No organization is exempt from the ESG boom. The growing public focus on environmental sustainability has affected building owners and occupiers alike, with parties on both sides of the rental equation committing to SBTi-aligned targets, navigating an increasingly stringent regulatory environment, and searching for ways to reduce their carbon footprint. This has contributed in recent years to the rise of a new type of commercial lease agreement. Enter the green lease.
Green leases are a type of lease agreement designed to align tenant and landlord interests around energy efficiency, water conservation, and other environmentally friendly measures in the construction, operation, and usage of commercial spaces. Widely regarded as effective and mutually-beneficial tools in the broader sustainability toolkit, these specialized agreements include language that requires both landlord and tenant to take actions they may not otherwise be incentivized to pursue, with an eye towards improving the environmental performance of a building.
There can be lots of moving parts with green leases, so let’s dive in.
There is no single, standard green lease – each one is different and will depend on the specific priorities of both landlord and tenant. But there are common topics that green leases may address, including:
Green lease provisions can range in specificity and scope. Figuring out the right approach will require collaboration between ESG, legal, and other stakeholders like asset management, property management, and leasing. Want more details? BOMA and IMT have created guides with sample green lease language that you can incorporate into your own agreements, and IMT’s Green Lease Leaders program has a library of resources and real-world case studies.
There are generally two approaches for incorporating a green lease: including the green lease as a separate exhibit to the standard lease agreement, or integrating the green lease language throughout the standard lease agreement.
Both approaches have pros and cons, though IMT’s Green Lease Leaders program advocates for the integrated approach, as it makes green leasing part of standard business operations and “normalizes” it for the tenant.
Just as there is no industry-standard green lease, there is no single right way to begin the green leasing process.
In some cases, the tenant may be the driving force – perhaps they have corporate sustainability targets and have already worked with legal counsel to develop standardized green lease language. In other cases, the landlord may be the catalyst – sustainability-conscious owners often see green leases as the right solution for aligning interests and ESG efforts with triple-net tenants.
In either scenario, implementing a green lease will involve collaboration and negotiation. Agreeing on the topics to cover, the exact provisions to include, and the final language will take time. And in situations where tenants are not already familiar with the benefits of green leasing, landlords will need to engage tenants early in the process and ensure they are effectively communicating the mutual value. As with all lease agreements, green lease provisions can be contested and redlined during the negotiation process. Keep this in mind as you think about including provisions around submetering, data sharing, and other topics that may touch on tenant privacy – early collaboration and communication will be key to ensuring tenant buy-in.
One high-level tactic is to account for all stakeholders up front. On the ownership side, this means ensuring that your organization has a defined policy around green leases (with committed buy-in from leadership), and that everyone from the C-Suite to asset management to property management and building engineering understands the value of green leasing as a best practice. Property teams and building engineers will be invaluable resources, as they know day-to-day operations best and can provide guidance around the most important focus areas for a given building. On the tenant side, this will mean bringing together construction, design/architecture, and consultants with the relevant stakeholders from ownership.
Another tactic is to make energy efficiency part of the conversation early – before lease negotiations even begin. IMT and Green Lease Leaders recommend that landlords proactively engage tenants on long-term efficiency strategies up front, and discuss how to align the tenant’s construction needs with the broader sustainability goals for the building. This sets the stage for future negotiations and will ensure that priorities stay in sync.
Looking for further help? Green Lease Leaders has tips for incorporating green leases into each step of the leasing process, and Washington DC’s Building Innovation Hub has practical guidance that applies to any region.