member companies, including many of the largest landlords in Canada. LEED AP professionals were also consulted, as were operations managers and leasing professionals within many of these landlord companies.

Owners and managers may have two initial questions: What's wrong with my current lease? and Why should I upgrade to a green lease now?

However, there's probably no longer any reason to answer the question: Why go green? Most of the public now "get it", and most commercial landlords and managers now see a business case for going green or, failing that, foresee pending regulation. Either way - carrot or stick - Canada's building stock will have to get greener, likely sooner than most think.
 
CREATING THE CONTEXT FOR SUSTAINABILITY

Existing commercial leases, based on the review undertaken by REALpac's Green Lease Committee, have many deficiencies when reviewed in light of emerging trends in sustainability. Commercial net leases generally do provide for operating costs that pass through building maintenance capital expenditures, but those clauses may not cover all costs involved in, for example, certifying a building under LEED EB or equivalent standard.

Existing leases may not allow for the recovery of carbon taxes, and they may not allow recovery of the costs of enforcement of environmental provisions against other tenants when the building environment as a whole benefits. Operating costs clauses may be vague when it comes to the ability of the landlord to purchase green power even though it may cost more.

Commercial net leases generally would not have any clearly established environmental goals, nor a detailed environmental management plan to show how the building could reach those goals.  Most commercial leases would not provide for smart meters for water or natural gas consumption. There are few existing leases that would deal with carbon credits and how they are allocated between the landlord and tenant, if and when they claimed.

In addition, costs dealing with rights of re-entry will need to be modified to permit the landlord to enter the tenant premises for the purpose of testing and, in some cases, for the purpose of making building modifications in order to comply with a green objective. These may include unilateral lighting retrofits, washroom upgrades or new controls.

On the technical side, few commercial landlords who are willing to set targets in a building will know how to describe a list of greenhouse gases or the accepted green standards for green furniture and fixtures, cleaning products or other types of tenant equipment.

Accordingly, almost every commercial lease currently in place in Canada, and the precedent forms currently being used by landlords, will be inadequate to deal with a carbon constrained and resource constrained world, not to mention a world where increasing government regulation in the green space will be the norm.
 
GETTING TENANTS ONSIDE

Leases are long-lived documents and it's not unusual for new tenancies, with renewals, to have terms of up to 20 years. Over that time period, a landlord (and the tenant) will have little ability to modify lease terms to enable the tenancy, the premises and the building to become more sustainable.

Each may be able to frustrate the other's attempts to green their space. Indeed, one can sabotage the other's air quality.

The single best opportunity to provide future flexibility for landlords and tenants in greening their premises and buildings is to convert all new tenancies to a form of green lease. In the existing buildings, the conversion process will, of course, be much more difficult as it may require landlords to have two or more sets of lease forms and charge-back calculations in use at one time as new tenants are brought in under the new lease form, while existing tenants are grandfathered under their old leases. If landlords of existing buildings can move existing tenants onto green leases, they will have more flexibility going forward to manage that building in a sustainable way.

Experience in Australia, the clear leader in this trend, has suggested that some tenants will resist the transition to green leases, particularly if they contain hard energy, water and natural gas consumption targets. Some tenants may not be willing to add non-traditional commitments to a lease deal.

Tenants may play landlords off against one another and suggest that they may prefer to be in a building where there are no environmental covenants. Tenants may be fearful of additional costs.  Tenants may also be concerned about an inadvertent breach of an environmental covenant in a lease.

As a result of these concerns, initial efforts by at least one major Australian landlord to green its leases included provisions that a breach of the environmental covenant in the lease was not a breach of the lease. This enabled the landlord to convince more tenants to sign on to the environmental objectives for the building as a whole, and move the tenants, baby-step by baby-step, towards the fully green lease. This is the approach initially taken by the National Standard Green Office Lease, although many landlords may want to make it a covenant.

Canada is generally behind the Australian model, but the Canadian industry is capable of catching up quite quickly, with the proactive work of landlords coast to coast. REALpac's objective is to make this job much easier.

The National Standard Green Office Lease is available to be downloaded, free of charge, from the REALpac web site at www.realpac.ca. There is also a black-line copy, comparing it against the National Standard (non-green) Office Lease so everyone can see what's different.

 
Michael Brooks is a partner with the Toronto law firm of Aird & Berlis LLP, the Chief Executive Officer of the Real Property Association of Canada (REALpac) and an adjunct professor at the Ted Rogers School of Management, Ryerson University.