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Case Study on Enforcement Mechanisms in Green Leases: New South Wales Police Headquarters Building

One specific issue I am focusing on in connection with preparing for a presentation later this month is enforcement mechanisms in green leases: if either the landlord or tenant breaches a green provision in the lease, what specific rights and remedies – if any – does the lease provide to the parties? I have discussed this issue previously at GRELJ, particularly in the aftermath of last fall’s panel at the Urban Green Expo here in New York City where the consensus was that most landlords would likely not want to create self-imposed gaps in their building’s net operating income by evicting tenants who breach green lease provisions. Attorney Larry Schnapf of Schulte Roth & Zabel echoes these sentiments in an article he published in the November 2009 issue of The Practical Real Estate Lawyer, writing that “[i]n most cases, the ‘nuclear’ option of lease termination is probably not a reasonable remedy. The best solution may be rent abatement [if the space fails to perform or the building fails to earn the anticipated certification] or increased rent if a tenant space exceeds certain energy demands or water consumption. The parties may want to negotiate ‘cure’ provisions to provide a reasonable period to correct the deficiency.”

Perhaps unsurprisingly, then, I had difficulty identifying specific buildings or spaces where the breach of specific green obligations in a lease give either party the ability to declare a default and terminate the lease. However, and as Schnapf suggests, I was able to find some details on the leasing structure for the New South Wales Police Headquarters Building, just outside of Sydney in Parramatta, Australia, which provides a specific remedy for the tenant in the event that the landlord fails to satisfy certain terms of the green lease. Designed by architects Bates Smart and completed in 2003, the 15-story tower’s lease document between the landlord, the Department of Commerce, and the New South Wales Police Service requires the landlord to earn a 4.5 star NABERS rating (National Australian Built Environment Rating System, an environmental self-reporting system that’s roughly equivalent to our Energy Star program) over the lifetime of the lease. The rating is evaluated annually and, if the landlord fails to earn 4.5 stars, the tenant’s rent is reduced by the amount of any increased energy and water costs that arise as a result.

This is an interesting arrangement which we haven’t heard much about here in North America. Is it conceivable that a tenant could demand that the landlord build in a rent rebate provision into its lease in the event the building or space fails to earn (or maintain) the rating required by the terms of the lease? I think it would be difficult to quantify the difference in operating expenses between a LEED Silver building and a LEED Gold building, but the concept is interesting to consider. (Of course, such an arrangement would depend on whether the lease is gross (the landlord pays for building operating expenses) or net (the tenant pays)). What about tying a reduction in rent to a lower level of third-party certification? Again, the question would be how to quantify such a reduction, but I would think a landlord would only agree to using its “reasonable efforts” to pursue the third-party rating anticipated by the tenant. Nevertheless, in a soft leasing climate where deals are far and few between, tenants may be able to insist on stricter language in green leases during negotiations.

Just as a side note, the USGBC’s Green Lease Guide suggests, under its form Defaults and Remedies section, that “[t]he remedies included in a lease for breaching environmental objectives will reveal how critical these obligations are to the parties. If the objectives are aspirational, the lease will include something less than an absolute obligation to comply, such as reasonable efforts. On the other hand, if the objectives are critical, the lease will include an absolute obligation to comply.” For example, if a tenant is required to occupy space in a LEED-certified building or LEED-CI-certified buildout (as is the case for the General Services Administration, which must occupy LEED Silver-certified space pursuant to federal legislation), the landlord’s failure to deliver that space at the required level may necessitate the tenant insisting on a right to terminate in the body of its lease. Conversely, for the landlord pursuing LEED-EBOM certification pursuant to a similar mandate or, more significantly, in order to comply with applicable legislation, certain green lease provisions may need to have more teeth.

Has anyone come across arrangements in leases similar to the New South Wales Police Headquarters or other provisions where green obligations were more than merely aspirational?

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4 Responses to Case Study on Enforcement Mechanisms in Green Leases: New South Wales Police Headquarters Building

  1. B. Carson February 4, 2010 at 4:16 pm #

    We’ve written in self-help and cure options, primarily on the LL side; in some instances we’ll have delineated fees, like you might with a rules and regulations violation by an office tenant.

  2. Aaron Brotman February 4, 2010 at 8:38 pm #

    While establishing incremental damages, rather than just the “nuclear option” for efficiency failures seems to make a lot of sense, I am a bit concerned about the possible perverse incentives established in the NSW Police HQ. As we have seen, the lease “green” part of any building is the people who occupy it, so a tenant – likely one less public or scrutinized than the State Police – may actually have the incentives set up so that the more energy is wastes the lower its rent goes.

    • Stephen Del Percio February 5, 2010 at 2:42 am #

      Interesting thought, but I would think the rent reduction clause or other clauses in the lease (permitted uses, perhaps?) would protect the landlord from this scenario.

  3. Patrick Drueke February 5, 2010 at 2:04 pm #

    I have included liquidated damage provisions tied to maintenance obligations in a green lease. This has underscored their importance, and is an equitable enforcement mechanism because the parties negotiated it up front.

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