Perform Due Diligence When ‘Greening’ Your Lease

While it can be a complicated process to “green a lease” for a tenant that requests environmentally friendly provisions, these agreements can work in your favor, too. Cost savings through energy efficiency, earning valuable credits toward LEED certification, and becoming attractive to green-centric prospective tenants are all major benefits.

There are some downsides to going green. For example, if you don’t take into account certain factors, such as the property itself and your leases with other tenants, you might be forced to overspend on green retrofitting or initial buildouts, or end up violating other tenants’ lease covenants with the changes.

That’s why before determining which green clauses to incorporate into a lease, you should conduct careful due diligence. This should include an in-depth review of your obligations under any existing leases, as well as loan agreements or covenants, conditions, and restrictions (CCRs). When examining other tenants’ leases, review the language to determine your ability to impose new green obligations or restrictions on these existing tenants. This comes into play when a new tenant or a current tenant that’s requesting green changes wants you to get other tenants on board with the changes, in an effort to green the entire building or shopping center. While you can invoke your right to “make reasonable changes to rules and regulations” during existing tenants’ lease terms, doing so works only if your changes aren’t in violation of some other portion of their leases. So make sure ahead of time that your hands aren’t already tied by obligations in other clauses.

Setting two requirements for tenants that request green provisions will give you the information you need:

Requirement #1: Tenant must specify goals. Ask the tenant to come in with goals in mind. It’s hard to grant requests when a tenant and its broker don’t know exactly what it’s looking for in the lease.

Requirement #2: Tenant must suggest substitutions. The tenant shouldn’t present you with the Model Green Lease and insist that the entire document be used as your lease. When faced with a green proposal, don’t have the knee-jerk reaction of assuming that it will create burdensome work for you. If you have an existing lease, it should be easy to pull out non-green exhibits and integrate the Model Green Lease exhibits that the tenant wants to replace them with—if the tenant knows what replacements it actually wants.

Be prepared for some typical tenant concerns to come up during negotiations for green lease provisions. For five key issues to address in your green lease provisions see “Negotiate Green Lease That Creates Value for You,” available to subscribers here.