By Lee Kaplan, Associate
As more companies boost their sustainability initiatives, both landlords and tenants are increasingly looking to advance their environmental goals through special lease provisions. “Green” provisions mandating environmentally-friendly practices can benefit both landlords and tenants economically – and seem poised to become standard practice in commercial leasing because of the growing political and social emphasis on sustainability.
Many commercial landlords have reevaluated their lease forms to address green issues in response to their own sustainability goals and the environmental goals of their tenants, lenders and investors. A growing number of credit tenants and institutional investors now require commercial property owners to include sustainability requirements in their form leases, and many landlords, tenants and capital providers now have team members dedicated to augmenting sustainability practices.
The growing demand for sustainability requirements to be imbedded in leases, coupled with the Inflation Reduction Act of 2022’s benefits for commercial real estate, has many landlords reevaluating their environmental practices. Many leases now including provisions that require both landlords and tenants to prioritize resource conservation.
Green lease provisions can take many forms, but common provisions include:
- Limits on energy and utility usage
- Reporting of energy and utility usage
- Waste disposal and recycling mandates
- Requirements for the installation or use of resource-saving technologies or fixtures (such as lights and faucets)
- Requiring compliance with LEED or other “green building” certifications.
- Mandates for materials to be used,
- Separate utility metering, and
- A requirement that the tenant cooperates with any parking management plan implemented by the landlord, including in some projects parking reduction and use of public transportation.
Sustainability obligations are distributed between landlords and tenants as part of lease negotiations, and compliance with these provisions often results in significant cost savings for both parties. Obligations imposed on tenants often require steps to minimize waste and comply with recycling programs, while landlords may be asked to make energy-efficient upgrades to their buildings. The extent to which such upgrades, and the costs of compliance with governmental sustainability mandates, may be passed on to tenants is subject to negotiation.
Extra incentive to engage in green leasing exists in jurisdictions where applicable law requires or incentivizes environmentally friendly practices, and at properties where landlords are seeking to achieve or maintain LEED certifications. For example, in California, utility data sharing lease provisions are especially important given existing law that requires landlords to report energy use data for larger buildings, and a newly enacted law will require large companies to make additional environmental disclosures starting in 2026 regarding greenhouse gas emissions and climate-related financial risks.
In addition to potentially reducing costs, incorporating sustainability concepts into commercial leases could help landlords and tenants access or benefit from governmental grants and subsidies. For example, the Inflation Reduction Act includes billions of dollars in incentives to commercial landlords that implement green upgrades to their buildings, but some of those upgrades may be impossible to complete without tenant cooperation.
A commitment to sustainability in leasing also has obvious reputational benefits for landlords and tenants alike and can help landlords attract tenants seeking to recruit and retain top talent, as workers increasingly seek out environmentally and socially responsible employers. Additionally, prioritizing environmental sustainability may make property owners and the companies that occupy their buildings as tenants more attractive to investors, as impact investing becomes increasingly widespread.
Sustainability concepts in leasing may benefit, landlords, tenants, and society at large. Increasing recognition of these benefits throughout the commercial real estate industry means that green lease provisions are poised to become more prevalent in the years to come. Landlords and tenants interested in this growing trend should consult with experienced leasing counsel regarding lease terms that could positively impact the planet and their bottom lines.