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IJLBE
4,1 Improving environmental
performance through innovative
commercial leasing
6
An Australian case study
A. Craig Roussac
Faculty of Architecture, Design and Planning, University of Sydney, Sydney,
Australia and
Investa Sustainability Institute, Sydney, Australia, and
Susan Bright
New College, University of Oxford, Oxford, UK

Abstract
Purpose – The purpose of this paper is to illustrate, by reference to practical examples, how leases of
commercial buildings can be more responsive to environmental issues.
Design/methodology/approach – The paper explains how difficult it is within the structure and
content of conventional leases to reduce the environmental impact of the tenanted commercial built
environment. It explores the interplay between the content and structure of commercial leases and the
behaviour of building owners, managers, tenants and occupants, illustrated through the experiences of
a large Australian-based commercial office building owner/operator.
Findings – With reference to practical examples it shows how conventional leases stifle innovation
and illustrates the difficulties in drafting leases that enable a responsive approach to building
management to be adopted. It shows how more fundamental changes that align and reward owners
and tenants for working together for mutual benefit are required.
Practical implications – The paper presents a number of “model clauses” for encouraging best
environmental practices and concludes with a suite of recommendations.
Originality/value – Although there have been conversations about green leases in recent years,
there is little detailed evidence of their use in the marketplace. This paper remedies that deficiency by
taking a case study approach that: illustrates the opportunities and difficulties in negotiating green
leases; and shows how attempts to provide innovative building management can be hindered or
supported by lease terms.
Keywords Australia, Leasing, Commercial property, Commercial leases, Environmental performance,
Leasehold innovation, Energy efficiency, Thermal comfort, Green leases
Paper type Case study

