Incorporating ESG in Commercial Leases: Building Certification, Use of Renewable Energy and Energy Improvements

Description

ESG continues to be a factor in business development, including commercial real estate. As the goal of mitigating climate change has risen, the commercial real estate industry has seen an increase in green buildings and clean energy infrastructure. Leases, which include various provisions to promote energy efficiency and environmental sustainability, are often referred to as "green leases." Such leases can be tailored to meet both landlord and tenant requirements and building-specific needs.

At the beginning of the process, landlords can seek to construct buildings that meet the requirements of LEED or other green building certifications. Landlords can also require the tenant to include specific sustainable design components, materials, or construction methods recommended for green building certification. It is unclear whether a landlord can require a tenant to meet a particular certification standard.

Landlords and tenants can also incorporate renewable energy into a commercial lease. In some cases, renewables like solar panels can lead to tax and power generation revenue, for which the parties will have to determine who bears responsibility, risk, and potential benefits.

Tenant improvements are often provisions in commercial leases, and the parties can structure leases to share costs associated with energy-saving improvements. Under a net lease, where the landlord is responsible for capital expenses and the tenant is responsible for utility and operating expenses, there is little incentive for the landlord to add energy-saving improvements because they do not directly reap any cost benefits from such improvements.

However, by selecting a different cost-sharing structure, landlords have a reason to implement significant energy-saving improvements. Likewise, leases seeking to achieve ESG compliance could specify only energy-efficient appliances and equipment on the leased property.

Leases can also impose limits on toxic cleaning products to improve indoor air quality. Parties can also include provisions in leases that incentivize the use of public transportation or alternatives to motor vehicles by providing storage or monetary compensation. A commercial lease provides these numerous opportunities to affect potential environmental and societal issues.

Listen as our expert panel discusses the key provisions in commercial leases that can incorporate ESG concepts. The panel will address critical provisions and best practices when negotiating these leases to achieve ESG goals.