Green Leasing – a Win Win for Tenant & Landlord

Green Leasing – a Win Win for Tenant & Landlord

Owners and occupiers of commercial properties are increasingly accepting the fact that the environmental performance of the buildings they own and occupy is not to be disputed or ignored anymore. But when it comes to sustainability initiatives such as energy efficiency or water conservation measures, owners and tenants are often found working in divergent ways, duplicating both the efforts and the spend in the process.

Despite the overwhelming benefits, owners and tenants face competing needs and priorities, stopping them both from accessing the tangible environmental, financial, health, security, and productivity gains that high-performance buildings deliver.

One of the ways to align the priorities and integrate the efforts is to get concurrence of purpose first and then put a structured process in place, which can be achieved by simply formalizing   environmental collaboration through the lease agreement they enter into.

Building leases do sometimes spell out how energy costs are divided between tenants and owners but they are usually vague and unstructured. Under most ‘gross leases’, for example, tenants have no incentive to save energy in their leased premises because energy costs are based on square footage they occupy and under most ‘net leases’, building owners have no incentive to invest in enhanced efficiency of building systems because the operating savings are enjoyed by the tenants.

To address this dilemma and to be fair to both the parties, a simple approach called ‘Green Leasing’ has emerged to support transacting for a building tenancy. This is done basically to promote energy efficiency through lease clauses that equitably assign costs and benefits of efficiency-related capital investments between the owners and tenants.

Many corporate tenants might have heard about green leases and many would have wondered whether they should consider crafting one. The answer, for a variety of reasons, is a Yes as such an arrangement would truly benefit everyone – the tenants, the landlords and not the least, the environment.

Benefits

  • Green Leasing – also known as Energy-Efficient Leasing or High-performance Leasing – is a set of leasing clauses that aim to allocate the financial costs and the resultant savings of investing in efficient building systems and operational practices between the owner and the tenant so that both can work towards maintaining and improving the same.
  • Green leasing also helps landlords and tenants manifest and quantify the sustainability goals they share providing a hedge against rising costs for energy, water and other resources and preemptively managing dynamic, divergent and stringent local building codes.
  • Green Leasing is a governance frame work that is generally applicable to tenancy within a green building. Often, it merely requires restructuring of terms and agreements already in place – such as, setting the average indoor temperature or capping the number of operating hours etc – in a fashion that provides sustained cost savings. Of course, all this without negatively impacting the tenant’s business performance or occupant comfort.
  • Leasing clauses can range from ‘Light Green’, where the parties work towards and not necessarily commit to specific actions to ‘Dark Green’ where more rigorous targets, monitoring and penalty mechanisms may apply. Securing environmental performance commitments, allocating financial investments and incentives and sharing verifiable technical data are the three key clauses that need to be prioritized in a typical Green Lease.

Though technologies like Intelligent Building Management Systems and Building Information Modelling will continue to improve the building performance, Green Leasing will certainly add a new dimension to the green building movement and drive real collaboration between landlords and tenants, the two major stakeholders in any green building movement.

Gautham is a co-founder of Responsible Cities Foundation

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