1. Introduction
This paper illustrates some of the opportunities and challenges involved in adapting
tenanted commercial space to improve environmental performance and reduce energy
consumption. Through a focus on the experience of a large Australian-based commercial
International Journal of Law in the office building owner and operator, Investa Property Group[1], we illustrate the
Built Environment
Vol. 4 No. 1, 2012
complexities of improving the environmental performance of tenanted space.
pp. 6-22
q Emerald Group Publishing Limited
1756-1450
[1] One of the co-authors, Craig Roussac, works for Investa Property Group as General Manager
DOI 10.1108/17561451211211714 – Sustainability, Safety and Environment.
Commercial property has a substantial impact on the environment and the operation of Innovative
buildings is a major contributor to greenhouse gas emissions, accounting for commercial
approximately 18 percent of emissions in the UK and approximately 10 percent in
Australia (Allen Consulting Group, 2010; Carbon Trust, 2009). It is crucial, therefore, leasing
that a better understanding is developed of the interplay between the technical
possibilities of the building itself, the content and structure of leases, and the behaviour
of the various actors involved in letting and using that space (owners, managers, 7
lawyers, landlord and tenant agents, occupiers, and customers). Although in recent
years there has been much talk, internationally, around the topic of “green leasing”
(Christensen and Duncan, 2007; Hinnells et al., 2008; Oberle and Sloboda, 2010) there is
little evidence as to what is happening in the marketplace, what the process of
negotiating green leases is like and the extent to which green leases are able to make a
difference. With some rare exceptions, letting practices – in the UK, the USA and
Australia – have remained largely untouched by the green agenda and both landlords
and tenants are resistant to entering into commitments to work together to improve the
environmental performance of the rented space (Estates Gazette, 2010).
A green lease has no fixed form, it is simply one that provides a leasehold structure
that will facilitate and support the property being used in an environmentally efficient
way. This can relate to any or all of energy use, water management, waste disposal,
travel plans and the use of sustainable materials. It can flavour the whole leasehold
relationship and include binding environmental performance targets, or can adjust
usual provisions to encourage environmentally sensitive behaviour (Bright, 2008). It is
clear that “green transformation” of the letting market is not going to happen easily,
but by telling the story of Investa’s experience and drawing on other models available,
we demonstrate the role leases can play in facilitating innovation within commercial
office buildings and encouraging responsible operating practices.
Investa’s experience is of value beyond Australia. Although there are detailed
differences in the policy and regulatory environments of the major developed nations,
and in the content of commercial leases, the essential issues faced are the same in the UK
and in the USA. The central challenge is the “split incentive”, referred to extensively in
legal and policy literature in each of these nations as a major barrier (Carbon Trust, 2005;
UNEP Finance Initiative Property Working Group, 2009, November). The majority of
investment grade property in these countries is let on a “net rent” basis, which means
that the tenant pays for the energy costs. As the landlord has responsibility for the
building structure and equipment there is little financial incentive for the landlord to
improve the energy efficiency of plant and equipment. The disincentive effect is
compounded by the fact that the cost of any equipment upgrades will usually fall to the
landlord who may be unable to pass the capital costs through the service charge. But
there are other common features of leases, which likewise inhibit change; such as the
length of leases, the rigidity of leasehold language, and the approach to “fit out”.
The problem is not confined to the wording of the lease itself. It extends beyond this
to the whole process of letting – the role that agents play in agreeing “heads of terms”,
how the occupied space is managed, and the way that the space is used.
Although it may be difficult to develop a standardised response to the challenge
given that the nature of the issues is so complex and property specific, various models
and toolkits are being developed that will assist (BPF, 2009; Investa Property Group,
2007a; REALpac, 2010). It is important that the various responses support
IJLBE innovation – in the way parties approach negotiations, define their self-interests and
deal with each other throughout the lease term and at expiry. These principles can apply
4,1 to all commercial lease arrangements and, importantly, can be addressed not only at the
time of initial let but also through amendments to lease arrangements where a building’s
environmental performance or services to occupants are falling short of what might be
defined as “best practice”.
8
2. The lease relationship and its limitations
The relationships between the owners (/landlords), occupiers (/tenants) and operators of
tenanted commercial office buildings are largely defined by leases. A typical office
building lease protects the interests of the landlord and tenant without expressly dealing
with matters of broader community concern, such as greenhouse gas emissions from
operating the premises, waste recycling, water use, etc. Despite a growing awareness of
the need to reduce environmental impacts from the operation of commercial office
buildings – expressed in community concern, emerging rating schemes, tenant
requirements, staff expectations, and emerging regulations, including disclosure
regulations – the structure and content of commercial leases can impose significant
constraints on the ability of buildings to be adjusted/updated.
In addition to the problem of the split incentive outlined above, there is the fact that
leases tend to be very rigidly drafted and do not allow flexible responses to new situations.
The length of leases means that these problems can persist over considerable time frames.
In the UK, although two-thirds of new leases entered into in 2008/2009 were for five years or
less these short leases were more common on units with lower rental values. For the higher
value properties, the proportion of leases less than five years in length is notably smaller, at
38 percent, and the proportion of leases longer than 16 years is 9 percent. Tenants who
occupy larger units tend to sign longer leases (IPD, 2009). Leases may also contain
extension options exercisable upon expiry, and in the UK there may be a statutory right to
renew which can make it difficult to change leasehold terms even when the contractual term
expires[2]. There is no public data on lease length in Australia but Investa’s experience and
(slightly dated, and limited) research suggests that the pattern is similar (Crosby, 2006).
The quickening pace of policy, regulatory and technical change in relation to
environmental understandings of commercial space means that leases need to allow
greater flexibility in order to maximise the opportunities available. The story of the
implementation of the CRC Energy Efficiency Scheme (CRC[3]) in the UK provides an
illustration of the difficulties of lease language. The CRC is intended to encourage carbon
savings within large organisations by requiring those who receive supplies of energy to
purchase permits (CRC allowances) to emit the resulting carbon dioxide. Many landlords
are required to be participants in the scheme. This increases the cost of supplying energy
to tenanted space and, in tune with the idea of the net rent, several landlords intend to
pass the cost of CRC participation onto tenants. The difficulty is that leases have not
built the language of CRC into the service charge and general outgoings clauses
so it is doubtful in many cases as to whether landlords can legitimately pass on the costs.

[2] Landlord and Tenant Act 1954, part II. If the parties cannot agree the terms of the new lease,
the court requires there to be a “good reason based [. . .] on essential fairness for the court to
impose a new term not in the current lease [. . .] against” the will of one party O’May v. City of
London Real Property Co Ltd [1983] 2 AC 726 (HL) 741.
[3] This was formerly known as the Carbon Reduction Commitment.
Furthermore, there is a real risk that leases will not be “future proof”. The property Innovative
industry invested much time and debate into consideration of how to accommodate CRC commercial
into new lease drafting throughout 2009 and 2010, only to find that the new UK Coalition
Government moved the goalposts significantly in its Comprehensive Spending Review of leasing
Autumn 2010, leaving the details of the scheme in a state of flux for some time thereafter
(for fuller discussion see Bright and Highmore, 2010).
In Australia, leases often set detailed specifications about management issues, often 9
with reference to standards in the Property Council of Australia’s Guide to Office
Building Quality (PCA, 2006). This level of detail would be highly unusual in the UK. In
Australia the rigidity of this approach makes innovation difficult. A practical
illustration is the standard provision for thermal comfort which provides for a fixed
temperature range – this prevents building operators from making adjustments
outside of this range even where that may promote greater comfort for the occupiers
and be less energy intensive. Investa has been exploring how thermal comfort can be
achieved with less energy use, but doing this has often involved breach of lease terms.
This experience is explained in Section 4 below, but for now the point to draw from this
is that it shows how conventional leases stifle innovation.

