Integrating Environmental Sustainability Concepts into Commercial Real Estate Leases | Husch Blackwell LLP

Recently, there has been an increase in environmental, social and governance (“ESG”) factors considered and incorporated into commercial real estate transactions. As the focus on climate change mitigation has increased, the commercial real estate sector has seen an increase in green buildings and clean energy infrastructure. The drive to integrate ESG factors into the industry has even trickled down to commercial real estate leases. Leases, which include various provisions to promote energy efficiency and environmental sustainability, are often referred to as “green leases”. Green leases can be tailored to meet the requirements of landlords and tenants, as well as the specific needs of the building. Here are some common ways landlords and tenants can incorporate green tenancy provisions into commercial real estate leases.

  • Building certificate – For land leases, landlords may require that the building be constructed to meet the requirements of some sort of green building certification, such as LEED or ENERGY STAR. As a cheaper and more broadly feasible approach, the landlord may require the tenant to include certain sustainable design elements, materials, or construction methods recommended for green building certification, but does not actually require certification to be obtained.[1]
  • Renewable energy – Leases can be written to accommodate landlords’ and tenants’ renewable energy needs based on the property. Parties may include language allowing the tenant to install solar panels on buildings and receive all benefits from the panels, including electricity generation revenues. On the other hand, the parties may want the landlord to be responsible for the installation and maintenance of renewable energy on site and require the tenant to purchase electricity directly from the landlord.
  • Major power saving improvements – For energy retrofits, leases can be structured to allow parties to share costs more equitably. Under a net lease, where the landlord is responsible for capital expenditures and the tenant is responsible for utility and operating expenditures, there is little incentive for the landlord to add energy upgrades because it does not directly reap the cost benefits of these improvements. By choosing a different cost-sharing structure, homeowners can be incentivized to implement major energy-saving improvements.[2] Alternatively, leases can include an amortization concept to spread capital expenditure over a specific period of time, if that makes sense given the length of the lease.
  • Equipment and appliances – The inclusion of green leasing clauses does not always have to oblige the parties to participate in large and expensive projects. Leases may specify that only ENERGY STAR qualified appliances and equipment such as computers, telephones, data center storage units and refrigerators are to be used in the leased premises. Additionally, with respect to fixtures and plumbing, these fixtures may be required to meet the standards of the EPA’s WaterSense program.[3] Other more minor requirements may include LED lighting in leased premises, installation of window shades to reduce solar radiation and reduce cooling demands, and optimization of HVAC schedules and temperature precedents. to improve HVAC efficiency and reduce costs.
  • Outdoor spaces – If the leased property includes outdoor spaces, parties may consider including wording to reduce unnecessary irrigation and require the use of native plants.
  • Employee/occupant benefits – Similar to green building certification requirements, leases may require the building to meet the WELL building standard. The WELL Building Standard addresses human health and well-being by “measuring, certifying and monitoring characteristics of the built environment that impact human well-being, through air, water, food, light, fitness, comfort and spirit”.[4] These standards aim to improve the mood, performance, health and well-being of building occupants. On a smaller scale, a lease can limit the use of toxic cleaning products as a way to improve indoor air quality. Another beneficial provision that parties can incorporate into their leases to positively impact the lives of the tenant’s employees and the environment is to require the tenant to provide a certain amount of money for a transportation pass. or a carpooling pass to all employees who use these means of transport. to commute to work or require the tenant to provide bicycle storage for employees to encourage consideration of alternative modes of transportation.

[1] Darren A. Prum, Commercial leases as a means of private environmental governance35 Ga. St. UL Rev. 727 (2019).

[2] Andrew Feiermann, What’s in a green lease?Institute for Market Transformation (2015).

[3] See WaterSenseUnited States Environmental Protection Agency, https://www.epa.gov/watersense.

[4] WELL building standardWELL International Building Institute, https://standard.wellcertified.com/well.

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