Green Lease Clauses to Consider in Commercial Leases

Filed under: Real Estate Law

The “green” trend is catching on everywhere, especially in areas like Southern California where we are highly concerned with saving energy. With buildings the single largest energy consumer in the United States, more landlords are considering green lease options. Commercial buildings account for 5.6 million structures, spanning 87 billion square feet, so any attempts to reduce energy usage will benefit us all.

Blog Image 2As a nation, we could save 3.3 billion dollars in energy costs by upgrading to more sustainable energy systems. So what’s holding us up? For existing commercial buildings that are not built to new “green” standards, it’s something called the “split incentive” problem. Landlords don’t want to pay for energy upgrades that won’t benefit them personally, and tenants don’t want to pay for upgrades on a building that doesn’t belong to them.

That’s where the “green lease” comes into play, and potentially help landlords and tenants align their interests in sustainability with their financial priorities. A green lease might include clauses that benefit both the landlord and tenant, so that both parties feel an incentive to implement energy-saving measures. Such clauses might include:

  • Submetering – rather than allowing energy costs to be aggregated across the entire building, adding submeters for each tenant allows landlords to bill them individually, thus providing incentive for tenants to reduce energy use;
  • Building commissioning – if the lease mandates regular evaluation and improvement to energy systems, tenants avoid inconveniences and landlords avoid delays in the improvement process;
  • Energy-efficient tenant improvement (TI) build-outs – tenants often pay for TI modifications to their space, but the lease can require them to select sustainable options such as LED lights, occupancy sensors, efficient appliances, and so forth; and
  • Savings pass-through – efficiency upgrades can be expensive for landlords, but they can recover some capital costs by passing savings from lower power bills through to their own budgets, until the costs are repaid, at which point tenants begin to benefit from savings

These are just some of the creative measures that can help a commercial landlord go green in older buildings. For more information on commercial leasing and ideas to improve energy efficiency, schedule a consultation with our real estate attorneys.

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