Not Easy Leasing Green
Consider these provisions before pursuing LEED certification.
Regardless of the pros and cons, landlords and tenants may
have no choice but to embrace green building and other sustainability practices.
California was the first state to adopt a mandatory green building code, and
other states have implemented similar requirements. In addition, several cities
such as Los Angeles, Phoenix, Honolulu, Las Vegas, and New York have adopted
mandatory green building ordinances. There is some overlap and some distinction
among federal and state code requirements, city ordinances, and various
prerequisites and credits that can be earned under the U.S. Green Building
Council’s Leadership in Energy and Environmental Design rating system, should
the landlord or tenant seek LEED certification. But all of these programs will
impact the leasing relationship between landlord and tenant in some way.
Therefore, whether dealing with green tenant improvements in
a single- or multitenant building or the construction of a new green building
for one or more tenants, the landlord and tenant should come to an agreement on
each party’s expectations and responsibilities. Because mandatory green
building requirements vary among states and cities, this article will focus
specifically on how the LEED rating system affects the following lease
1. Delivery of Premises; Commencement Date; Rent
The delivery, term commencement, and rent commencement dates
are typically determined by the party — landlord or tenant — that is
constructing the tenant improvements. These dates could be further impacted if
either party expresses an interest in obtaining LEED certification.
If the tenant is seeking LEED certification, the landlord
may not want it to affect the dates noted above. For example, certain LEED
credits, such as enhanced commissioning, are not awarded until eight months to
10 months after substantial completion. Other credits, such as thermal comfort
verification, are not awarded until six months to 18 months after tenant
2. Operating Expenses
If the landlord seeks LEED certification for a multitenant
building, it may want to reconsider whether to enter into gross or net leases
as there will be costs associated with obtaining and maintaining LEED
certification, commissioning, and green building capital expenditures, repairs,
and replacements. If it chooses to use net leases, the landlord will want to
expressly list these costs. Otherwise a tenant could argue they are not
standard pass-through operating expenses. As a trade-off, a tenant may want to
negotiate for a share of tax credits and/or other incentives in exchange for
paying for such additional operating expenses.
3. Use of Premises; Alterations, Additions, and Improvements
A typical use clause restricts the tenant to a specific use
of the premises, but sometimes allows all other lawful uses. Regardless, the
use must comply with applicable law, including state or local green building
codes and/or ordinances.
In addition, if the landlord or the tenant seeks LEED
certification for the property, the tenant should expressly agree its use of
the premises will comply with LEED prerequisites and credits. The tenant should
be required to comply with whichever is the most stringent — state codes, local
ordinances, or the applicable LEED prerequisites and credits. Any alterations,
additions, or improvements that jeopardize LEED certification should be
prohibited. By example, LEED for Green Interior Design and Construction MR
Credit 1.2 requires maintenance of 40 percent to 60 percent of non-shell,
nonstructural components of the premises.
4. Maintenance and Repair; Surrender of Premises
The tenant and landlord should agree on who should be
required to maintain what portion of the premises or building, as applicable,
in its LEED-certified condition so that it does not run the risk of losing its
LEED certification. If LEED certification is not concurrent with delivery of
the premises to the tenant, the parties should expressly clarify the condition
(pre- or post-LEED certification) under which the premises must be surrendered
at the expiration or termination of the lease.
Parking is a source of revenue for landlords. However,
certain LEED credits, state codes, and local ordinances require bicycle
parking, changing rooms, and that parking not exceed the minimum per zoning.
The LEED credits calculate parking based on full-time and part-time staff and
peak transients but don’t seem to take into consideration that the number of
tenant employees may change over time. The lease needs flexibility to allow for
changes to parking corresponding with the changes in the number of tenant
6. Assignment and Subletting; Relocation; Early Termination
The landlord should determine whether a prospective
assignee/subtenant’s proposed use of the premises will comply or conflict with
applicable LEED requirements. In addition, both the landlord and tenant should
be cognizant of the impact of seeking to obtain LEED for Green Interior Design
and Construction MR Credit 1.1, which requires that the tenant enter into a
minimum 10-year lease. This may hinder the ability to assign the lease, sublet
the premises, relocate the tenant, or terminate the lease, especially if the
consequence is revocation of the LEED certification.