3. Crucial relationships function outside the lease

“Green” provisions must be built into the expectations of the parties at the start of
negotiations. In late 2010, the Northwest Energy Efficiency Alliance (NEEA) moved
into a building in Portland, USA, on the basis of a green lease. NEEA explains how
important it was to the leasing process that its brokers continually communicated
NEEA’s environmental goals to the landlord and, indeed, only introduced NEEA (2011)
to landlords that shared its sustainability vision. In practice, most negotiations are
conducted through landlords’ and tenants’ agents (Figure 1) who are focussed
primarily on getting a deal done, and if environmental goals are not introduced early
on it will be difficult to build them into the lease itself. Research conducted in the UK by
Crosby et al., shows that the heads of terms agreed have a significant impact on the
resulting lease (Crosby et al., 2005, pp. 167, 172). This has also been the experience of
Investa; unless key “green lease terms” are discussed as part of the initial heads of
terms, there is considerable resistance to their inclusion in the resultant lease.
Various actors who play important roles in relation to how the space is used are not
in fact party to the lease itself (Figure 2). Property management is often outsourced
Figure 1.
Lease negotiations are
largely conducted through
intermediaries
Tenant Agent Agent Landlord

Figure 2.
Occupiers Tenant Landlord Operators Once signed, the lease is
the central relationship,
Lease yet it does not define or
encourage broader
engagement
IJLBE to building operators who do not have a direct contractual obligation to the
4,1 occupants/tenants even though they are crucial to the delivery of services described in
leases and have a pivotal role in achieving environmental objectives.
The building manager may in turn subcontract elements of the building’s
operations (mechanical services maintenance, lift maintenance, cleaning, security, etc.)
to specialist providers, or act as agent for the landlord who contracts their services
10 directly. Regardless of the contractual structure, the landlord is unlikely to maintain a
close or direct working relationship with the service providers. Even in the case of
landlords that internally manage their buildings[4], the majority of specialist functions
will be performed by people who have no direct connection to the lease. Furthermore,
employees of the landlord with responsibility for operating a building will not usually
have been involved in negotiating a lease and may not even have access to it.
The situation is similar for tenants. Negotiations between landlords and tenants
take place at a corporate level, generally before the tenant occupies the demised
premises. The users of individual buildings may be employed by tenants, but they are
not themselves tenants. Most staff and employees have neither access to a copy of the
lease, nor awareness of the obligations of landlord or tenant.
Given that operators and occupiers of commercial office buildings are often not
familiar with the contents of leases between landlords and tenants, it begs the question:
can commercial office building leases effectively facilitate innovation and encourage
responsible operating practices? Put another way, does it matter whether leases
prohibit or promote improved environmental performance if the people on the ground
do not know what the leases say? This identifies a broader challenge. It is simply not
possible to address environmental performance in the commercial built environment
without understanding how the various communities using the building engage – with
the space, with legal documentation, and practice manuals, and with other owners,
occupiers, building managers, customers, employees and so on.
Clearly these questions are fundamental to determining whether leases can provide
a basis for improving the environmental performance of commercial buildings.
We believe they can and they should. However, it is clear that fundamental changes
that align and reward owners and tenants for working together for mutual
(and community) benefit are required. It will be necessary for innovative approaches
to be adopted within leasing practices that take account of how occupiers behave and
what occupiers want out of buildings. Operators need to be free to innovate in the way
they run buildings, to be incentivised to do so, and to engage meaningfully with
occupants regarding these kinds of issues. Furthermore, the content and structure of
agreements between landlords and tenants will need to be understood by this wider
group of stakeholders.

4. Some challenges illustrated through practice

The limitations and challenges mentioned above have profound implications for the
operation of buildings and the wellbeing of their occupants in practice. Often landlords
are compelled to instruct building operators to meet requirements that are not in the best
interests of occupants and in doing so they waste energy and resources that could be put

