Regulations and Incentives

Across the country, building codes are being updated to require higher standards of energy and environmental performance, and governments at all levels are offering financial incentives for new green construction and retrofits. For example, the Ontario Power Authority in partnership with Enbridge, Union Gas and Hydro One (and in Toronto, the Better Building Partnership) have financial incentive programs for energy efficiency.

The City of Toronto has adopted The Toronto Green Standard to require certain new construction to meet minimum sustainable performance standards, and also offers reductions in development charges for some projects which meet higher standards. The City also requires certain kinds of new buildings to be constructed with “green” roofs.

Governments at all levels across the country either have, or are considering, regulations requiring their owned and leased property to meet certain standards of sustainability. Many building owners who have existing governmental tenants or who hope to attract such tenants to their properties in the future may find themselves out of the running because their real estate does not meet the green standards which these governmental entities are setting.

In addition to these and other governmental compulsory initiatives and incentive programs, many owners and occupants of new and existing buildings around the world are voluntarily adopting and implementing sustainability standards for their real estate. Applications for registrations under LEED, BOMA BESt, BREEAM, Energy Star and other rating programs are increasing exponentially.

There is a growing body of evidence that green buildings have higher rents, higher occupancy rates, lower operating costs and higher sale prices than traditionally built buildings and many occupiers are demanding green buildings with the expectation of increased employee productivity, decreased employee absenteeism and turnover, and lower occupancy costs. Green buildings are increasingly perceived by both owners and tenants as being good for business. Those who ignore this trend risk having their properties eventually become “dinosaurs”.

Why Green Leases Are Necessary

The combined “carrot and stick” effect of the commercial desirability of green real estate and new governmental regulation and both current and forthcoming incentives are forcing landlords and tenants of commercial properties to recognize the changes and challenges, and to rethink the lease documents which govern their roles, responsibilities and long-term relationship. It is no longer good enough to rely on existing lease forms.

When leasing space, all parties need to consider how the lease document will impair, or facilitate, their green goals, keeping in mind the long-term nature of many leases and the practical certainty of continuing major changes in the legal, political, social, environmental, design and business climate in which owners and occupants of buildings will have to manage their businesses and their property.

Albeit somewhat slowly, the North American real estate community has begun to understand the need for corresponding changes to their lease documents. Organizations such as the Building Owners and Managers Association (BOMA) and the Real Property Association of Canada (REALpac) have recognized this and have recently published “green” office lease forms, which are adaptations of standard lease documents previously published by them. REALpac has also published a green lease guide for commercial office tenants. For more information, go to www.boma.org and click on “Store” and then “Leasing”, or go to www.realpac.ca and select “Office GREENLEASE”.

Why is a green lease necessary? Simply put, because existing non-green lease forms are not designed for a “green” world and typically contain many terms which may prevent or inhibit the achievement of landlords’ and tenants’ sustainability goals. In addition, and importantly, they do not include provisions necessary to adequately address issues such as:

(a) standards, targets and benchmarks for environmental performance and management of the building and the tenant’s space,
(b) measurement of energy and water consumption,
(c) leasehold improvement, premises alteration, repair and maintenance obligations consistent with green standards,
(d) the treatment of costs related to green construction, achieving green certification, capital costs of green installations and replacements and green building operation,
(e) the use of green energy sources,
(f) the use of green cleaning products and methods,
(g) allocation of potential costs and benefits from new carbon taxes and carbon credits,
(h) sustainable standards respecting matters such as lighting, indoor air quality and garbage, and rules governing things like the use of construction materials and recycled products,
(i) the resolution of disputes concerning adherence to green targets or operational standards, or
(j) adequate remedies for the breach of green requirements in the lease.

Key Areas For Review

While it is beyond the scope of this article to describe all of the matters which a review of
existing lease forms with a view to making “green” modifications might address, some key focus areas are:

• operating costs
• permitted use
• casualty and insurance
• tenant improvements and alterations
• maintenance and repair
• removal of tenant improvements and fixtures
• landlord access
• waste management
• signage
• utilities
• assignment and subletting
• rules and regulations
• default and remedies

Leases are long-term agreements which, once signed, are difficult to change unless the parties mutually agree to do so. They need to evolve to reflect the changes which have already occurred, and which will continue to occur in the future, with respect to the design and operation of buildings so that they will meet the sustainability demands and requirements imposed uponboth landlords and tenants.

Conclusions

Landlords completing a new development have the opportunity to create a new “green” standard lease form, tailored to the particular goals of the landlord, prospective tenants and the nature of the building. Renewals of leases are more problematic, as they are often predicated upon the terms of the existing leases and therefore there is limited scope to introduce green lease provisions where the other party is unwilling to do so.

Some leases provide that renewals will be “on the landlord’s then standard form” – which
creates an opportunity to incorporate green lease language. Even if neither party has a right to compel the other to agree to amend the lease to incorporate green provisions, the
landlord and tenant may nevertheless each adopt their own green objectives and take action to
implement changes in those areas which are within their own control.

In the long run, landlords and tenants will likely conclude that it is in their mutual best interests to work closely together, and there is no time like the present to begin the task of identifying existing lease documents and creating new forms, which will facilitate rather than impede the realization of both parties’ legitimate “green” objectives.

Lloyd Cornett is a Certified Specialist (Real Estate Law) practicing with Aird & Berlis LLP in Toronto.

This entry was posted on Monday, August 23rd, 2010 at 2:19 pm and is filed under Going Green, Leasing Space. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.