Energy Conservation Clauses in Commercial Leases

By April 29, 2015 No Comments

Sherry photoEarlier this month, the U.S. House of Representatives passed the bipartisan Better Buildings Act to pass its version of the bill in March, and President Obama is expected to sign it into law. In addition to promoting energy efficiency in federal office buildings, it also creates a voluntary, market-based Tenant Star program to encourage landlords and tenants to achieve high levels of energy efficiency in leased office space.

Energy efficiency clauses in commercial leases can be advantageous to both tenants and landlords alike. For landlords, these clauses may be essential to achieving or maintaining a building’s LEED, Energy Star or other green building certification program, which in turn may allow the landlord to attract tenants willing to pay a premium rent in exchange for the benefits of conducting their businesses in an energy-efficient building.

What are these benefits for tenants? Green buildings save companies money on utilities by reducing energy and water consumption, and, according to some studies, facilitate employee satisfaction and productivity. So why don’t more commercial leases include energy efficiency clauses?

In a “standard” commercial lease, the tenant generally is responsible for the cost of utilities for its portion of the building, while the cost of any improvements to the overall structure may be shared by both the landlord and tenants. Thus, while the tenant benefits from lower operating costs following energy-efficient upgrades to the commercial building, the landlord may not see any immediate benefits from its investment in efficiency upgrades.

A number of programs have been developed to address this disconnect by creating incentives that benefit both landlords and tenants alike. One stellar example in the commercial leasing arena is the Natural Resources Defense Council’s Energy Efficiency Lease Guidance, which sets forth three central principles for negotiating energy efficient commercial leases to mutually benefit landlords and tenants alike.

First, the landlord should commit to operating the common areas of the building as efficiently as possible, and the tenant should likewise commit to the efficient use of energy in the leased premises. To achieve this objective, a lease may contain provisions addressing agreed-upon seasonal temperature levels for the leased premises, mandating periodic energy audits to ensure proper functioning of equipment, and requiring both landlord and tenant to agree that any new building systems must meet minimum energy efficiency standards.

Second, the entity that benefits from efficiency upgrades should be responsible for the capital expenditures to make the upgrade. Here, the lease should include a provision that allows the landlord to recover the full cost of system upgrades that improve the building’s energy efficiency.

And, third, actual consumption of resources in the building should be measurable and transparent. Simply put, the success or failure of any energy efficiency project can only be determined if resource consumption is measured. Without metering of both the individual tenant’s energy use and the energy use in the common areas, energy efficiency lease provisions may be nothing but empty promises.

Investing time in negotiating a commercial lease that includes energy efficiency provisions makes good sense for businesses – it saves money on utility costs, leads to a happier workforce, and garners goodwill from customers. Our firm enjoys working with businesses to negotiate commercial leases that achieve these objectives.

Photo credit: Sherry Lueders

This post is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting with an attorney.

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