WHY ENTER INTO A GREEN LEASE?

Building owners are incentivised to enter into Green Leases to:

•    lower the building operational costs;

•    increase the ease of sale and rental (especially with the new Disclosure Obligations);

•    enhance tenant retention and improve occupancy rates;

•    receive a premium rent for Green Buildings; and

•    assist to future proof their “asset” from higher energy costs and tightening legal regulations.

Tenants prefer green leases because it:

•    improves tenant productivity;

•    improves general well being;

•    assists in meeting Occupational Health and Safety requirements for their own staff; and

•    strengthening of their “Brand” via their location/use of a green building.

LEASING & GREEN LEASING ISSUES TO CONSIDER

Traditional Leases

A conventional lease will typically contain the following features:

•    A right of exclusive possession for the tenant with the landlord usually only entitled to enter and remain upon the lease premises in limited defined circumstances coupled with the tenant’s right to quiet enjoyment;

•    It will define the amount and methods of repaying rent and outgoings (i.e. utility bills, rates, repairs and maintenance costs and insurance calculated as a proportion of a total reasonable floor area occupied by the tenants);

•    It will impose obligations on the tenant to only use the lease premises for a permitted purpose; and

•    It will define limited powers for the landlord to enter and remain upon the lease premises for repair and maintenance.

Green Leases

Green leases do require greater levels of cooperation and ongoing communication between landlord and tenant. That commitment is a hallmark of a green lease.

Landlords will require additional rights of entry to repair certain works, impacting on energy efficiency of a building, and the tenant may also be granted limited rights to carry out their own work.

Commercially, the building owner will pass any upfront costs of a green building upgrade onto the tenant through a higher rental. However, the tenant will often benefit from lower utility outgoings due to desired construction features that reduce energy and water consumption. Further, if the owner intends to sell its asset in a short to medium term, then it must also consider whether it can recoup its investment on the sale.

The green lease will therefore require key specific features including:

•    Targets and benchmarks, which could be an obligation on the landlord to separately metre the energy and water consumption of each tenant;

•    Establishing the mechanisms for the appointment of a qualified and independent consultant to monitor energy and water consumption and reuse, and assess compliance with targets and benchmarks prescribed by the lease to ensure they are cheap;

•    Describe the penalties for failing to comply with the lease obligations or achieved prescribed targets; and

•    Setting targets to reduce waste consumption and disposal and increase recycling.

One option that the owner could implement is to employ an Energy Service Company to design, build, finance and operate the Energy Efficiency upgrade of their commercial building, so that the owner does not bear the full cost of the capital works but funds the upgrade thought the energy savings and environmental permits. More information on Energy Service Companies will be provided in a future article.

The information in this article has been provided by Dermont Duncan from Crisp Legal. If you would like further information on green leases than we would be happy to put you in contact with Crisp Legal who are experts in energy efficiency regulations and other environmental issues that relate to commercial property. 

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