[4] Investa Property Group operates an internal model. A directly employed “property
supervisor” is based at each building and oversees the work of contract service providers.
to better use. In other situations landlords must sit by as tenants make poor fit out Innovative
decisions which impact their staff wellbeing and productivity. Some illustrations follow. commercial
4.1 Thermal comfort
leasing
Office buildings exist to provide productive workplaces for their occupants. Insofar as
it affects productivity, comfort is obviously important; however, there is no absolute
standard for human “thermal comfort”. The internationally-accepted definition states 11
that “thermal comfort is that condition of mind which expresses satisfaction with the
thermal environment” (ISO, 1994). Everyday experience of office environments tells us
that different people have different perceptions of thermal comfort at different times.
Furthermore, those perceptions are impacted by a range of environmental and human
variables (Fanger, 1970).
With the increasing prevalence of air conditioning in commercial offices, there has
been a trend to codify in leases what constitutes acceptable thermal conditions. In
Australia, where air conditioning is universal, this has led to the prescribing of internal
air temperatures of 20-248C (21.5 ^ 1.58C in winter and 22.5 ^ 1.58C in summer) in
typical commercial leases. For reasons yet to be understood, these prescriptions are
significantly cooler than the 23-268C recommended by leading international authorities
on the subject (ASHRAE, 2010; ISO, 1994). Furthermore, these specifications take no
account of other influences on human thermal comfort such as air velocity and the
temperature radiating from windows. This inconsistency between leases and
established comfort benchmarks is significant because energy use is directly
proportional to the differential between internal and external temperatures (Ward and
White, 2007). Also, because people adjust clothing to dress for the weather, so is
occupant comfort weather and seasonally dependent (Morgan and de Dear, 2003;
Ove Arup & Partners Ltd, 2008).
Landlords in Australia who attempt to provide air temperatures above 248C during
summer run the risk of breaching leases and incurring penalties, even though the
conditions are likely to be more comfortable for occupants than those prescribed by the
leases. A study by Investa during the Australian summer 2009/2010 (where such lease
boundaries were pushed on the basis of scientific rather than contractual advice!),
found that a 18C increase in thermostat settings was associated with a 6 percent
reduction in daily air conditioning energy use (Roussac et al., 2011). Furthermore, an
analysis of data recorded via the company’s tenant “helpdesk” for a follow up trial
(2010/2011) found a 16 percent reduction in the frequency of “complaints” related to air
conditioning relative to other building issues (Roussac et al., 2012). These results
demonstrate significant potential for greenhouse gas emission reductions and comfort
improvements, if only the leases would not preclude it!

4.2 Fit out churn

Fit outs and refurbishments consume large volumes of resources, much of it associated
with “churn”. Churn refers to the replacement of building elements throughout the life
of a facility. Using Investa’s portfolio as a guide (Investa’s is the largest portfolio of
office buildings in Australia), it is estimated that each year between 10 and 15 percent
of commercial office leases expire. At expiry tenants generally have the choice of
whether to stay or go. It is common for landlords to offer incentives to stay and these
are normally in the form of fit out contributions or cash. While Investa does not keep
IJLBE precise statistics, prior to the global financial crisis they estimated that 75 percent of
4,1 expiries led to fit out contributions (to both renewing and new tenants) and the other
25 percent took cash and retained their fit out. So, from Investa’s experience, the annual
churn range is probably between 7.5 and 11.5 percent and the average life of a typical
office fit out is just over ten years (Terry and Moore, 2008)[5].
Fixtures, fittings and furniture are replaced even more frequently and have larger
12 impact. Treloar et al. estimated that the total life cycle energy consumption of fixtures,
fittings and furniture at a churn rate of 5.6 times over 40 years (i.e. a life of just over
seven years) was close to, if not more than, the operational energy use for the case
study building (Treloar et al., 1999).
The implications of these figures are significant. It is clear that fit outs are more likely
to be replaced because they become unsuitable than because they “wear out”. In many
cases, fit out decisions at the commencement of lease impact negatively on indoor
environment quality (IEQ) and occupant wellbeing by reducing the penetration of
daylight and limiting the circulation of air, as found in a study by a team working at
Cardiff University (CRiBE, 2007, p. 9). Landlords are often powerless to intervene in
these decisions. Alterations clauses in leases commonly permit the tenant to install
demountable partitioning and carry out non-structural work (subject to the landlord’s
consent, not to be withheld unreasonably), again without reference to the environmental
impact. It has also become standard for leases to require departing tenants to “make
good”, i.e. remove all of the tenant’s property from the premises and repair or reinstate to
a condition which is satisfactory to the landlord. Although this (partially) protects
landlords from misconceived fit out decisions it increases waste yet further.

4.3 Excessive demand for building services capacity

A commercial office building’s quality is measured according to a range of criteria,
including its capacity to provide tenants with services such as mechanical and electrical
capacity. A high quality building is therefore generally one which boasts significant
capacity to handle tenant loads, in addition to providing prestigious accommodation and
views. The Property Council of Australia’s Guide to Office Building Quality is an example
of a document which classifies office building quality, setting out minimum performance
criteria which the market then uses to determine a building’s status.
Understandably, perhaps, tenants presented with benchmarks will typically seek
performance towards the upper end of the scale in each of the categories for any given
amount of rent, perceiving that greater service represents better value. This challenge
was expressly acknowledged by the PCA in the 2006 version of its guide, noting that
“higher, bigger, larger is not necessarily better” and that excessive demands often lead
to negative environmental and financial consequences (p. 7).

