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How Might Courts Construe Permitted Use Clauses in Green Commercial Leases?

Green Lease Matrix

One topic we discuss with particular frequency here at GRELJ in the green lease context is the obligations within the lease – imposed upon either landlord or tenant – to operate the demised premises, or the base building and common areas as the case may be, in a sustainable manner, as you may want to sell your house fast in San Antonio, it is best for you and the buyer to get all of these things straight first. The roadmap for that operation is generally found in an environmental performance objective clause, or in other provisions that may not explicitly set forth green building requirements but are instead merely aspirational. One interesting legal question that could arise in this context is exactly how a court would construe such aspirational clauses in the event the parties dispute exactly how “aspirational” those clauses should be. For example, consider the following form clause from the Model Green Lease:

Environmental Performance Objective Clause: Landlord will “operate and maintain the Building and the Premises to minimize (i) direct and indirect energy consumption and greenhouse gas emissions; (ii) water consumption; (iii) the amount of material entering the waste stream; (iv) negative impacts upon the indoor air quality of the Building and the Premises.” Landlord will “use its reasonable efforts to cause other tenants of the Building to conduct their operations in the Building and their premises in conformity with the Environmental Performance Objective.”

In the event that – at some point in the future – litigation arose out of this type of clause’s aspirational requirements, how might a trier of fact construe the landlord’s “reasonable efforts” and obligation to “operate and maintain” the building in a sustainable manner? The same question exists if the landlord places those same aspirational requirements on its tenants. There are no decisions (which I have been able to identify through a Westlaw search) that directly address this topic. However, at least under New York law, use restrictions in commercial leases will be strictly construed, although courts will construe leases in their entirety in order to ascertain the intent of the parties as to the demised premises’ use. It is therefore arguable that an aspirational green lease clause could be – in the event of a dispute – considered to be a requirement rather than strictly aspirational. If you are a landlord considering to sell your house or a tenant considering green lease implementation should therefore learn about the law of the jurisdiction governing the lease in order to appropriately assess how other clauses throughout the document may impact a court’s construction of their respective obligations.

An illustrative New York case is Qwakazi, Ltd. v. 107 West 86th Street Owners Corp., 123 A.D.2d 253, 506 N.Y.S.2d 162 (1st Dep’t 1986). There, the Appellate Division held that a commercial lease’s restrictions on the tenant’s use for a particular purpose had to be strictly construed under New York law. The lease clause in question was that the “Tenant shall use and occupy demised premises for sale of comic books, toys, posters, books solely.” Nevertheless, the tenant proceeded to sell video cassettes. The Appellate Division noted that “[a] landlord has a legal right to control the uses to which his building may be put by appropriate lease provisions, which to be effective must be enforced.” The court also stated that the tenant “was aware of the growing video cassette industry when it negotiated its present lease but did not include the sale and rental of video cassettes in the agreement as a permitted use. [The tenant] should not now be permitted to engage in a use of which it was aware but failed to include in its agreement.”

The scenario I imagine is where a tenant – who may not share the same green goals as the landlord – or vice versa – moves into space and doesn’t follow the environmental performance objective clause with any real precision. In the event of a dispute, how would a court construe the parties’ obligations? I’m also struck by the Appellate Division’s language in Qwakazi; if a tenant knows that leases are beginning to incorporate green requirements but fails to expressly incorporate them into its lease, that failure could be the basis for the landlord to argue that such uses are simply not permitted – even if they are included within broad, aspirational language.

For example, this issue recently arose tangentially in my practice where a developer client – whose project is seeking LEED for Core and Shell certification – decided that it wanted to require potential tenants to sign some sort of green lease. One potential tenant resisted, and our client approached us asking whether that tenant might jeopardize the client’s ability to earn its desired level of LEED certification (compelled, incidentally, by a corporate commitment to building all of its facilities to a predetermined level of LEED certification). As we discussed with the client, while potential tenants will have little impact on a LEED-CS application, if the building were to ongoing certification under LEED-EB:OM, an uncooperative tenant might play a role in impacting the project’s application – which could have serious consequences if the project seeks tax incentives or must otherwise comply with other emerging regulatory requirements. For that reason, we suggested precise lease language that identified the tenant’s specific obligations rather than broad aspirational strokes that might eventually leave the landlord without remedy in the event that its goals for third-party certification went unrealized due to circumstances created by the tenant.

