Sunday, January 24, 2010

A Green Lease Cautionary Tale

Imagine developing a new LEED certified building only to have the investment and competitive future of the property negated by one clause in a tenant’s lease. Think it can’t happen, or that it didn’t happen? Think again.

The anchor tenant in a new building caused a clause to be inserted in the lease which read:

“Landlord shall not be required to impose on Tenant or any other tenant of the Building, requirements for Tenant or other tenants to comply with any certification requirements under the USGBC’s Green Building Rating System or other green or sustainable design elements.”

Sustainable building, LEED certification and social responsibility all continue to be important elements in the commercial property maket sector. Achieving LEED certification and having a good sustainability program enhances market value and competitive positioning. More and more tenants have sustainability as a requirement because they recognize the long term financial and social benefits of doing so.

However, there is an expectation in the marketplace that buildings will improve their sustainability profile over time as new technologies and competitive requirements dictate. Doing so requires capital investment which must be borne in part by tenants, and there’s the rub. In the case referenced above the anchor tenant forced a clause into their lease prohibiting the building from requiring any tenants in the building from complying with any sustainable project requirements. Presumably this stance was taken to insulate the tenant from lease increases associated with capitalization of these projects. Once the clause is in place the building and its owner are effectively held hostage until the clause is renegotiated or the lease terms out. During the time the clause is in effect the building owner alone is responsible for capitalizing all sustainability improvements. Improvement which will benefit tenants as well.

A more rational approach would be to recognize that sustainability improvements over time will benefit both owner and tenants. Instead of negotiating a hostage clause like the one above the parties could have chosen to agree on a governance mechanism that would allow joint participation in decision making and an equitable cost / benefit sharing formula.

For more on this tale see

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