In my last blog post, I outlined key issues that a landlord should consider when negotiating a lease with a perspective tenant in a LEED-certified building. In this post, I want to review the same issue but from the tenant’s perspective.
Green building practices and technologies are increasingly being incorporated into a growing number of commercial buildings. These green practices and technologies may benefit a perspective tenant in a variety of ways. For example, the tenant could realize energy and utility cost savings or obtain a reputational advantage from being in a LEED-certified building. On the other hand, a tenant needs to be mindful that the tenant’s operations in the building may be made more difficult, and the tenant’s proposed alterations to the space may be more costly, due to the landlord’s green practices. Examples of issues that a tenant should consider before entering into a lease for a LEED-certified or other green building include:
- LEED Compliance: In some cases, the tenant may require that the landlord’s building maintain a LEED-certified standard as a condition of the lease. If this is the case, then the lease should require that the landlord maintain the required LEED standard throughout the term of the lease and take such steps as are necessary to maintain the standard during the term.
- Environmental Management Plan: In a LEED-certified building, the landlord may have an environmental management plan that details what compliance standards the tenant must meet with respect to its energy and utility consumption, materials used, etc. Prior to signing the lease, the tenant must have a good understanding of the management plan and understand how the tenant may need to modify its existing operations to conform to the management plan.
- Operating Expenses: The tenant should pay particular attention to what is included in operating expenses that are billed back to the tenant in a net lease. Many green technologies are more expensive than standard technologies. Therefore, if the landlord needs to replace energy efficient mechanical systems, then the increased cost of these systems could be passed on to the tenant. While it is true that the tenant might realize a cost savings due to energy efficiencies, the tenant must consider whether the amortized cost of the improvement is more than the savings.
- Tax Benefits: In some instances, the landlord may receive a benefit in terms of tax or other incentives with respect to maintaining a green building. If the tenant’s sustainable activities are a direct cause of the landlord’s tax benefit, then the tenant should consider whether some of the benefit should be passed along to the tenant.
- HVAC: HVAC issues are a common point of contention between landlords and tenants. The tenant should consider whether the HVAC system in the green building is adequate to keep the tenant’s employees and customers comfortable during the heating and cooling seasons.
- Materials and Equipment Availability: Most leases contain a force majeure provision that allows the landlord a grace period for performing maintenance and repairs if materials and equipment are not available. This may be of a particular concern in a green building where specialized products and materials might take a significantly longer period of time to obtain than standard products and materials.
- Advertising and Promotion: If the tenant entered into the lease specifically because the building maintained a particular green standard, then the tenant should be allowed to use in its advertising and promotional materials the fact that the tenant is in a green building.