In the Spotlight: Enforcing the Green Lease

The primary focus of “green lease” discussions has been on the economic aspects: the interplay of the rent (whether gross or net) with the utility cost. A pure net lease provides little incentive for a landlord to invest additional capital to conserve energy or water if the tenant is the only party to enjoy the savings. A pure gross lease aligns the landlord's capital cost with the savings in lower operating costs, but does not invite the tenant to conserve utility and water use. As one commentator notes, a “modified gross” lease, which requires the tenant to pay usage costs above a defined base, is best suited to the “green lease.” (Friedenberg, “Green Leases” Green Development News, April, 2009).

To date, the green lease discussion has avoided the complications of enforcing “green lease” provisions. Many leases simply advise the tenant that the building is being operated as a green building and provide the tenant with a handbook. This approach demonstrates lack of familiarity with green practices in commercial real estate and does not address the consequences of failure to adhere to green practices. The fact that Leadership in Energy and Environmental Design (LEED) Certification for buildings was originally tied only to its construction or renovation (and not its operation) reinforced this approach.

Changes in the Marketplace

Conditions evolve quickly. Green practices in building management are becoming more familiar, and LEED has developed a protocol for building management for Existing Buildings Operations and Maintenance (“EBOM”). In addition, ASHRAE (The American Society of Heating, Refrigeration and Air Conditioning Engineers) is developing a building energy labeling program. Governmental entities have entered the marketplace as: 1) landlords; 2) tenants; 3) developers; and 4) most importantly, as the source of grant money or tax credits. The U.S. General Services Administration lease protocol “Green Lease Policies and Procedures for Lease Acquisition” requires prospective landlords to deliver a structure that satisfies LEED Silver Standards. Some state and municipal entities now require “green” elements as part of entitlement approvals. As a result of these changes in the marketplace, the need to examine the issues associated with enforcement of the “green lease provisions” has intensified.

'Green Provisions'

The term “green provisions” (for purposes of this article) refers to those elements of a lease which require adherence to a specified code or standard [whether prepared by the landlord or a third party, such as the United States Green Building Council ("USGBC"), which prepared LEED, Energy Star, prepared by the Environmental Protection Agency (EPA), or the ASHRAE building energy labeling program]. These standards become applicable to a building either by a landlord decision (either to seek a tax credit, or as an investment decision) or through a governmental requirement (a permit condition). The “green provisions” may require, for example, a tenant to separate trash for recycling, maintain operational limits for building systems (thermostat control), use occupancy sensors for lighting, use window blinds, limit water or electrical consumption per square foot, or use “green cleaners” in cleaning products.

To hardened lease negotiators, certain of these provisions may seem precious and immaterial to a discussion of enforcement of leasehold remedies. They may or may not be. If the consequences of a tenant's failure to abide by a green provision includes loss of a tax credit, or jeopardizes a key permit for the building, then the landlord will (and should) insist upon having an effective and appropriate remedy for the tenant's non-compliance.

Eviction

As an unlikely remedy and declaration of default, eviction also may be inappropriate. Leasehold remedies generally result in default and threat of loss of possession for the tenant. Courts are reluctant to order eviction absent a substantial, material breach that persuades the court to award what is generally considered extreme relief. Breach of incidental “green provisions” will not likely cause a court to forfeit the tenant's possessory rights. Courts are unlikely to equate failure to comply with building operational standards with the failure to pay rent or other charges. Even failure to pay rent has not always resulted in forfeiture. See 16 ALR 437, supplemented in 31 ALR 2d 321, Friedman on Leases, Fifth Edition, Milton R. Friedman and Patrick A. Randolph, Jr., and Four Seasons Mfg., Inc. v. 1001 Coliseum, LLC, 870 N.E. 2d 494 (Ind. Ct. App. 2007). A landlord seeking forfeiture for breach of “green provisions” would likely need to demonstrate that special circumstances arising from the breach warrant eviction (such as jeopardizing land use pursuits and approvals, or loss of other benefits) and that such special circumstances were clearly recited in the lease. A landlord would need to demonstrate that the tenant was aware of the green requirement in the entitlement (or tax benefit) as well as the consequences for non-compliance, and that eviction would resolve the underlying matter. Forfeiture or eviction ultimately is an equitable remedy. See DiBella v. Fiumara, 63 Mass. App. Ct. 640 (2005) and Howard D. Johnson Co. v. Madigan, 361 Mass. 454 (1972).