5. Significant innovations occurring outside leases

Even without effective green lease arrangements there are numerous factors driving
the creation of more environmentally and socially responsible office accommodation,

[5] Investa’s data for disposal of construction and demolition waste indicates a 56 percent
reduction in fit out churn between 2008 and 2010, the period corresponding with the global
financial crisis (Investa Property Group, 2011). Tenants were choosing to retain fit out and
stay in premises as a means of conserving capital during the economic downturn.
both via new construction and refurbishment. Corporate responsibility has become a Innovative
significant factor in the decision making of large organisations and this desire to
project an image of good corporate citizenship is influencing accommodation choices,
commercial
particularly among larger institutions (Colliers International, 2010). Likewise, major leasing
property owners are competing to demonstrate “sustainability” leadership credentials
to their array of stakeholders, notably tenants, investors and staff. These demand and
supply side factors are being brought together by growing evidence that 13
environmental performance is associated with asset “quality” and is contributing to
higher investment returns (IPD, 2011).
Governments too are encouraging this change. The City of Melbourne (2011), for
example, now offers building owners the opportunity to recover the cost of financing
environmental retrofit works from tenants through a charge linked to the city’s rates
collection. Likewise, the state of NSW has passed legislation – The NSW Local
Government Amendment (environmental upgrade agreements) Act 2010:
[. . .] to allow local councils to enter into environmental upgrade agreements with owners of
buildings and finance providers as a way of funding works to improve the energy, water or
environmental efficiency of those buildings (Office of Environment & Heritage (NSW), 2010).
The Green Deal in the Energy Bill currently before the UK Parliament adopts a similar
approach[6]. Again, the aim is to make it easier to fund energy efficiency measures
with no upfront costs, with costs recovered by a charge on utility bills.
The hope is that landlords will voluntarily make use of these funding opportunities.
This may be optimistic. The UK Government, in a signal that more forceful measures
may be required, has made provision for a review to be undertaken of private rented
properties (both domestic and non-domestic) by 1 April 2014 to compare the energy
efficiency of rented properties with non-rented[7], and power to make non-domestic
energy efficiency regulations which could compel landlords to upgrade properties prior
to letting (but this power can be used only if it will not materially decrease the number of
properties available for rent)[8]. It is early days for the financing arrangements in
Melbourne and NSW; however, there are indications that barriers, particularly in
relation to the requirement for tenant consent and the accounting treatment of liabilities,
are limiting the schemes’ effectiveness: there has been no evidence of take-up to-date.
These various approaches all work to provide either an incentive to improve
environmental performance or easier access to capital to fund technical improvements.
But none of them address the problem of what you do in the face of leases that prevent
technical changes being made, nor do they address behavioural issues. Furthermore, in
the majority of cases, owners can only take up the opportunities if the building is
currently unlet, or if the leases allow flexibility.

6. The case for broader engagement via the lease

Earlier we suggested that relationships between building operators and occupiers are
largely defined by leases, and yet those parties tend to be unfamiliar with the contents
of the leases that affect them. This is a problem, of course. The benefit of making
changes to the structure and content of leases between landlords and tenants will be

[6] Energy Bill [HL] 2010-11.

[7] Energy Bill [HL] 2010-11 cl 39, as at 3 June 2011.
[8] Energy Bill [HL] 2010-11 cl 46, as at 3 June 2011.
IJLBE limited if changes do not focus on improving communication and collaboration with
4,1 this broader group of stakeholders. What is needed is a broader and more collaborative
approach to the defining of objectives, drafting of agreements and administration of
duties. As mentioned above, intermediaries involved in the leasehold negotiations have
a crucial role in setting the framework.
A further step is to increase the transparency of building performance. The most
14 eco-efficient commercial office buildings exhibit a combination of excellent design and
appropriate technology, together with highly competent and committed operators. Yet a
building’s eco-efficiency is not readily observable to occupants (who themselves also have
an influence on building performance) and other stakeholders in the way that attributes
such as views, location and finishes are. The EU’s Energy Performance of Buildings
Directive requirements for display certificates and the Australian Government’s recently
enacted Commercial Building Disclosure legislation are both designed to address this
information gap. Both schemes, however, only require annual updates.
Raising awareness about buildings’ operational performance was a key motivator
behind the development of Investa’s 2009 Sustainability Report, the first of its kind to
incorporate an interactive data visualisation tool (Figure 3) (Investa Property Group,
2010). This “bare all” approach, which provided insights into detailed monthly
performance statistics at an individual building level, was expected to be popular with
those staff associated with well performing buildings and less so with those operating the
others[9]. Feedback from Investa employees was somewhat surprising. In response to the
question: “what do you think the consequences of publicly disclosing detailed
building-level performance statistics will be for the future performance of
Investa-operated buildings,” 70 percent (n ¼ 52) from a sample of 74 staff (representing
approximately 1/3 of Investa’s workforce) surveyed upon their first exposure to the online
data visualisation prototype rated them as either “very good” or “extremely good.”
Interestingly, the proportion was higher among those working directly within buildings
at the “property supervisor” level (9 of 12). About 55 percent of staff (n ¼ 41) rated the
public disclosure of detailed building-level performance statistics as being “very good” or
“extremely good” for them “personally and/or professionally”. Unsurprisingly, property
supervisors working on buildings that had demonstrated significant eco-efficiency
improvements were found to respond most favourably to that question, whereas
those from poorer buildings were more cautious; though all were more than “slightly
positive.”
Lease obligations that require building operators to disclose detailed performance data
in a form where “good/bad” performance can be easily distinguished by building
occupants may therefore be welcomed or resisted, depending on the performance leading
up to disclosure. It is widely accepted that people are most productive in an organisational
setting when they combine high levels of competence and commitment, where
commitment is defined as a combination of an individual’s motivation and confidence on a
goal or task (Hersey et al., 2001). Clearly the existence of an “audience” can help to increase
competence and commitment levels and drive better building performance. On the flip side,

