Recently, there has been an uptick in Environmental, Social, and Governance (“ESG”) factors being considered and incorporated into commercial real estate transactions. As climate change has become more important, the commercial realty industry has seen an increase for green buildings and clean energy infrastructure. ESG factors are now being included in 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 landlord and tenant requirements, as well as building specific needs. These are some of the most common ways that landlords and tenants can include green leasing provisions in commercial real estate leases.
- Building Certification – For ground leases, landlords can require the building be constructed in a manner to meet the requirements for some sort of green building certification, such as LEED or ENERGY STAR. A landlord can ask tenants to include sustainable design components, materials, and construction methods that are recommended for green building certification. However, this is less expensive and more accessible.[1]
- Renewable Energy – Leases can be drafted to meet landlord and tenant needs with regards to renewable energy depending on the property. Parties can include language that allows the tenant to put solar panels on their buildings. They will also receive any power generation income. The parties might also want the landlord to install and maintain on-site renewables, and the tenant to buy power directly from him.
- Major Energy-Saving Improvements – When it comes to energy-saving improvements, leases can be structured in a manner that allows the parties to share the costs more evenly. A net lease where the landlord is responsible only for capital expenses and the tenant for operating and utility expenses means that the landlord has little incentive to make energy-saving improvements as they don’t directly benefit from them. Landlords can be incentivized by choosing a different cost sharing structure to implement major energy-saving measures.[2]Leases can also include an amortization option to spread out capital expenses over a specified time period, if this makes sense given the length and duration of the lease term.
- Equipment and Appliances – The inclusion of green leasing provisions does not always have to compel the parties to partake in major, expensive projects. Leases can require that only ENERGY STAR rated appliances and equipment, such as computers, phones, and data centers storage units, be used within the leased premises. These fixtures may also need to comply with EPA WaterSense program standards.[3]Other minor requirements could include LED lighting throughout leased premises, window shading to lower solar radiation, reduce cooling demands, optimization of HVAC schedules and temperature precedents in order to improve HVAC efficiency, lower costs, and optimize HVAC schedules.
- Outdoor Spaces – If the leased property includes outdoor spaces, the parties can consider including language to reduce unnecessary irrigation and require native plants to be utilized.
- Employee/Occupant Benefits – Similar to green building certification requirements, leases can require the building to meet the WELL Building Standard. The WELL Building Standard addresses health and wellness of people by “measuring, certifying, and monitoring features of the built environment that impact human and well-being, through air, water, nourishment, light, fitness, comfort and mind.”[4]These standards are intended to improve mood, performance and health of building occupants. To improve indoor air quality, a lease may limit the use or toxic cleaning products on a smaller scale. Another beneficial provision that parties can incorporate into their leases to positively impact the lives of tenant’s employees and the environment is by requiring the tenant to provide a certain amount of money towards a public transportation pass or vanpool pass to all employees who use such forms of transportation to get to work or require the tenant to provide bicycle storage for employees to encourage the consideration of alternative methods of transportation.
[1] Darren A. Prum, Commercial-Property leases as a means for private environmental governance, 35 Ga. St. U.L. Rev. 727 (2019).
[2] Andrew Feierman, What’s In A Green Lease?Institute for Market Transformation (2015).
[3] See WaterSense, United States Environmental Protection Agency, https://www.epa.gov/watersense.
[4] WELL Building StandardInternational WELL Building Institute https://standard.wellcertified.com/well.
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