In the case of the loss of a tax credit or other benefit, a court may find that monetary damages for the breach are the appropriate remedy rather than eviction. Again, a landlord would be well served by having the fact of the potential tax credit set out expressly in the lease, accompanied by explicit language addressing the precise consequence of loss of the credit. Similarly, a tenant relying on a building's being green for its marketing or calculation of its corporate carbon foot print will need to alert its landlord of the importance of green operations if it intends to reserve a monetary remedy against landlord's failure to operate the building in a particular manner. A lease is a contract; its breach can give rise to both damages and equitable remedies. As with other contracts, consequential damages are not easily recovered; explicit language addressing the material consequences of failure to adhere to “green provisions” will benefit the parties.

Loss of Certain Privileges

Lease defaults also may give rise to a loss of certain rights or privileges. Such rights and privileges may range from loss of extension rights, expansion rights, or protection provided by a Subordination/Non-Disturbance Agreement. Absence of default is often a pre-condition to maintenance of such rights. Declaration of a default (even a default that expressly cannot give rise to an eviction) may be seen (particularly by the tenant's lawyer during lease negotiations) as an overly harsh remedy unless the tenant's act has caused significant, identifiable consequences.

Injunctive relief to compel compliance could be attempted, but it may be a challenge to demonstrate irreparable harm to one party or the other.

Claims of loss of value arising from loss of “green building” status will undoubtedly arise in coming years. For example, the LEED EBOM program requires that, upon periodic recertification of a building, continuous compliance with designated LEED protocols be demonstrated during the immediately preceding period. A non-compliant tenant could cause a building to lose LEED certification upon periodic renewal. As a result, claims will arise and will be fueled by the growing recognition that LEED certified buildings trade for more money than otherwise comparable buildings. However, proof of a landlord's damages could be difficult to establish for several reasons. First, to date, the data is thin (but growing) as to the monetary value of a LEED certification. Second, such claims will be analogous to the stigma claims for hazardous materials. Those claims have foundered for lack of quantifiable, expert appraisal evidence.

Non-Default Alternatives

Alternative lease provisions may be developed to address less consequential breaches of green provisions, meaning those breaches that would not jeopardize a tax credit, or entitlement. The balance of this article describes a few such provisions (in addition to the conventional approach of notice and cure with the possibility of default for repeated violations). Liquidated damages (not giving rise to lease default status) for violations of green provisions could be established. See Friedman on Leases, supra, for a discussion of liquidated damages clauses.

To avoid collection issues, such liquidated damages could be assessed against a “green” security deposit and/or expressly stated to be “additional rent” when triggered. Disputes as to whether the damages were triggered appropriately are inevitable, particularly if the amounts are substantial.

An alternative or supplemental approach is to provide a green ombudsman, who is expressly empowered to assess liquidated damages, to facilitate compliance. This approach would combine practicality with enforcement. Such a person, if an independent third party, would be empowered to recommend to both landlord and tenant approaches to address obstacles to green efforts. An ombudsman could be an information resource and authorized to conduct informal mediation. If liquidated damages were modest (and possibly donated to a green charity), this approach may provide an effective mechanism to address day-to-day compliance issues. The lease would need to set out the ombudsman's authority expressly (and possibly, a mutual selection process).

In some situations, non-monetary remedies may be appropriate. In certain buildings, listing in a lobby a directory of those tenants actively participating in green programs could serve as a “carrot.” The corresponding “stick” could be threat of removal from the directory as a result of tenant non-compliance. A “wall of shame” listing offending tenants could be effective, but no doubt overly offensive to tenants.

