Green leases: a way to reduce greenhouse gas emissions

By Peter McMahon and Crystal Eggleton.

Key Points:
A green lease incorporates environmentally sustainable design principles and specific rights and obligations on the landlord and tenant in addition to those found in a conventional lease.

Buildings contribute about 40 percent of total greenhouse gas emissions with heating, ventilation, air-conditioning and lighting accounting for 84 percent of the commercial building sector’s greenhouse gas emissions, so it makes sense that they should be on the frontline of the fight against global warming. One way that both landlords and tenants can contribute to reducing greenhouse gas emissions is by using a "green lease" to regulate the landlord-tenant relationship.

What is a green lease?

A green lease is distinguished from a conventional lease by incorporating environmentally sustainable design principles and specific rights and obligations on the landlord and tenant in addition to those found in a conventional lease, such as environmental performance benchmarks.

A green lease is usually considered in the context of new buildings which have been constructed with environmentally sustainable design principles, but can apply also to a standard or retro-fitted building where the terms of the lease recognise the immediate things that landlords and tenants can do in their existing building to make a difference to the environment.

Key elements

A green lease involves a mutual commitment to environmental sustainability. Co-operative mechanisms need to be included so that both parties are working towards reducing energy and water consumption. The lease should also set out the benchmarks which need to be achieved. Experts should be used to determine appropriate key performance indicators and benchmarks to be included in the green lease.

A green lease requires a balance between a collegiate approach, where the parties set out their desired outcomes, and a coercive approach which specifies specific responsibilities and the consequences for failing to comply. The Commonwealth Government Green Lease Schedule represents a move towards the coercive approach.

For a green lease to be effective, there need to be penalties and/or incentives for meeting the benchmarks specified in the lease, otherwise there may not be a sufficient motivation to work towards achieving the specified targets. The appropriate remedy should be determined according to the importance of the benchmark but could include, in the case of a failure by the landlord, rent abatement or a reduction in outgoings, and in the case of a failure by the tenant, an increase in rent or outgoings. Damages for failure to meet targets could be difficult to assess but could include increased cost of outgoings and damage to reputation. The usual remedy for breach of a lease by a tenant, re-entry and termination, is generally regarded as inappropriate for a breach of "green obligations".

However, before agreeing to such penalties, the parties would need to be comfortable that reports into compliance with the benchmarks are accurate and reliable. Another issue in enforcing penalties is that often one party’s non-compliance can affect the other party’s ability to meet its benchmarks. As a result, it is important to include an appropriate independent expert mechanism for dispute resolution, which might include factors to be taken into account when making a determination and how to select the expert.

New provisions

In order to achieve the objectives of a green lease, there will need to be some creative provisions included in the lease as well as modifications to existing boilerplate clauses in standard leases.

These might include:

• restrictions as to the nature and kind of materials which could be used in fit-outs and refurbishments so that only green materials are used and a similar restriction for make good at the end of the lease
• imposing an obligation of the landlord to separately meter the energy and water consumption of each tenant
• a mechanism for the appointment of an independent consultant to monitor and assess compliance with the benchmarks set out in the lease
• setting targets to reduce water consumption and waste disposal
• an agreement to annually assess the NABERS rating and whether improved levels of certification can be achieved
• expanding the landlord's right of entry to repair the premises to also include installing energy and water saving modifications in the premises
• a modification of the landlord's right of entry to check the state of repair of the premises could be expanded to include checking on compliance with the green objectives of the lease; and
• a modification of the tenant's covenant to keep the premises in a clean and tidy condition to insist that waste be placed in different bins according to type and disposed of accordingly, with a converse covenant of the landlord to ensure recyclable and non-recyclable bins are available to the tenants to ensure these requirements are met.

These are just a few suggestions for matters which could be considered in preparing or negotiating a green lease in addition to the obligations on the parties to meet the benchmarks and key performance indicators set out in the lease and the consequences for failing to meet those benchmarks.

In keeping with the co-operative approach of green leases, it is also appropriate to establish in the lease a building management committee to deal with green issues arising from the building.

In order for a landlord to meet these obligations, it may be necessary to ensure that green obligations are written into service contracts to ensure that service contractors adhere to standards commensurate with the green objectives of the lease.

Why now?

Australia’s ratification of the Kyoto Protocol, which gives a binding commitment to limit greenhouse gas emissions to 108 percent of 1990 levels by 2012, should lead to a nationwide co-ordination of strategies and policies which will promote an increasing awareness and desire for environmentally sustainable practices in all facets of life. One way in which both landlords and tenants can act to support a reduction in greenhouse gas emissions is by implementing a green lease.

For further information, please contact Peter McMahon and Crystal Eggleton.