If you are the owner of a multi-tenant commercial building and you are considering implementing LEED or another green building rating system, consider these four aspects of your existing leases before making the leap.
First, what costs associated with new sustainability efforts can be shared with the tenants? A threshold issue in your decision to implement new measures will likely be cost and whether any of the cost can be shared with tenants. Take stock of what expenses are permitted to be passed through to tenants under the current leases. In particular, consider the treatment of capital expenditures and similar “big ticket” items. A lease may allow at least some of the cost (perhaps on an amortized basis) of capital expenditures that are energy saving devices to be shared.
Second, what latitude do you have to impose new operational procedures on the current tenants? A common example of a new operational procedure is a recycling program. A good rules and regulations provision will be helpful here because it may allow you to stretch the four corners of the lease a bit to add new sustainability measures and ensure tenants’ compliance. If you are planning to pursue certification or recognition through LEED or another green building rating system, then this will be an important consideration as the tenants’ compliance and cooperation may mean the difference between achieving certification and not.
Third, where will sustainability defaults fit into your leases’ current defaults and remedies provisions? With respect to sustainability measures that are law, it is often appropriate for you to mandate tenants’ compliance. For those measures that are not yet law, consider whether your tenants have an obligation to comply under the leases and when noncompliance becomes a default. It is likely that any noncompliance would be a covenant default, which may be subject to a longer notice and cure period. Practically, consider what remedies you are willing to exercise for noncompliance with sustainability measures.
Fourth, which party will reap the benefits of any rebates, credits or other incentives that accrue due to the new sustainability efforts? Often, a standard lease form will not address the allocation of these items. It is often assumed that the landlord receives the benefit but consider your tenants’ contributions to your sustainability efforts and also consider that for tax purposes and otherwise each party may benefit more from certain incentives.
Finally, and perhaps most importantly, you must communicate with your tenants and they must buy in to this process. It will make the implementation of sustainability measures infinitely easier if your tenants are on board and enthusiastic – involve them early and often so they can share in the success of your building’s transformation.Copyright © 2012 Pepper Hamilton LLP