These concepts are still largely legal theory at this point, but until aspirational green lease clauses are interpreted by the courts or more fully analyzed by legal scholars, landlords and tenants alike may be treading in dangerous waters when it comes to lease provisions that fail to specifically allocate the parties’ rights and responsibilities. These dangers are more acute in situations where the parties have competing visions and objectives when it comes to sustainable goals for the demised premises.

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3 Responses to How Might Courts Construe Permitted Use Clauses in Green Commercial Leases?

  1. Brian Anderson May 7, 2010 at 3:11 pm #

    Steven,

    Great post. A few thoughts.

    1. Aspirational? As you argue, the green lease clause you cite is not “aspirational”. The clause is being inserted into a lease, a contract. Not a marketing brochure. While the language might be vague, it is no less enforceable. As with the case of any shoddily drafted, inexact clause that lacks clear mechanisms for measuring compliance and providing remedies, this clause only increases the potential for dispute, litigation and mismatched expectations between landlord and tenant.

    2. Reasonableness. The provision you cite contains 2 main clauses. Both would be interpreted by a court under the usual rubric of contractual analysis-plain language, context, intent, reasonableness, etc. After all, the first is an unqualified obligation of landlord–the landlord “will” do the the things that follow. The second is that time-honored contract chestnut of “reasonable efforts”. Whether in a broker agreement, manufacturing agreement, asset purchase agreement, or lease, “reasonable efforts” provisions have a long history of interpretation in caselaw. For example, in a matter I’m handling now the issue would be interpreting the purchase agreement requirement that the seller make reasonable efforts to obtain a release of easement prior to closing. Now, the green lease clause. Imagine I’m a mid-sized tenant in a mall with such a clause in my lease. Anchor tenant in mall does a huge remodel. I see massive dumpsters outside my entrance being filled, dumped and refilled every day with zero effort to reuse/recycle. My green-oriented customers tell me they won’t go to my mall anymore because they’re forced to walk past the eco-carnage en route to my store. The local newspaper writes a story about green hypocrisy. Did the landlord make reasonable efforts to enforce the EPO? Change the hypo to have the landlord or its affiliate construction company handling the build.

    3. Analogy to Use Restrictions in Leases. The analogy to use clauses in leases is interesting, but I think it’s not quite on point. After all, use restrictions are in no way aspirational. In the context of a mall lease, for example, the use restrictions mesh with the non-compete and radius clauses to restrict, e.g., the number of shoe stores in a certain area. Therefore, these clauses are often carefully bargained for and understood to be strictly binding and not at all aspriational. Maybe a more direct analogy is to the lease provisions where landlord agrees to equitably enforce building rules/regs against other tenants. That’s a common lease provision and it is enforceable and does have a caselaw history of interpretation and enforcability. More generally, though,is the issue of “reasonable efforts”. Though innocuous sounding, “reasonable efforts” is not an unenforceable, aspirational phrase. It is used and enforced in a wide range of contracts–e.g., in a matter I’m working on now the seller has to make reasonable efforts to get an easement released.

    4. Where is the term Environmental Performance Objective defined? Is it the same for every tenant in the building? Does every lease contain the same EPO? How does the EPO differ from the smallish litany of requirements in the first sentence of this clause?

    Thanks again for a thoughtful post! Brian

  2. Alan Whitson, RPA May 16, 2010 at 1:48 am #

    While Brain raises some very good points; it must be pointed out that the Model Green Lease includes more than the Environmental Performance Objective. Also the example above is not the complete EPO from the Model Green Lease.

    The EPO is used in the MGL to establish the intent of both Landlord & Tenant(s) in board terms. Yet at the same time limit the EPO to four specific areas which may be subject to future government mandates.

    The Model Green Lease includes very specific requirements for operational performance, the measurement and verifcation of that performance, and an Annual Enviromental Report from the Landord to the Tenant.

    It also places the financial incentives in the right place to reward the landlord for operational excellance.

    For more info on the Model Green Lease, and the Model Green Lease Workshops go to http://www.squarefootage.net

    Alan Whitson, RPA
    Chair – Model Green Lease Task Force

    • Brian Anderson May 18, 2010 at 10:20 am #

      Alan,

      Thanks so much for your post. It’s great to get the benefit of your many years of practical experience. I’d love to see the full EPO. Could you please post it here? It also sounds as though you’re structuring the lease so that landlord or tenant will be positioned for future public or private mandates. That’s a good idea. I assume you’re thinking of climate change but what are the other 3? Thanks, Brian

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