June 6th - 2008

Green buildings may affect lease negotiations

Getting the right tenant with the right landlord or the right developer often requires masterful negotiations.

Getting the right tenant with the right landlord or the right developer often requires masterful negotiations. Green buildings add another dimension to the negotiation. That was one of the messages coming out of the Green Real Estate Conference in Toronto in April.
 
With all of the advantages of going green, including not only savings from reduced utility costs and lower operations and maintenance expenses, but also enhanced occupant productivity and health, comes a new set of expectations for tenants and with them, legal considerations.
 
Celia Hitch, Counsel, Lang Michener LLP, spoke about possible legal implications with tenants perhaps asking for minimum environmental standards in their leases. And they may even want a warranty.
 
Foster cooperation
Developers need to think about if they really want to go about a green building in a serious way and not just as a marketing tool. And REALTORS®, developers and landlords need to consider how to partner the tenant for the duration of the lease term to make sure that the building runs efficiently.
 
Here are a few tips that can be taken from Hitch’s remarks:

  1. Foster co-operation. A landlord may decide to install a day lighting system, but he or she doesn’t have the ability to require the tenants to leave the blinds where they need to be to make the system efficient.
     
    Or a landlord may want to install, for example, waterless urinals, but if there is a normal amortization schedule on the building, that might not be something that can be put through in capital expenditures if the existing facility has 20 years of life left in it. The tenant might not want to get stuck with the extra cost. Co-operation is key, because even though the landlord builds or retrofits the building, the tenants are the ones who are occupying the space and using the resources.
     
  2. If a building is going for Leadership in Energy and Environmental Design (LEED) certification, make sure your buyer/tenant understands the LEED process. “If you are a large tenant and the building is under construction and the building is going through an (existing building) retrofit before you move in, you may want to think about hiring your own LEED consultant to have some oversight,” said Hitch. A tenant may want to insist that they have the ability to monitor what the landlord or builder is doing, so that they can flag areas where the retrofit may lose points under the building rating system.
     
  3. Be sure both parties know how important the LEED rating is to the tenant. “If (the tenant) can establish that (they) really need this building to be LEED Gold…” for branding purposes or employee retention, for example “and you ask the landlord is it going to be LEED Gold, and it isn’t, how are you going to handle that? Maybe you can say that the landlord has fundamentally breached the lease…. The problem with that is that litigation is the slowest and least effective solution on the face of the earth. It can take years,” said Hitch. “This is where the landlord and the tenant need to partner in with some creativity about what it is that they really want… and what the recourse is to achieve that.”
     
  4. Put the solution in the lease.  Have a pre-negotiated recourse. The most effective incentive for a landlord is usually cash, said Hitch. If you are a tenant and the landlord promised you LEED Platinum but delivered LEED Silver, “I’d just say ‘You owe me $1 million.’ It seems like a big number, but if you think about the differential in rent costs…it is not long before you hit $1 million,” said Hitch. If you need to be able to walk away, put it in the lease.

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