Conclusion

As the green lease is first and foremost a business relationship concerning occupancy of real estate, the remedies for enforcement of the “green provisions” should strike an acceptable balance within that relationship. Breaches that give rise to material, identifiable, and adverse consequences to the landlord must be expressly described in the lease and distinguished from less consequential violations. For those less consequential violations, landlords and tenants should negotiate provisions that work in the context of property management and allow each party to conduct its primary business while accomplishing the building's “green” agenda.

Ronald W. Ruth is Managing Partner of Sherin and Lodgen LLP, a Boston-based firm with substantial involvement in commercial real estate, leasing and litigation. He is a LEED Accredited Professional, and has practiced real estate law for over 25 years.

The primary focus of “green lease” discussions has been on the economic aspects: the interplay of the rent (whether gross or net) with the utility cost. A pure net lease provides little incentive for a landlord to invest additional capital to conserve energy or water if the tenant is the only party to enjoy the savings. A pure gross lease aligns the landlord's capital cost with the savings in lower operating costs, but does not invite the tenant to conserve utility and water use. As one commentator notes, a “modified gross” lease, which requires the tenant to pay usage costs above a defined base, is best suited to the “green lease.” (Friedenberg, “Green Leases” Green Development News, April, 2009).

To date, the green lease discussion has avoided the complications of enforcing “green lease” provisions. Many leases simply advise the tenant that the building is being operated as a green building and provide the tenant with a handbook. This approach demonstrates lack of familiarity with green practices in commercial real estate and does not address the consequences of failure to adhere to green practices. The fact that Leadership in Energy and Environmental Design (LEED) Certification for buildings was originally tied only to its construction or renovation (and not its operation) reinforced this approach.

Changes in the Marketplace

Conditions evolve quickly. Green practices in building management are becoming more familiar, and LEED has developed a protocol for building management for Existing Buildings Operations and Maintenance (“EBOM”). In addition, ASHRAE (The American Society of Heating, Refrigeration and Air Conditioning Engineers) is developing a building energy labeling program. Governmental entities have entered the marketplace as: 1) landlords; 2) tenants; 3) developers; and 4) most importantly, as the source of grant money or tax credits. The U.S. General Services Administration lease protocol “Green Lease Policies and Procedures for Lease Acquisition” requires prospective landlords to deliver a structure that satisfies LEED Silver Standards. Some state and municipal entities now require “green” elements as part of entitlement approvals. As a result of these changes in the marketplace, the need to examine the issues associated with enforcement of the “green lease provisions” has intensified.

'Green Provisions'

The term “green provisions” (for purposes of this article) refers to those elements of a lease which require adherence to a specified code or standard [whether prepared by the landlord or a third party, such as the United States Green Building Council ("USGBC"), which prepared LEED, Energy Star, prepared by the Environmental Protection Agency (EPA), or the ASHRAE building energy labeling program]. These standards become applicable to a building either by a landlord decision (either to seek a tax credit, or as an investment decision) or through a governmental requirement (a permit condition). The “green provisions” may require, for example, a tenant to separate trash for recycling, maintain operational limits for building systems (thermostat control), use occupancy sensors for lighting, use window blinds, limit water or electrical consumption per square foot, or use “green cleaners” in cleaning products.

To hardened lease negotiators, certain of these provisions may seem precious and immaterial to a discussion of enforcement of leasehold remedies. They may or may not be. If the consequences of a tenant's failure to abide by a green provision includes loss of a tax credit, or jeopardizes a key permit for the building, then the landlord will (and should) insist upon having an effective and appropriate remedy for the tenant's non-compliance.

