Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Real Estate Leasing, April, 2008
The past several decades have seen a major push towards environmentally friendly products, increased conservation of resources, and ensuring viable sustainability for future generations. Although progress has been slow, the "green" movement is becoming more prevalent in the commercial and industrial building and leasing sector of the economy.
Developers are now erecting "green buildings," employers are actively seeking environmentally friendly spaces from which to operate under "green leases" and employees are choosing to work for companies that value social responsibility.
A green building is one that is designed and operated using environmentally sound principles of promoting the efficient use of resources and minimizing the negative effects to the natural environment. Green building can lead to reduced operating costs by increasing productivity and using less energy, water and other natural resources, improved public and occupant health due to increased indoor air quality, and reduced environmental impacts. Green buildings are often built to satisfy a number of requirements in the Leadership in Energy and Environmental Design (LEED) certification system, originally developed by the United States Green Building Council and now under licence in Canada by the Canada Green Building Council. The LEED rating system is also being used in the United Kingdom, Australia and India. Alternatively, green buildings may have the BOMA Go Green or Go Green Plus designation, which are particularly useful for greening existing buildings.
A green lease is a lease for space, in either a green or conventional building, that incorporates ecologically sustainable development principles that help to ensure the ongoing use and operation of the building minimizes the impact on the environment. A green lease incorporates provisions that provide incentives to the landlord and the tenant to reduce energy consumption through efficient energy management practices, to increase the rate of recycling, and to use environmentally friendly materials when installing tenant improvements. Provisions contained in a green lease may also include: (i) setting targets and benchmarks for environmental performance by both landlord and tenant, together with remedies such as increased or decreased rent when those benchmarks have not been met by the respective parties; (ii) instituting rules and regulations regarding energy use, indoor air quality, materials used in the building and the leased premises, and recycling; and (iii) dispute resolution mechanisms to effectively govern disputes between landlord and tenant with respect to the targets and benchmarks.
The leasing of space in green buildings to tenants under green leases is on the rise. The question that landlords, tenants and even property managers are asking is "why do I care about utilizing green buildings and green leases whats in it for me?" The answer is simple: increased cost savings over the long term coupled with decreased negative environmental impacts and wasting of resources.
From a land owner and landlords perspective, green leasing helps to maximize the long-term return on investment obtained from a particular building. Although the upfront costs involved in constructing a green building are currently estimated to be approximately 5% higher than the costs involved in constructing a conventional building, the maintenance costs and expenses for green buildings are considerably lower. Additionally, research suggests that tenants may be willing to pay a slightly higher basic rent for space in a green building and that green buildings often attract a significant premium when being sold. Further, various government incentives, such as those found in the Canadian C-2000 program, exist to help make green building and green leasing more attractive from a financial perspective.
From the perspective of a tenant, green leases help increase profitability through materially reduced additional rent flowing from the increased efficiency of building systems and management practices. Of course, these cost savings will only be experienced in long-term leases since the basic rent charged under green leases in green buildings may be higher than rent charged in conventional buildings. In addition to the financial benefits that can be gained from operating under a green lease, the positive public relations effects of being associated with the green movement may be important. Also, the ability to attract and retain talented employees that are looking to work in a healthy and physically superior environment may be increased.
While green buildings and green leases are not currently the norm in commercial and industrial building and leasing in Canada, the instances of these buildings and leases continue to grow. As additional information and studies further show that the long-term benefits can outweigh the short term costs, it is anticipated that green building and green leasing will increase.
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