[9] Investa wanted to respond to feedback that previously reported aggregated portfolio
performance data was of limited use for independent analysis because it masked much of the
detail. Concerns about poorer performing buildings being perceived negatively were offset
by the fact that most buildings would present well and that the publication of such data
would be an “industry first”.
 Innovative
commercial
leasing

15

Figure 3.
Snapshot of the Investa
2009 Sustainability
Report’s interactive data
visualisation tool showing
monthly data trends
Source: Investa Property Group (2010)

it has been found that “if either motivation or confidence is considered low or lacking,
commitment as a whole will be low” (Hersey et al., 2001).
Disclosure of poor operational performance without adequate support from a
landlord willing to invest in the systems, training and tools to help building operators
address that performance may therefore be counter-productive. Furthermore, to a poorly
informed audience, more information is unlikely to deliver greater understanding or
better behaviour (Janda, 2011). For these reasons it is crucial that initiatives be
implemented as a suite that combines education with useful information, technology and
a forum that facilitates working together.

7. A suite of examples for how we might do better

This section suggests a variety of ways the structure and content of leases can be
improved to encourage better alignment between the stakeholders that influence the
environmental performance of commercial office premises.

7.1 Green lease schedule

It is possible to promote environmental performance in a flexible way by agreeing a
“green lease schedule” which can be attached to a standard lease. This can be
comprehensive, or sketchy, depending on how much detail the parties wish to put in.
IJLBE Likewise, it can be aspirational (setting non-binding goals) or more prescriptive
4,1 (setting binding goals and the consequences of breach).
An example of this approach is the Investa precedent lease, extracts from which
follow:
16.1 Green Lease Schedule
...
16 (a) The Landlord and the Tenant agree that:
(i) the objectives outlined in the Green Lease Schedule are established to positively
contribute to the working environment of the occupants of the Building and promote
the efficient use of resources in the Building’s operation;
(ii) they will each use reasonable endeavours to meet the objectives outlined in the Green
Lease Schedule and to use the Premises and operate the Building in the spirit of
progressively improving environmental performance as measured against the
objectives outlined in the Green Lease Schedule;
(iii) they will consult with each other on issues or circumstances that may enhance
environmental performance and will consider undertaking all such opportunities
which are expected to have a positive impact on the work environment subject to an
analysis of the costs and benefits;
(iv) they will constructively consult with each other on issues or circumstances that may
detract from attaining the objectives outlined in the Green Lease Schedule
(Investa Property Group, 2009).
The landlord commits to annual measurements, and the tenant to providing the
landlord with information necessary to enable environmental reporting. The
commitments are not binding and breach will not constitute a breach of the lease.
Future landlords are not required to adopt the green lease schedule. The problem of fit
out churn discussed earlier is reduced by a tenant promise to incorporate energy, water
and indoor environmental quality performance criteria into fit out design and
equipment selection.
The green lease schedule referred to in the Investa lease is a 12 page document
containing checklists used to indicate the landlord’s and tenant’s wide-ranging “green
lease” commitments (Investa Property Group, 2007b). Each of the checklists is reproduced
from the Green Lease Guide, a publication developed by Investa in collaboration with the
cities of Melbourne and Sydney and the NSW Government to educate the parties about the
benefits and costs of various commitments. The guide is used in conjunction with the lease
and schedule and summarises the impact of each commitment in terms of: financial cost,
employee wellbeing, and corporate reputation (Investa Property Group, 2007a). The
schedule is attached to every Investa lease.