7. Damage and Destruction; Insurance
If the LEED-certified premises is damaged or destroyed, the
parties should clarify whether replacement includes LEED certification and, if
so, whether to the same level (LEED Platinum, Gold, Silver or certified) and/or
the same credits obtained. Architects, engineers, and contractors should
consider obtaining green errors and omissions insurance, which covers liability
if, for example, a contract to design and build a LEED Gold building is entered
into but the building is only awarded LEED Silver.
In addition, the tenant should be required to maintain green
property insurance, which covers LEED re-certification costs. The party
engaging the contractor may consider holding back funds until LEED
certification is obtained; however, this can create problems between the
general contractor and its subcontractors, even if the general contractor is
not in default. Some credits can take six months to 18 months to be awarded
after substantial completion.
8. Expansion Option; Right of First Refusal/Offer
The parties should consider the impact an expansion has on
the original premises that has already achieved LEED certification. If
maintenance of LEED certification is important, the expansion premises should
similarly comply. In addition, if the tenant has a right of first refusal/offer
to lease additional, non-adjacent space, the parties need to consider whether
to use two different leases, especially if the new space is not required to be
LEED certified, as the LEED-related tenant lease obligations will not apply to
the non-LEED-certified space.
9. Extension Option — Fair Market Rental Value
It is common for the landlord and tenant to provide that if
the term of the lease is extended, the rent during the extension term will be
based on a fair market rental value formula. Issues may arise using this
formula, especially if the property is LEED certified, because there may not be
any LEED-certified comparables. The parties will also want to make sure the
appraisers have significant experience on LEED projects.
10. Default; Remedies
The parties should clarify whether there should be a default
and corresponding remedy if LEED certification, a specific LEED level, or a
specific LEED credit is not obtained due to tenant or landlord action. In
addition, the parties should clarify the appropriate remedy if the tenant is
not in monetary default but its actions cause the property to have its LEED
certification revoked. The landlord will want the right to monitor the tenant’s
performance of LEED-related covenants, and the tenant will want to require that
the person monitoring have significant skill and experience related to LEED
11. Work Letter
A work letter is usually an exhibit to the lease that
provides tenant improvement guidelines. The landlord and tenant may agree that
they will each perform certain portions of the work. The landlord usually wants
control over any changes to the building systems; however, doing so might result
in the landlord unintentionally taking on certain LEED certification
Regardless of who performs the work, the contractor and
architect who are engaged should be LEED-APs with the requisite experience.
Since the architect and the contractor are involved in the LEED certification
process, architect and construction contracts should be modified to address
LEED expectations, responsibilities, and remedies for failure to comply. The
landlord or tenant may offer varying incentives to the design team based on the
level of LEED certification obtained. The design team will likely want to
obtain its own errors and omissions green insurance to provide some coverage in
the event it fails to deliver a LEED-certified project or the level of LEED certification
In addition, the contractor will likely want the landlord to
be required to provide training to its building maintenance staff so that
building equipment and systems are operated and utilized properly in accordance
with LEED requirements. This shifts the burden from the contractor to the
landlord in the event LEED certification is revoked for improper maintenance.
Similarly, the landlord may want to pass this obligation on to the tenant, to
the extent feasible.
12. Letter of Intent
Since the aforementioned LEED-specific lease provision
modifications are not customary, they should be addressed in the letter of
intent. At the letter of intent stage, the landlord and tenant should agree
upon the expectations of the level of LEED certification and credits to be
pursued, how the responsibilities in connection with obtaining and maintaining
LEED certification should be allocated, and what the remedies should be if
either party fails to comply with those responsibilities.
Eric A. Altoon, JD, LEED-AP,
is a partner with Gordon Kemper LLP in Los Angeles. Contact him at