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What is a Green Lease?

No organization is exempt from the ESG boom. The growing public focus on environmental sustainability has affected building owners and occupiers alike, with parties on both sides of the rental equation committing to SBTi-aligned targets, navigating an increasingly stringent regulatory environment, and searching for ways to reduce their carbon footprint. This has contributed in recent years to the rise of a new type of commercial lease agreement. Enter the green lease. 

Green leases are a type of lease agreement designed to align tenant and landlord interests around energy efficiency, water conservation, and other environmentally friendly measures in the construction, operation, and usage of commercial spaces. Widely regarded as effective and mutually-beneficial tools in the broader sustainability toolkit, these specialized agreements include language that requires both landlord and tenant to take actions they may not otherwise be incentivized to pursue, with an eye towards improving the environmental performance of a building. 

There can be lots of moving parts with green leases, so let’s dive in. 

What goes into a green lease? 

There is no single, standard green lease – each one is different and will depend on the specific priorities of both landlord and tenant. But there are common topics that green leases may address, including: 

  1. Energy efficiency measures: A green lease may require the landlord to make energy-efficient upgrades to the building, such as installing energy-efficient lighting or HVAC systems, or require the tenant to turn off lights and equipment when not in use.

  2. Pass-through clauses for capital improvements: Triple-net leases often suffer from a “split incentive” problem when it comes to energy efficiency upgrades. Namely, if tenants are paying for utilities directly, landlords have no financial incentive to invest in capital upgrades that reduce energy use, because the resulting savings will go to the tenant. To address this, some green leases will incorporate a “pass-through” clause that allows landlords to pass on the costs of capital improvements onto tenants as operating expenses.

  3. Water conservation: The lease may include provisions related to water conservation, such as requiring the installation of low-flow toilets, faucets, and showerheads.

  4. Submetering: Green leases may include provisions that allow landlords to submeter tenant spaces and/or equipment for accurate energy and emissions monitoring and to facilitate reporting, benchmarking, and compliance. If there is tenant usage that falls outside of the landlord’s submeter, the lease may require the tenant to report it.

  5. Data sharing: Related to submetering, the lease may also stipulate that the landlord and tenant must share any data they have relating to the environmental performance of the building. These clauses can be particularly helpful for landlords in triple-net lease scenarios, where tenants generally control utility access. On the flip side, sharing landlord-controlled data can also drive tenant engagement with energy efficiency initiatives and promote adoption of more sustainable practices. There are many avenues to take here, as both parties (landlord and tenant) may reasonably need energy data to facilitate their own sustainability programs and ESG reporting and compliance. Data sharing clauses should include language around the frequency of reporting and the utility types and metrics to be reported. 

  6. Onsite/offsite renewables: A green lease may include specific language around financing, installing, and operating onsite solar, or to define a certain percentage of the tenant’s purchased electricity that must come from renewable sources. 
  1. Indoor air quality: The lease may include clauses about ventilation and air filtration (e.g. in accordance with applicable ASHRAE standards) and/or require tenants to minimize or eliminate usage of toxic cleaning products and paints.

  2. Waste reduction: The lease may include provisions related to waste reduction, such as requiring the landlord to provide recycling and composting facilities. The tenant may also be required to implement practices like reducing paper usage or committing to a recycling program.

  3. Reducing transportation-related emissions: The lease may contain provisions that support the reduction of emissions from employee transportation, including requiring landlords to provide bike storage, or requiring tenants to provide transit benefits for their employees.

  4. Sustainable purchasing: The green lease may require tenants to opt for energy-efficient appliances (e.g. ENERGY STAR-certified office equipment) and lower carbon building materials during remodels and build-outs. 
  1. Green certifications: The lease may require the landlord to obtain green building certifications such as ENERGY STAR, LEED or BREEAM, or to maintain any existing certifications.

  2. Local law compliance: In jurisdictions with strict building performance standards, a growing tactic is to include green lease language that allows fees and fines to be shared with tenants in the case of non-compliance.

  3. Retrocommissiong and energy audits: The lease may require the landlord to conduct retrocommissioning of building systems and equipment (in compliance with ASHRAE guidelines) or perform energy audits at an agreed-upon interval. 

Green lease provisions can range in specificity and scope. Figuring out the right approach will require collaboration between ESG, legal, and other stakeholders like asset management, property management, and leasing. Want more details? BOMA and IMT have created guides with sample green lease language that you can incorporate into your own agreements, and IMT’s Green Lease Leaders program has a library of resources and real-world case studies. 

What forms do green leases take? 

There are generally two approaches for incorporating a green lease: including the green lease as a separate exhibit to the standard lease agreement, or integrating the green lease language throughout the standard lease agreement. 

Both approaches have pros and cons, though IMT’s Green Lease Leaders program advocates for the integrated approach, as it makes green leasing part of standard business operations and “normalizes” it for the tenant. 

Guidance for implementing a green lease 

Just as there is no industry-standard green lease, there is no single right way to begin the green leasing process. 

In some cases, the tenant may be the driving force – perhaps they have corporate sustainability targets and have already worked with legal counsel to develop standardized green lease language. In other cases, the landlord may be the catalyst – sustainability-conscious owners often see green leases as the right solution for aligning interests and ESG efforts with triple-net tenants. 

In either scenario, implementing a green lease will involve collaboration and negotiation. Agreeing on the topics to cover, the exact provisions to include, and the final language will take time. And in situations where tenants are not already familiar with the benefits of green leasing, landlords will need to engage tenants early in the process and ensure they are effectively communicating the mutual value. As with all lease agreements, green lease provisions can be contested and redlined during the negotiation process. Keep this in mind as you think about including provisions around submetering, data sharing, and other topics that may touch on tenant privacy – early collaboration and communication will be key to ensuring tenant buy-in.

One high-level tactic is to account for all stakeholders up front. On the ownership side, this means ensuring that your organization has a defined policy around green leases (with committed buy-in from leadership), and that everyone from the C-Suite to asset management to property management and building engineering understands the value of green leasing as a best practice. Property teams and building engineers will be invaluable resources, as they know day-to-day operations best and can provide guidance around the most important focus areas for a given building. On the tenant side, this will mean bringing together construction, design/architecture, and consultants with the relevant stakeholders from ownership. 

Another tactic is to make energy efficiency part of the conversation early – before lease negotiations even begin. IMT and Green Lease Leaders recommend that landlords proactively engage tenants on long-term efficiency strategies up front, and discuss how to align the tenant’s construction needs with the broader sustainability goals for the building. This sets the stage for future negotiations and will ensure that priorities stay in sync. 

Looking for further help? Green Lease Leaders has tips for incorporating green leases into each step of the leasing process, and Washington DC’s Building Innovation Hub has practical guidance that applies to any region.