Green Leases: Aligning Business and Environmental Responsibility

As Canada moves toward a net-zero economy in the face of rising climate challenges, the commercial real estate (CRE) sector is continually adapting. Strategies for operational, management, and capital improvements evolve to keep pace with growing awareness and knowledge. Older buildings are getting energy-efficient makeovers, while new developments incorporate sustainable leasing from the get-go.

Sustainable leasing, guided by Environmental, Social, and Governance (ESG) criteria, has shifted from being a nice-to-have to an industry expectation in the CRE sector. Green Leases serve as a clear roadmap for landlords and tenants, laying the contractual foundation for achieving ESG goals. But the advantages don’t stop at risk mitigation and compliance; these leases also give you a competitive edge by appealing to socially responsible investors and tenants.

Understanding Environmental, Social, and Governance (ESG)

ESG criteria focus on the long-term sustainability and ethical considerations of property operations and management. They aim to generate enduring value through energy-efficient buildings and sustainable leasing practices. These criteria are divided into three essential aspects:

• Environmental:  Centers on a building’s eco-footprint, including energy efficiency, waste management, and sustainable construction.
• Social:  Considers the impact on the community and tenants, including health, well-being, accessibility, diversity, and inclusion.
• Governance:  Looks at ethical conduct and practices, emphasizing transparency and compliance.

So, What Exactly is a Green Lease?

A Green Lease, sometimes known as an energy-aligned or high-performance lease, is a contract between a landlord and tenant that promotes sustainability and energy-efficient buildings. It outlines specific clauses to encourage and obligate both parties to optimize the building’s environmental performance, and align financial and Environmental, Social, and Governance (ESG) objectives between the property owner (landlord) and the corporation (tenant).

Not a new concept, Green Leases have evolved into performance-based contracts that should align with local and federal climate action policies and targets, particularly for protecting energy-efficient buildings. Unlike traditional commercial lease agreements, performance-based leases, these contracts establish building-wide and portfolio-wide goals for carbon reduction and energy use. Both parties have clear roles in achieving these objectives, with metrics to monitor progress and plans to meet targets.

A Bit of History

In 2005, the Building Owners and Managers Association International (BOMA) “greened” its model lease and provided the industry with a step-by-step guide on how to write a lease that incorporated sustainable building management and maintenance practices.  They have since updated this guide several times, with the most recent update being in 2018.

The Real Property Association of Canada (REALPAC) followed suit in 2008 with the public release of its first “green” office lease, introduced to the commercial real estate industry.  REALPAC has continued to update this lease to incorporate ever changing conditions, public drivers, legislation, measures, and vocabulary that are part of responsible Environmental, Social, and Governance within the commercial real estate industry.  Its’ most recent release was in 2021, where it incorporated several current drivers, including health emergencies and pandemic response.

The 6 Core Elements of a Green Lease

• Integrated Resource Management: Tracking energy, water, and waste to set and meet sustainability goals, and make necessary adjustments.
• Enhanced Indoor Environment: Balances indoor air quality with low-VOC materials and air filtration standards, while also ensuring building accessibility for the diverse needs of tenants and visitors.
• Shared Responsibility and Transparency: Landlords and tenants jointly commit to sustainability, with clearly outlined roles, responsibilities, and contributions to maintain alignment and accountability. Managing these responsibilities often falls under the purview of a property management professional. [Learn more about what a Property Management Professional does in our dedicated blog post.]
• Key Performance Measures and Reporting: The lease should allow for routine tracking and mandatory reporting of ESG related key performance indicators (KPIs) to protect the intention of the lease.
• Third-Party Verification: Certifications like LEED, BREEAM, or Energy Star provide independent validation that the building’s environmental performance aligns with or surpasses the ESG goals set in the lease.
• Tenant-Landlord Collaboration: Through regular meetings and shared resources, as well as joint investment in sustainability projects, ensure that the landlord and tenant maintain an open dialogue and collaborate effectively.

The Business Case

In today’s competitive business landscape, corporate sustainability is no longer a nice-to-have; it’s a must.  A green lease can be a powerful tool in achieving corporate sustainability goals and commitments for both the landlord and the tenant and is often administered by an experienced property management professional.  It also bolsters a company’s ESG scores—a crucial metric for modern investors and stakeholders – and serve as a practical compliance tool to support building performance policy and imposing limits on energy consumption or carbon emissions.

These performance-based leases define building performance standards, delineate the landlord-tenant responsibilities, and ensure full transparency and accountability. In an age when investors increasingly scrutinize companies’ social and environmental impacts, having a green lease becomes necessary.

A Win-Win for Business and the Planet

As ESG goals become global priorities, the commercial real estate sector will continue to adapt. Green Leases serve as a powerful tool, creating a cooperative framework for landlords and tenants to work towards a more sustainable future. Far from a passing trend, Green Leases are emerging as a vital component in a world that is paying more attention to ESG initiatives. These leases not only meet regulatory standards but also attract modern investors and stakeholders.

As you plan your next step in commercial real estate, ask yourself: Isn’t it time to align your business strategy with environmental responsibility? The experienced property management team at Pivot West Commercial can identify ways within your standard lease form to achieve both profitability and eco-responsibility. [Reach out to us today.]