7.2 Building management plans and committees

The green lease schedule discussed above differs from the green lease schedule
developed by the Australian Government under its Energy Efficiency in Government
Operations (EEGO) policy. That policy requires, for the majority of office leases the
Australian Government enters into, a formal commitment to energy efficiency, including
an agreement between landlords and tenants to commit to a minimum ongoing
operational building energy performance standard, measured by the National
Australian Built Environment Rating Scheme. The schedule sets out the requirement
for the creation of a Building Management Committee (BMC) and how it functions,
including the Energy Management Plan the committee is required to develop,
how building performance is to be monitored and periodical reporting on the outcomes Innovative
(Australian Government, 2010). commercial
A key advantage of this approach is the formalisation of the ongoing role of the
BMC in developing, monitoring and implementing the EMP. Participants need the leasing
necessary skills to “meet the landlord or tenant’s needs and obligations”, however
“they will not need to be accredited building or energy experts or hold specialist
qualifications” (Australian Government, 2010). 17
Under the EEGO model, the BMC must include the landlord’s and tenant’s “energy
representatives” (Australian Government Solicitor, 2011, p. 21). There is no
requirement that the committee include other stakeholders (although they are not
excluded). We understand the BMC is a feature of the schedules used for larger
tenancies where the government tenant has greater bargaining power (p. 20), however,
we have not found evidence that government tenants are widely using the policy to
drive “effective operational management” (Australian Government, 2010).
In the UK, there are few publicised examples of green lease provisions in use. The
Better Buildings Partnership (BBP, a collaboration of London’s leading commercial
property owners and allied organisations) produced a “green lease toolkit” during 2009,
but there is little evidence as to what impact it is having. This toolkit also promotes the use
of a BMC which is tasked, inter alia, to set up and review an environmental management
plan for the building, including specific targets (BBP, 2009, pp. 9, 13, 14, 20, 21).

7.3 Green improvements

Under a “net lease” the “split incentive” means that the landlord has limited financial
incentive to install eco-efficient plant and machinery because the cost of servicing the
building is borne by its tenants. A survey conducted as part of the New York City
Office of Long-Term Planning and Sustainability PlaNYC (2011) initiative found that
60 percent of NYC building owners believed the split incentive was an impediment to
their investing in retrofits. Approaches that overcome this “significant disconnect
between those owning/managing buildings and those paying the energy bills”
(All Party Urban Development Group, 2008, p. 25) may be crucial, therefore,
in improving the environmental performance of buildings leased on a net basis.
In light of this challenge, Investa amended its precedent lease to permit the recovery
of costs associated with capital works directly benefiting the tenants through a special
amortisation charge applied to the rent. The concern that the landlord will be able to
upgrade its buildings at the tenant’s cost (expressed by tenants during the consultation
process) is addressed by limiting the application to projects that will reduce outgoings
costs to tenants and also reduce the environmental impact of running the property
(i.e. energy and water saving projects, and some projects to enhance IEQ). The tenant’s
outgoings costs are not permitted to increase (due to the improvements charge) above
the amortised cost of the project without written approval from the tenant. Subject to
the improvement not causing an increase in the tenant’s outgoings, the landlord can
carry out a green improvement after a consultation period. The tenant must then allow
the landlord to do “all things reasonably required” to this end, even if “quiet
enjoyment” or access to the premises is affected.
Similar approaches have been adopted under the models recently legislated by the
Victorian and NSW Governments, and also for the model lease language in the PlaNYC
“Energy Aligned Lease”. Under the PlaNYC model, a building owner’s capital expense
IJLBE pass-through is limited to 80 percent of the predicted savings in any given year. This
4,1 provides the tenant with a cushion to protect against underperformance and the owner
still receives the full reimbursement, however, the payback (recovery) period is
extended by 25 percent (PlaNYC, 2011).
Investa’s experience negotiating these clauses has been mildly positive, with the
provisions making it through the negotiating phase on approximately 50 percent of
18 occasions since they started being introduced in 2009. A large proportion of tenants has
been willing to accept the fact that there may be free-riders in buildings where not all
tenants have signed up to the new green improvements clauses, noting that their
expense is always in proportion to their benefit. In some instances, however, particularly
where government tenants are involved, tenants have expressed the view that the
capital reimbursement provision is not justified because the landlord has the benefit of
the asset improvement and a greater likelihood of retaining tenants at lease expiry.
The (landlord’s) counter to this argument is that it is invariably cheaper and
more effective to conserve capital and offer a substantial tenant incentive payment
instead.

7.4 Sustainability incentive (lighting controls)

As mentioned in the earlier section on fit out churn, it is common practice for landlords
to offer financial incentives to new and renewing tenants. Depending on the level of
demand, this may amount to 20-30 percent of the total rent payable over the term of the
lease. Tenants are generally free to use the incentive at their discretion; however, it
generally offsets the rent or contributes to the cost of fitting out the premises. Although
conventions vary from market to market, it is usual in Australia for the landlord to
provide floor and ceiling finishes, air conditioning and fluorescent lights as base
provisions and the tenant fits out from there (often removing part of these components
and reinstating at expiry). It is a tenant’s decision whether or not lighting controls that
automatically switch off lights based on occupancy should be installed.
In 2005 Investa introduced an initiative called the Investa Greenhouse Guarantee
(Investa Property Group, 2005) designed to give tenants access to quality office lighting
systems and expertise, with guaranteed environmental and investment benefits. While
some tenants were motivated to take up the offer, it was found that many simply lacked
the time and inclination to invest in lighting controls even though they would, in typical
cases, deliver guaranteed returns on investment of 30 percent and better. In response to
this inertia, the company decided to introduce a “sustainability incentive” that can only
be used to pay for lighting controls. An arrangement was agreed with the partner
company delivering the Greenhouse Guarantee to provide the controls for a fixed rate
per square metre equivalent to the incentive being offered. The controls specification
and all associated details are described in a schedule to the lease. Under this
arrangement, where tenants must introduce automatic lighting controls if they are to
receive the incentive, take-up is now in the order of 70 percent.

