With climate change increasingly on the public agenda, the buzz term “green lease” is increasingly thrown about.

But, what is a green lease and what are the benefits?

This article explores environmentally sustainable leases and explains why a green lease provides benefits to landlords, tenants and the environment.

What is a Green Lease?

A green lease is a commercial or retail lease that is also:

  • Environmentally sustainable; and
  • Adopts and promotes energy efficiency measures.

The 2012 COAG National Strategy on Energy Efficiency highlighted that energy consumption in commercial buildings in Australia accounts for 25% of our total national energy consumption. This figure is staggering. If we can minimise energy in the corporate and retail sectors, it’s also worth considering how much you can do to reduce your overall energy consumption.

Green leases are not standard or uniform, and it is up to landlords and tenants to insist upon green provisions or changes.

There are many choices about the types of provisions to be inserted in commercial or retail leases to make them “green”. In general, there are two extremes – varying between a “hard green” lease on one end of the spectrum and a “soft green” lease on the other end. Most green leases fall somewhere in between these two ends of the spectrum.

Hard Green

A “hard green” lease contains strict provisions for breach of a lease, such as penalties for either party failing to reach green targets or failing to monitor energy consumption.

Soft Green

Alternatively, a “soft green” lease promotes a more collaborative approach and encourages landlords and tenants to work together to identify different ways that energy can be saved and work together towards these goals.

What Types of Things Do Green Leases Monitor?

Green leases consider ways to implement and operate environmentally friendly strategies and reduce energy use. Typically, a green lease includes clauses which relate to:

  • Ways the landlord can make modifications to the building or change management practices to raise their NABERS Energy rating or Green Star Rating;
  • Implementing energy performance measures;
  • Implementing reporting requirements and audit requirements;
  • Establishing an Environment Management Committee (EMC) and Environmental Management Plan (EMP) in larger commercial buildings; and
  • Promoting on-going cooperation between landlords and tenants to achieve mutually beneficial outcomes.

The Benefits of a Green Lease

When correctly implemented, a green lease can financially benefit both the landlord and the tenant. As a bonus, there are wider environmental benefits, which help all of us.

Tenant Benefits

Upon implementing a green lease, tenants can benefit from:

  • Lower energy bills;
  • Less water usage;
  • Fewer outgoings for items such as air conditioning, heating and waste management; and
  • Potentially a longer tenancy (given the cheaper operating costs), meaning fewer relocation costs.

Additionally, the tenant can promote its commitment to sustainability by way of reputation – something that may reap benefits for the tenant in certain industries. 

Landlord Benefits

Landlords can benefit from:

  • Lower operating expenses for the building;
  • Happier and longer term tenants;
  • Tax deductible expenses for implementing green changes; and
  • Entitlement to charge higher rent to tenants based on “green ratings”. 

Sustainability Ratings

Rating systems have been developed to monitor the sustainability goals of buildings and green leases, the two most common being NABERS and Green Star.

NABERS

The National Australian Built Environment Rating System (NABERS) is a rating scheme for existing buildings and collects and measures data with respect to:

  • Energy consumption; and
  • Resource consumption.

NABERS is a performance based management tool managed by the Government (in NSW, the NSW Office of Environment and Heritage) and aims to encourage both landlords and tenants to implement environmentally sustainable policies and reduce energy use and waste.

NABERS rates buildings by measuring the energy impact of its operations. This can include water and energy consumption, the refrigerants used, the way it deals with stormwater runoff, pollution and emissions, transport availability, indoor air quality, the satisfaction of the occupants (or tenants) of the building and its dealings with other waste and toxic materials. For example, NABERS will consider whether a building has solar energy or if it re-uses grey water.

Green Star

Green Star is a voluntary environmental rating tool administered by the Green Building Council of Australia – a national not for profit organisation.

Green Star offers ratings for design and “as built” buildings, encouraging green measures to be implemented in the design, development and construction process.

Green Star considers the following matters when deciding on a rating:

  • Is solar energy used?
  • What is the building made of (i.e. construction materials used) and are these recycled or recyclable?
  • Is the building sympathetic to its environment or location?
  • Is public transport available?
  • Can people walk or cycle to the building?
  • Does the building use grey water?
  • Is the building energy efficient?
  • How is natural light used in the building?
  • Is natural air available in the building?

Practical Considerations

Sound good so far? The next thing to consider is how you go about a green lease which contains a mechanism for sustainability measures and provides tools and support to achieve these aims.

New Leases

The first step to entering into a new green lease is to negotiate a heads of agreement containing green lease terms in addition to the usual commercial or retail lease terms.

If agreed upon at the outset of negotiations, ensure the final contract incorporates green lease terms, rather than as additional terms that parties can negotiate.

It is important to make sure that the lease includes the green lease terms as essential or core conditions, especially if green targets must be met, or the building fit out must conform to standards to ensure sustainability.

Physical Requirements

Consider also how the physical building and management of the building can best be optimised to deliver sustainable results.

Your green lease should include the following issues:

  • Environmental performance of the building;
  • Temperature regulation;
  • The ability to monitor electricity and energy use;
  • Metred services compliant with NABERS usage and targets;
  • Natural light;
  • Water use;
  • Improving and monitoring waste management;
  • Cleaning;
  • Bicycle storage and shower facilities;
  • Building management;
  • Assessment of and maintenance of a Green Star rating;
  • A provision for self-auditing; and
  • Building materials.

Existing Leases

Existing leases are harder to make green if they didn’t start out that way. In effect, it is often a retrospective application of green provisions and, if the building requires conversion, who pays for organising this?

Ultimately the landlord will end up paying, but may be able to pass on contributions by way of lease outgoings or operating expenses. If green changes to a lease can save the tenant costs of energy and other resources, it would be beneficial for a tenant to cooperate, both regarding sharing expenses and allowing the landlord access to carry out the green works.

An existing lease may not provide for some aspects such as data reporting and sharing as well as the establishment of an Environmental Management Committee. However, given the benefits outlined above, it may be worth landlords and tenants in existing leased premises consider whether green changes are worthwhile.

Key Takeaways

In a nutshell – green is good! Considering the environmental impact of your commercial or retail lease will not only save you money on expenses like energy, but it can also see you and your business reduce its overall footprint and commit to sustainability. If you are entering into a new lease, consider drafting green terms alongside the standard commercial terms of the lease agreement. If you are already engaged in a commercial or retail lease and would like to find out more about how to integrate green terms into your existing lease, get in touch with our leasing lawyers on 1300 544 755.

Emma Heuston

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