Green Leasing Basics

by Geoff White, Esq., FIGP

      Green building and leasing has become a best business practice for many property owners and tenants for office, retail, warehouse space across the country. The generally perceived monetary benefits of leasingMetropolitan Building in Warsaw by Sir Norman Foster, Hon. FIGP a green building or tenant space is (i) increased worker productivity, (ii) profitability through long-term utility cost savings, and (iii) reputation enhancement, to both customers and potential employees. Companies such as PNC Bank, Citibank, McDonald’s, Subway, Target, Staples, Kohl’s, Best Buy and Office Depot and the U.S. General Services Administration have all placed a priority on leasing “green” space.

What is a green lease?

      Much like the term green building, a green lease does not have a widely accepted definition. A green lease can take many forms, however, the key concepts in any green lease are: (i) rent structure and operating expenses; (ii) utilization of sustainable building practices in connection with the build out of tenant improvements; (iii) sustainable development principles and regulations (throughout the building or larger development); (iv) the use and disposal of hazardous materials, including cleaning supplies; (v) recycling; and (vi) environmental management plans. A green lease may also detail environmentally friendly products to be used, water and energy conservation methods and targets, the use of alternative sources of energy on-site, such as solar or wind, indoor air quality standards, and dispute resolution procedures. The most useful resources for attorneys to utilize in drafting green leases are the United States Green Building Council’s (“USGBC”) Leadership in Environment and Energy Design (“LEED”) for Commercial Interiors (“LEED CI”), the Building Owners and Managers Association’s (“BOMA”) Guide to Writing a Commercial Real Estate Lease, including Green Lease Language (the “BOMA Guide”), the Real Property Association of Canada’s (“REALpac”) Green Lease Resource Centre and the California Sustainability Alliance’s Leasing Toolkit.

      The most prominent third party green building standard for leased space is the USGBC’s LEED CI. This system provides all parties with a framework and a third party certification system to adhere to in constructing tenant space.

      BOMA has produced a form of green lease that is likely to be an industry standard for years to come. BOMA is a membership organization of building owners, managers, developers, leasing professionals, facility managers, asset managers and the providers of the products and services necessary to operate commercial properties. In the summer of 2008, BOMA released the BOMA Guide, which was designed to facilitate the ongoing implementation of sustainable building practices. The BOMA Guide provides both property owners and tenants with a framework to enter into a green lease, although without the rigidity of the USGBC classification and certification process. Although the BOMA Guide will not be universally adhered to, it provides building professionals with the tools necessary to craft greener leases.

      REALpac’s Green Lease Resource Centre also provides excellent materials for attorneys to utilize in creating a green lease. The site contains a form of green office lease, as well as multiple other helpful resources. The form of lease is a modified version of the National Standard Office Lease that REALpac has published since 2002, making this resource comparable to the BOMA Guide. The form of green office lease is generally considered more of a consensus building form than the BOMA Guide. It focuses on targets and goals for sustainable features while generally avoiding harsh penalties for unintentional noncompliance with such goals. It is also designed in a flexible manner in order to consider long term changes in the real estate industry due to carbon offsetting and trading.

      The California Sustainability Alliance’s Leasing Toolkit is an excellent resource for all stakeholders in a green lease. It provides an effective roadmap of a green lease transaction from the RFP stage through lease negotiations. It also provides a useful green lease provision database that can help in drafting a green lease.

Unique Legal Issues for Green Leases

      Much like the rest of the green building industry, green leases contain a collection of legal issues that landlords and tenants have not previously considered in lease agreements. This article considers four common issues and considerations in connection with a green lease: (i) green building is generally more costly and its construction process might take longer than standard construction; (ii) new green building products should be used with care; (iii) the responsibility of obtaining the necessary LEED certification level must be considered and (iv) how the use of green building products and materials impact the insurance/casualty provisions within a lease.