7.5 Re-work counter-productive clauses

Many clauses designed to protect the parties’ interests have unfortunate side-effects.
Examples discussed throughout this paper include “make good” requirements that
oblige tenants to return premises to the state that existed prior to their fit out, even
when this might involve stripping out still valuable materials, alterations clauses that
pay no attention to environmental impact, and temperature control bands that take no Innovative
account of the weather outside or occupants’ clothing choices. These things can be commercial
changed by amending standard lease clauses to take account of environmental impact.
So, for example, the NEEA green lease specifies that all tenant improvement work leasing
must be performed in accordance with sustainability practices and maintain
Leadership in Energy and Environmental Design (LEED) certification for Commercial
Interiors certification (LEED is an internationally recognised green building 19
certification system, developed by the US Green Building Council) (NEEA, 2011).
Likewise, a model clause in the BBP green lease toolkit provides that if proposed tenant
alterations adversely impact on energy and water efficiency the tenant “will consider,
[and, where reasonable, implement],” the landlord’s suggestions to minimise this
impact (refer to BBP toolkit, p. 23). The cautious approach advocated by BBP reflects
the commercial challenge in agreeing changes to standard leasing practices.
Investa’s lease, as well as emphasising the role of the schedule and the broader
collaboration that entails, also seeks to eliminate some of the more problematic
“industry standard” clauses:
.
For rent reviews, the independent valuer must be instructed to take into account
the sustainability incentive and the green improvement payments to avoid any
erosion of the value of these when making a determination.
.
The landlord may require the tenant to not remove improvements to the
premises made by the tenant that, in the landlord’s opinion (acting reasonably),
improve the environmental performance of the premises. There is a similar
provision in the BBP green lease toolkit (refer to BBP toolkit, pp. 23, 24).

Some of these anomalies can alternatively be addressed by negotiating a green lease

schedule. However, if the schedule is not binding, as is the case with the Investa example
provided above, this may leave an unsatisfactory degree of uncertainty. This was the
motivation for the NEEA (2011, p. 6) when it recently negotiated the inclusion of a
variety of green aspects into the lease itself for its new premises in Portland’s
Commonwealth Building. The advantage, as described by NEEA, is that “if the building
sells, the next owner will be required to stick to their predecessor’s commitments”.

8. Concluding remarks
“Green leasing” has become the catchphrase to represent new approaches to leases that
aim to promote improved environmental performance. Although we also use this
language, it carries the risk of becoming stereotyped. In sum, what we argue for is an
approach to leasing and managing let space that enables and encourages innovation,
co-operation and collaboration. This involves not simply a re-examination
of the structure and content of the lease itself but also the relationships between the
landlord and tenant, building operators and users of the space so that practices take
account of how occupiers behave and what occupiers want out of buildings. Operators
will need to be free to innovate in the way they run buildings, to be incentivised to do
so, and to engage meaningfully with occupants regarding these kinds of issues.
Furthermore, the content and structure of agreements between landlords and tenants
will need to be understood by this wider group of stakeholders. The following
recommendations suggest ways of encouraging innovative leasing that put
environmental concerns at the core of the relationship:
IJLBE .
start the discussions early in the negotiating process, make sure that agents
4,1 understand the environmental goals, but do not leave it only in the hands of
agents;
. express clearly what constitutes good environmental design and performance
(e.g. in green lease schedules);
.
consider whether to use language that gives enforceability and will also bind
20 future owners;
.
commit to transparency and accountability for performance that goes beyond
regulatory requirements;
.
develop processes, such as a BMC, noticeboards, etc. that enable all stakeholders
to be actively involved in the pursuit of, and commitment to, environmental goals
for the duration of the lease;
.
if it is a net rent lease, use clauses that enable environmental improvements to be
made in a way that overcomes the problem of the split incentive;
.
review standard lease terms to consider their potential impact on environmental
performance (particularly the alterations, making good, and rent review clauses);
.
consider how control and responsibility are aligned within the lease, as in the
lighting controls example considered above; and
.
build in adaptability for changes in technology, occupant expectations and
legislation.

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Corresponding author
A. Craig Roussac can be contacted at: [email protected]

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