We recently had the privilege of drafting a first of its kind Green Rider for a national lending institution for use with its branch leases throughout the United States and Canada. The Rider was drafted broadly from a national tenant’s perspective, so as to be read within the context of an existing landlord lease form. Our goal was to put together a comprehensive sophisticated document to serve as a source of key provisions that the business decision-maker at the client could review, choose from, and tailor to the specific project at hand.
In an ideal world, landlords and tenants would have perfectly aligned sustainability goals. In reality, often their goals are not aligned, as landlords tend to bear the brunt of the initial capital costs, while tenants tend to reap most of the long-term benefits in energy savings. The following considerations are just the beginning of a myriad of issues and concerns that should be addressed when one considers implementing sustainability goals in a lease.
Dividing the Duties
The Green Rider should appropriately divide sustainability obligations and allocate key risks between landlord and tenant. While the most costly obligations associated with sustainability, such as retrofitting, benchmarking and certification, will fall on the landlord, sustainability is not without its own costs and obligations for tenants. Sustainable tenants should be prepared and budget for the additional costs and obligations that may not normally be imposed on a traditional tenant, such as increased capital contributions and the engagement of sustainability consultants.
To LEED or Not to LEED?
Whether the leased premises, the building, or both, will be LEED Certified is a critical issue that the landlord and tenant should discuss very early in the leasing process. Unless the parties have agreed on obtaining a certain level of LEED Certification, the Green Rider should provide optional language on LEED Certification that also provides timelines and benchmarks to measure the progress of certification attainment.
Tailoring the Rider
In a typical lease transaction, property type affects key lease items, such as rent structure and lease incentives. In a sustainability context, property type is even more important, and the feasibility of each sustainability measure should be considered based on the type of property involved. For example, a triple net lease in a to-be LEED Certified office tower may involve a heavily negotiated certification and indemnification provision, while a gross rent in-line shopping center lease may focus on the capital contribution provision.
The Green Rider should also be tailored to the specific landlord party involved, which could range from a sophisticated shopping center developer to a small business owner. The client’s business decisionmaker should choose Green Rider provisions depending upon the size, capabilities and mind set of the particular landlord in question.
Optional vs. Absolute Terms
In certain cases, the parties may want a particular sustainability goal to be an aspiration and, in other cases, the obligation must be drafted in absolute terms. In the aspirational case, the drafter should consider using language such as “endeavor to” or “use good faith reasonable efforts to obtain”, with limited repercussions if the goal is not met. Alternatively, when the deal requires that a particular requirement be absolute, the Green Rider should provide that failing to comply is a default, and seek indemnification for such a failure.
This article is the first part of a Sustainability in Leasing Series designed to assist commercial landlords and tenants with implementing green leasing practices by providing practical insight and solutions. The next installation in the series is: Sustainability in Leasing – Part II: The Green Lease Policy Statement & Practical Solutions to Implementing Green Goals and is featured below in this newsletter.
Questions can be directed to Inshirah A. Muhammad, Associate in the Phillips Lytle Environment and Real Estate Practices at (212) 508-0465 or firstname.lastname@example.org.