Last month during our summer sabbatical here at GRELJ, Model Green Lease Task Force head Alan Whitson forwarded us an article he published in a recent issue of Office Insight magazine. In “How to Add Value and Avert Lawsuits: Avoid the Conflicts Between LEED-EB:OM and LEED-CI,” Mr. Whitson describes how the interplay – or lack thereof – between these two different LEED suites may create unanticipated liabilities for landlords and brokers who market LEED-EB:OM-certified space to tenants that subsequently seek to pursue LEED-CI.

Quoted in the article is Alex Spilger, who serves as Sustainability Manager for BCCI Construction in San Francisco. Mr. Spilger observes that

“[i]t’s a common misconception among tenants, real estate brokers, and building owners . . . that LEED-EB:OM certification guarantees LEED-CI certification. It’s easy to imagine there would be some cross-over between the LEED-EB:OM and LEED-CI rating systems. Green strategies put into action in the base building should help a tenant earn points for LEED-CI and vice versa. But, this is not always true since there is little overlap between the two rating systems – they are structured differently.”

Some of the examples which Mr. Whitson presents in the article are particularly noteworthy because they suggest the dangers that may arise out of an indiscriminate marketing strategy implemented by the landlord and its leasing team. For example, a building that scores in the 98th percentile for energy efficiency will earn 18 points under LEED-EB:OM, but a tenant in pursuit of LEED-CI will not receive any points for the base building’s exemplary energy performance. A base building can also receive up to 15 points under LEED-EB:OM for alternative transportation where employees carpool to work; under LEED-CI, unless the base building is sufficiently close to mass transit, the tenant will not receive any alternative transportation points, even if its employees all carpool.

Indeed, Mr. Spilger also describes in the article a recent project where a tenant leased space in a LEED-EB:OM Gold-certified building with the expectation that – it too – would earn LEED-CI Gold for its own interiors. Rather, because LEED-CI’s prerequisite water efficiency requirements are higher than those for LEED-EB:OM, the tenant was unable to pursue a LEED-CI rating without completely replacing the bathroom fixtures. Mr. Whitson notes that

“[i]f the requirements for LEED-CI were considered before upgrading the building’s restrooms, fixtures with higher water efficiency could have been selected at little or no extra cost, while creating a competitive advantage for the building. Imagine the liability a real estate broker or interior designer with a LEED AP designation might have if they fail to explain the ramifications to their client before the lease is signed, or if this blows a lease deal for a building owner.”

Risk management, of course, is not strictly the province of outside counsel; LEED consultants and real estate professionals need to understand the mechanics of each individual LEED rating system – and how they interact, or fail to interact, with one another – when presenting certification alternatives to their clients. For example, we wrote previously here at GRELJ about how a base building’s green features can offer tenants up to 21 points for tenants seeking LEED-CI certification. However, Mr. Whitson’s remarks above should ring all the more salient in a construction environment where controlling costs continues to remain paramount, and USGBC continues to place an increased emphasis on existing buildings.

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. 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. Landlords and tenants considering green lease implementation should therefore consider 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.

Although the costs of auditing were raised by opponents to the bills earlier this year, mandatory energy audits are now required every ten years, though buildings certified under LEED 2009 for Existing Buildings: Operations & Maintenance or which receive EPA’s Energy Star label are exempt. It’s this exemption that’s of particular interest to us here at GRELJ; here’s the pertinent text from the body of the bill:

No energy audit is required if the building complies with one of the following as certified by a registered design professional:

• The covered building has received an EPA Energy Star label for at least two of the three years preceding the filing of the building’s energy efficiency report.

• There is no EPA Energy Star rating for the building type and a registered design professional submits documentation, as specified in the rules of the department, that the building’s energy performance is 25 or more points better than the performance of an average building of its type over a two-year period within the three-year period prior to the filing of an energy efficiency report consistent with the methodology of the LEED 2009 rating system for Existing Buildings published by USGBC, or other rating system or methodology for existing buildings, as determined by the department.

• The covered building has received certification under the LEED 2009 rating system for Existing Buildings published by the USGBC or other rating system for existing buildings, as determined by the department, within four years prior to the filing of the building’s energy efficiency report.

Legislation which incorporates LEED into local-level legislation is something we’ve noted frequently here at GRELJ, and a couple of recurring issues immediately come to mind with Int. 967.

First, although the bill does allow buildings to earn certification under “other rating systems as determined by [DOB],” the bill does not provide any input on what those other systems might be, or how DOB will “determine” those that would qualify a building for the exemption. Does this language sufficiently address non-delegation doctrine concerns? (i.e., a private third-party organization is effectively determining whether an energy audit is unnecessary under Int. 967 by proxy).

Second, there is no language that allows the legislation to track changes in LEED; for example, if USGBC releases a next-generation LEED system subsequent to LEED 2009, what happens? We have noted this specific issue recurring in various types of legislation. For example, when we wrote about San Francisco’s decision to reconsider its LEED-driven green building ordinance, we pointed out that “LEED itself continues to be a moving target and policymakers must guide themselves accordingly when considering the merits of [LEED-driven] legislative activity.”

Finally, could design professionals balk at signing off on the energy audits given that LEED-EBOM is subject to the same Minimum Program Requirements which, if violated by the building owner, could result in a decertification proceeding, the consequences of which remain unclear?

These questions are obviously theoretical at this point and are designed to elicit your thoughts in the comments. However, I want to stress that the New York City legislation emphasizes the import of assessing and understanding LEED-related risks as the rating system continues to permeate into the private sector in a variety of legislative contexts.

Just as a side note for your reference, the other three bills that constitute the “Greener, Greater Buildings Plan” are:

• Int. 564: New York City Energy Conservation Code. Closes the “50 percent loophole” in the current New York City Energy Code, which does not require owners who renovate less than 50 percent of their building’s total space to comply with the most current – and energy-efficient- version of the Code.

• Int. 476: Benchmarking. Requires buildings to perform an annual assessment of their water and energy use using EPA’s Portfolio Manager tool for the purpose of comparing themselves with their peers, but exempts certain buildings for which public disclosure would be problematic (i.e. high energy users such as data centers).

• Int. 973, Lighting Retrofits and Submetering. Requires large tenants to be submetered and lighting systems to be upgraded during renovations (whether or not those renovations contemplate electrical work) or, at the latest, by 2025. Residential tenants are exempt. Renovations where construction costs are less than $50,000 are also exempt.

Other than the revisions to the Energy Conservation Code under Int. 564, the legislation applies to all New York City buildings larger than 50,000 square feet (or buildings that stand on the same tax lot and, together, are larger than 100,000 square feet).

• GGBP Passes City Council (Urban Green Council)