      Green building is generally more costly and timely than the standard construction process. Landlords and tenants must realize this when determining the tenant improvement allowances detailed in the lease. Although having a green space is obviously an important issue, having a finished space ready in the necessary time period is generally a far more important issue. It is thus important for both parties to discuss these potential timing and cost issues with construction and design professionals that have green building experience that can provide advice in regard to both of these concerns.

      Landlords, tenants and construction and design professionals must collaborate in order to select and install green building products and systems that result in the achievement of both the green leasing goals of the project and the needs of the tenant because the use of certain green building products and systems may create unforeseen issues for the tenant. Some specific examples of a failure to collaborate were detailed in a presentation titled “Don’t Let Green Design Cause Red Ink”, presented by Frank Musica at the AIA Convention 2007 (this presentation is no longer available online). The first example to consider is one in which a design firm specified cork flooring in kitchen areas. Unfortunately, this product had not been properly tested for use in high traffic kitchen areas and the cork flooring resulted in a growth of mold created by the high traffic and water spillage of the kitchen area. Another example was a tenant that provided the government with military and terrorism identification systems. The tenant invested in green design that featured extensive day-lighting. The day-lighting included skylights and large window systems. Upon inspection of the new space by the government, it was determined that the tenant was putting confidential information at risk. The tenant faced a threatened revocation of its contractor’s security rating and cancelation of existing contracts. These outcomes show why all of the parties involved with green space must carefully work together in the installation of green building products and systems in order to avoid potential liabilities that would be otherwise unforeseeable.

      An increasing number of tenants require a specific LEED certification level be achieved in determining the acceptability of their leased space. In such instances, tenants may attempt to require the achievement of such LEED certification level in order to take occupancy or pay rent. Others may trigger a lease default if there is a failure to achieve such certification level. Landlord’s are not generally in the position to guarantee such certification level because the project architect, general contractor, subcontractor and the USGBC all have a major impact on whether the space meets the required certification level. The landlord will thus need to (i) make sure it is working with construction and design professionals that both understand these issues and are able to fulfill the applicable green building requirements and (ii) protect itself in its applicable construction and design agreements. The landlord and tenant should also work together in crafting a lease that adequately protects each of their respective interests and avoids liability outside of either of their control. Lease incentives such as free rent periods or rental abatements are the best way to properly incentivize a property owner to deliver a green lease space without undue penalty (default) for items outside of its control.

      A green lease must carefully consider the increase in both the replacement cost and the rebuilding period following a casualty event, due to specific green building issues. The cost of green building products are generally more expensive than standard materials. There will also be additional costs incurred if the space needs to re-obtain its LEED certification following a casualty event. It is important that each of those issues are considered when determining replacement value and how that is detailed within the lease. If the casualty event is not the fault of the tenant, the lease should also consider who will be responsible for the costs of the LEED re-certification. Finally, the rebuilding of the space will also take longer due to the installation of many energy efficient systems, an increased demand of green building products resulting in longer periods of time to obtain the products and the LEED re-certification process following the casualty event.

      In conclusion, green leasing, much like the green building movement itself, is here to stay. There are a multitude of new legal issues and risks that both a landlord and a tenant must consider if they elect to lease green space. These potential risks are further reasons to encourage your clients to work with the most skilled professionals in the green building industry, whether that is an architect, contractor or attorney in site selection, plan preparation, lease negotiation and the final build-out of the space in connection with a green lease.

This Article will be published (without the graphics/photos included here) in the October, 2009 issue of the Louisville Bar Association’s monthly publication Bar Briefs.

Geoff White is a Senior Associate in the Real Estate Group of the Business/Corporate Department at Frost Brown Todd. He is LEED Green Associate, a Fellow of the Institute of Green Professionals and a contributing author to Green Real Estate Law Journal. He is licensed to practice law in Kentucky and Ohio and is a member of the Kentucky Chapter of the U.S. Green Building Council.