Green leases are coming of age – tenants need to unlock their full potential

A new generation of green leases is emerging, one which promotes enhanced collaboration and offers tenants a myriad of opportunities to reduce operational costs while achieving truly sustainable workplaces.

Tenants are increasingly interested in green leases. Globally, 34 percent of occupiers had green lease clauses in 2021, while a further 40 percent plan to sign them by 2025, according to JLL’s Decarbonizing the Built Environment report. As they become more popular, their scope is starting to evolve.

Many early green leases were focused solely on energy efficiency, and reducing water use and waste.

That’s now changing as building owners and tenants feel the pressure from incoming regulations and growing sustainability expectations among their customers, employees and shareholders. Today there is a shift toward reducing overall carbon emissions and delivering proof of net zero progress.

Some leading examples are also looking beyond the environmental side, to cover social and governance issues as well. Done well, these can create spaces that are as good for people as they are for the planet.

Leading green leases are starting to address criteria such as carbon taxes and credit allocations, and the use of sustainable materials in fit-outs. Others are now considering the addition and maintenance of high-quality amenities that better support employees’ daily needs and reflect companies’ health and wellbeing commitments, such as maintaining a high level of indoor air quality and natural light, along with social responsibility or diversity and inclusion clauses.

These sustainability-linked attributes can go a long way to improving employee satisfaction. It’s not only about providing a productive and welcoming environment that justifies the commute, but shows companies are taking their sustainability commitments seriously. All of this helps to attract an increasingly sustainability-conscious workforce and retain staff in the long-term.

Getting tenants and landlords working together

In contrast, collaboration between landlords and tenants is an area which, in many cases, is yet to meaningfully evolve. Establishing common areas that deliver benefits for both parties is critical. Energy use reduction is the top priority, followed by installing onsite renewables and then offsite procurement through power purchase agreements, virtual power purchase agreements or green tariffs.

Data sharing, particularly around energy performance, is key to monitoring and measuring progress. It’s in both the tenant and landlord’s interest to ensure data is as robust and accurate as possible. This provides greater visibility into what’s working well, identify areas for improvements and promote goal setting based on actual performance results.

The question of who pays is often a thorny one. In North America, tenants with triple net lease contracts can end up bearing the brunt of costs. In other situations, landlords who have signed full service leases can feel aggrieved if tenants get significant advantages without covering any of the costs.

It highlights the need for better collaboration; in cases where tenants’ energy bills will be significantly lower in the long-term, cost sharing and the introduction of performance-based programs can expedite progress towards common goals. Whatever the lease structure, tenants should be closely involved in conversations around any sustainability upgrade works to ensure disruption is minimized and additional operating expenses are minimized.

Bringing out the best in green leases

Green leases 2.0 are far more than a checklist of items to include in the contract; they should be outcome-based. Their power is in making a difference through superior sustainability performance and accomplishing meaningful milestones over the lease term.

They should set measurable goals with corresponding KPIs that reflect mutual tenant and landlord interests, their sustainability priorities and the characteristics of the property. The following considerations are key:

• Make sustainability a priority from the start - Tenants have greater leverage to execute stronger green leases if they prioritize sustainability when they begin their building search. Sustainability performance criteria and the landlord’s commitment to achieving greater environmental performance should guide site selection. Too often, tenants decide on a property and then try to shoehorn green lease clauses into the contract.

• Bring the right people to the table - Sustainability experts should be at the table during lease negotiations. If not, attorneys and brokers may remove green lease clauses due to a lack of understanding or to simplify the contract. Sustainability experts are best placed to identify lease elements that have current and potential future cost implications – and setting up the lease to be future-proof is in the best interests of all parties. Sustainability professionals are often responsible for ensuring green leases are executed so it’s important that key stakeholders from the tenant and landlord sides meet early in the process.

• Maintain flexibility - Green lease clauses should focus on sustainability performance rather than installing specific materials and equipment. Overly specific clauses may inhibit action that can achieve optimal results. For example, rather than specifying ‘LED lighting’ across the building, it could be better to mandate ‘reasonably efficient light fixtures’, because what is the most efficient today may not be in five years’ time.

• Maximize stakeholder involvement throughout - Tenants and landlords must be committed to continually evaluating and discussing progress and work to achieve the goals. If landlords seem unwilling to engage in a collaborative effort, it may be wise to consider a different property.

For more information on green leases and how to use them effectively, contact our team of sustainability experts and check out our new report on Green Leases 2.0.

Contributor:
Karen Saarkoppel, Director Energy and Sustainability, JLL