Green Building Leases and How They Involve Consulting Engineers

Last June, the Real Property Association of Canada (REALpac) released a national standard “green” commercial lease in response to a demand by landlords and tenants for leases with “green” components.

A conventional commercial lease may not be sufficient to incorporate green components or to ensure that landlords’ interests are aligned with tenant usage. Conventional leases do not establish environmental goals for the building, for example, or rules to enable the building to achieve those goals. Nor do they anticipate emerging issues such as emissions trading or greenhouse gas regulatory caps. Green leases, on the other hand, do cover the above issues, and they encourage the use of green materials in building improvements and encourage green practices by both the landlord and tenant in the management, use and occupation of the building.

REALpac’s “National Standard Green Office Lease for Single-Building Projects -1.01 -2008” ( www.realpac.ca)was developed by a committee comprising lawyers, sustainability experts, leasing specialists and Leadership in Energy and Environmental Design (LEED) Accredited Professionals.

The green elements of the lease are landlord-centric in that they contemplate that the landlord will drive the green objectives, decision-making and compliance. Of course, the lease can be revised to a tenant-centric model, or a shared responsibility model. It is also intended for office projects, but again appropriate modifications can be made for retail and institutional scenarios.

Landlords and tenants who decide to use such a lease, will almost certainly need to rely on technical consultants at different stages of the process.

The green elements of the lease are in large part structured through an “Environmental Management Plan” (EMP). The plan is referred to in the following instances:

• The tenant must pay its share of operating costs to the landlord including costs of developing and/or modifying and operating the building to achieve the objectives of the EMP (Article 6).

• The landlord will permit the tenant to use electricity, domestic water, sewage disposal and other utility services as the landlord determines to constitute normal use or as may be specified in the EMP (Article 7).

• The landlord must manage, maintain, operate and repair the building in accordance with the EMP. The tenant must permit the landlord to take reasonably necessary steps to comply with the EMP (Article 8).

• The tenant must manage, maintain, operate and repair the premises and construct, use, operate and maintain leasehold improvements and all furnishings, fixtures and equipment so as to comply with the EMP. The tenant must also perform alterations in accordance with the EMP (Article 9).

• The tenant must use the premises in a manner consistent with the EMP (Article 10).

The EMP can have far reaching consequences to a tenant if the landlord pursues an aggressive plan.

Implementing the environmental management plan

General objectives include commitments to reduce the use of potable water, energy and the production of greenhouse gases, etc. Specific objectives may include targets and set dates for achieving parameters related to electricity and gas consumption, waste diversion, indoor CO2 levels, etc.

The parties will likely need to rely on technical consultants to obtain data on the above parameters prior to the lease and to advise on the legitimacy and attainability of the proposed environmental objectives. Selecting objectives that are so low they are not legitimate, or that are so high as to be unattainable, will simply frustrate the process.

One clause in the lease contemplates the possibility of regulators imposing a resource reduction target on the building. As well, the lease specifies that the landlord is entitled to the benefit of any carbon offset credits created as a result of activities conducted within the premises or the building (but of course, not those to which the tenant is entitled by law).

The implementation of the EMP is set out in various requirements, including those in the table on page 31.

The provisions are quite general and will likely apply to most commercial green leasing settings. However, further details such as which party will be required to carry the burdens and pay the associated costs, will always be a matter for negotiation between the landlord and tenant.

Compliance will be a tricky area should these leases come under judicial scrutiny. The EMP contains a clause requiring the parties to cooperate “from time to time in determining compliance with the Environmental Objectives… and in refining such Environmental Objectives from time to time.”

Although it’s not explicitly stated in the lease, it’s likely the parties will be required to rely on third party consultants to measure and report on the environmental performance of the building to determine if the stated Environmental Objectives have been met. Consultants’ assistance will also be helpful in addressing any failure to meet the objectives.

The REALpac Green Lease is a useful tool for negotiations but may lack elements that practitioners may wish to incorporate:

First, the lease does not include a dispute resolution mechanism. Such a mechanism could deal with both the determination of a breach and its resolution. The provisions of any applicable provincial arbitration legislation may be of assistance.

Second, there are no consequences for failing to achieve the environmental objectives. A breach of the EMP by either party does not constitute a default under the lease. This is intentionally so in the standard lease but may not be appropriate in all cases. In the absence of any consequences to a breach, it will always be uncertain whether the party in breach is likely to actually “use commercially reasonable efforts” to cooperate with the other party and bring about a remedy.

While currently green buildings and green leases are not typical in commercial leasing in Canada, their prevalence will grow in the coming years as is already happening in Australia and the United Kingdom.

Tamara Farber is a partner and certified specialist in environmental law at Miller Thomson LLP. David Holmes is an associate in the firm’s real estate group. Both are in Toronto.