Climate-Aligned Leases: top seven aspects to consider
Leases are an important climate change tool
Leases are powerful tools to align owners and tenants towards shared climate goals. That said, “traditional” leases often put owners and tenants at odds. But it doesn’t have to be that way, and, in fact, new climate legislation and disclosure requirements are, for the first time, forcing owners and tenants to work together (and putting an end to outdated concepts like the “split incentive.”).
In this new market and regulatory paradigm, leases should be updated to meet these unique challenges and opportunities. This is especially true for (1) projects pursuing deep green goals (including Living Building Challenge and WELL or LEED Platinum), (2) projects that are part of portfolios with ESG goals or reporting requirements, and (3) projects sited in the ever-increasing number of jurisdictions with Building Performance Standards.
Lease language can manage a variety of risks by ensuring that expectations and obligations are clear and enforceable - so what are the key issues and considerations?
Key aspects and considerations
Below are the top 7 aspects of a climate-aligned lease. Many of these issues and considerations are not necessarily new, but they are heightened, or the issues more nuanced, in the context of high-performing, deep green projects and increased regulation of the climate impacts of the built environment.
Lease structure
Generally speaking, any “green” lease requirements should be incorporated directly into the lease, in the section(s) that is aligned with the topic, not tacked on the end as a “rider” or separate “green addendum.“ This sends a clear message to all parties that sustainability and climate-related aspects are integral and integrated parts of the project and, as such, the supporting documentation.
This structural change also makes it more difficult to just strike or “tear off” a separate addendum as “non-standard,” green aspects. And to be clear, “green” and sustainable lease aspects are very much standard in today’s world.
Learn more about lease structure and moving away from the term “green lease,” via this blog post.
Clarify and distinguish goals from requirements
Given that sustainability has often been thought of, and treated as voluntary, it can be easy to conflate goals with requirements. But in today’s world, sustainability is highly regulated and this trend is expected to continue. And while we encourage owners and tenants to work together and take a collaborative approach, this can sometimes result in a lack of clarity with respect to contractual requirements.
Good leases should clearly outline contract requirements and distinguish them from any aspirational goals. Contract requirements should be clear, include defined terms (see below), and outline the consequences of failing to achieve any requirements.
Photo by Mediamodifier on Unsplash
For example, if appropriate, tenants should have a specific energy budget, and a clear outline for what happens if the budget is exceeded.
Define key terms
Words like “green” can mean so many different things that they are virtually meaningless.
If we were asked to deliver a “green” building, and we wanted to be cheeky, we could literally paint the building green in color - and arguably we wouldn’t be wrong.
But we can do much better than that. It benefits all parties to clearly define key terms. One topic where we often see issues arise is specific project goals: clearly define which certification(s) are being pursued, including the relevant version (or “as of” date), and who is responsible for which aspect(s) of certification.
Operational issues and ongoing costs
Sustainability has moved from moment-in-time certifications (often driven by substantial completion) to performance based requirements that require a year or more of performance data. This is a big step in the right direction towards driving better climate outcomes. That said, ongoing performance requirements can be tricky and should be formalized and clarified in lease documents (and other contracts).
Aspects such as recycling and waste requirements, janitorial restrictions (chemicals and cleaners), Red List or other materials restrictions, and embodied carbon limits should be clarified.
For example, how long do any requirements last: through substantial completion? Through certification? Through re-certification? For the term of the lease? Including any extensions? Do they apply to any subsequent Tenant Improvements? These temporal limitations should be clarified in the lease.
Ongoing, performance requirements also require increased access to spaces for testing requirements, especially for certifications that focus on air and water quality (Living Building Challenge and WELL, for example). Testing and access expectations should be clearly outlined in the lease.
Consider the bigger picture
Lease considerations that relate to compliance with laws are critical, and Building Performance or Emissions Standards are a key example. Specifically, for laws that require data or other metrics to demonstrate compliance, owners and tenants will want to ensure their leases provide for data sharing. Leases should address the information necessary for climate-driven regulations such as climate disclosure laws (California’s SB 253), ESG goals and metrics, embodied carbon limits (building code amendments and purchasing requirements), and even expected future issues like water metrics and sub-metering (read more about water benchmarking at this blog post).
For example, for portfolios pursuing GRESB, Tenants and Community 4 “ESG-specific requirements in lease contracts” rewards “green” leases with an increasing number of points based on the number of social and sustainability-driven topics that the leases cover. If GRESB scoring is important, consider how leases can support that endeavor.
Data sharing
Transparent data sharing is key for compliance with building performance and emissions standards, as well as ESG reporting and carbon-disclosure legislation. Both owners and tenants benefit from transparent data sharing that is mindful of confidentiality and related considerations. And lease provisions that clearly outline the type of data, how it will be used, and an agreed upon format can save not only headaches, but also costs. See our comprehensive blog post, Data Sharing is Key to Building Performance Compliance, for more information.
Resilience and Social metrics
Buildings can provide or support social goals that manage risk and benefit the broader community. And we think that buildings should provide benefits beyond their four walls.
There are an increasing number of creative strategies that have a positive impact on the surrounding community.
A few ideas to consider:
Green Lease Leaders, Credit 10 Establish Social Impact Goals for Health, Wellness, Diversity and Inclusion
Ideas outlined in the WELL Building Standard (Feature Community 14, Emergency Resources, provide opioid response kit and training)
Reserving the right to use common areas as heating and cooling centers in the event of an emergency
These aspects can, and should, be supported by lease language and rules and regulations that outline expectations and any related safety or other considerations.
And, if owners are going to expect tenants to share costs associated with compliance or related capital expenditures, they should also design ways to share incentives and benefits with tenants.
Connect with us
We help our clients develop and negotiate leases that support compliance, manage risk, and meaningfully support climate goals. Because sustainability just doesn’t have to be that hard, and collaboration is the key to meaningnful climate action.
If you have questions or need support, contact us!
Disclaimer / Warning: This is common sense, but bears repeating: this blog is intended for informational purposes and does not contain or convey legal advice. The law is inherently fact specific. General information, including this blog, should not be used as a substitute for competent legal advice from a lawyer you have retained and who has agreed to represent you.