Eviction

As an unlikely remedy and declaration of default, eviction also may be inappropriate. Leasehold remedies generally result in default and threat of loss of possession for the tenant. Courts are reluctant to order eviction absent a substantial, material breach that persuades the court to award what is generally considered extreme relief. Breach of incidental “green provisions” will not likely cause a court to forfeit the tenant's possessory rights. Courts are unlikely to equate failure to comply with building operational standards with the failure to pay rent or other charges. Even failure to pay rent has not always resulted in forfeiture. See 16 ALR 437, supplemented in 31 ALR 2d 321, Friedman on Leases, Fifth Edition, Milton R. Friedman and Patrick A. Randolph, Jr., and Four Seasons Mfg., Inc. v. 1001 Coliseum, LLC, 870 N.E. 2d 494 (Ind. Ct. App. 2007). A landlord seeking forfeiture for breach of “green provisions” would likely need to demonstrate that special circumstances arising from the breach warrant eviction (such as jeopardizing land use pursuits and approvals, or loss of other benefits) and that such special circumstances were clearly recited in the lease. A landlord would need to demonstrate that the tenant was aware of the green requirement in the entitlement (or tax benefit) as well as the consequences for non-compliance, and that eviction would resolve the underlying matter. Forfeiture or eviction ultimately is an equitable remedy. See DiBella v. Fiumara , 63 Mass. App. Ct. 640 (2005) and H oward D. Johnson Co. v. Madigan , 361 Mass. 454 (1972).

In the case of the loss of a tax credit or other benefit, a court may find that monetary damages for the breach are the appropriate remedy rather than eviction. Again, a landlord would be well served by having the fact of the potential tax credit set out expressly in the lease, accompanied by explicit language addressing the precise consequence of loss of the credit. Similarly, a tenant relying on a building's being green for its marketing or calculation of its corporate carbon foot print will need to alert its landlord of the importance of green operations if it intends to reserve a monetary remedy against landlord's failure to operate the building in a particular manner. A lease is a contract; its breach can give rise to both damages and equitable remedies. As with other contracts, consequential damages are not easily recovered; explicit language addressing the material consequences of failure to adhere to “green provisions” will benefit the parties.

Loss of Certain Privileges

Lease defaults also may give rise to a loss of certain rights or privileges. Such rights and privileges may range from loss of extension rights, expansion rights, or protection provided by a Subordination/Non-Disturbance Agreement. Absence of default is often a pre-condition to maintenance of such rights. Declaration of a default (even a default that expressly cannot give rise to an eviction) may be seen (particularly by the tenant's lawyer during lease negotiations) as an overly harsh remedy unless the tenant's act has caused significant, identifiable consequences.

Injunctive relief to compel compliance could be attempted, but it may be a challenge to demonstrate irreparable harm to one party or the other.

Claims of loss of value arising from loss of “green building” status will undoubtedly arise in coming years. For example, the LEED EBOM program requires that, upon periodic recertification of a building, continuous compliance with designated LEED protocols be demonstrated during the immediately preceding period. A non-compliant tenant could cause a building to lose LEED certification upon periodic renewal. As a result, claims will arise and will be fueled by the growing recognition that LEED certified buildings trade for more money than otherwise comparable buildings. However, proof of a landlord's damages could be difficult to establish for several reasons. First, to date, the data is thin (but growing) as to the monetary value of a LEED certification. Second, such claims will be analogous to the stigma claims for hazardous materials. Those claims have foundered for lack of quantifiable, expert appraisal evidence.

Non-Default Alternatives

Alternative lease provisions may be developed to address less consequential breaches of green provisions, meaning those breaches that would not jeopardize a tax credit, or entitlement. The balance of this article describes a few such provisions (in addition to the conventional approach of notice and cure with the possibility of default for repeated violations). Liquidated damages (not giving rise to lease default status) for violations of green provisions could be established. See Friedman on Leases, supra, for a discussion of liquidated damages clauses.

To avoid collection issues, such liquidated damages could be assessed against a “green” security deposit and/or expressly stated to be “additional rent” when triggered. Disputes as to whether the damages were triggered appropriately are inevitable, particularly if the amounts are substantial.

An alternative or supplemental approach is to provide a green ombudsman, who is expressly empowered to assess liquidated damages, to facilitate compliance. This approach would combine practicality with enforcement. Such a person, if an independent third party, would be empowered to recommend to both landlord and tenant approaches to address obstacles to green efforts. An ombudsman could be an information resource and authorized to conduct informal mediation. If liquidated damages were modest (and possibly donated to a green charity), this approach may provide an effective mechanism to address day-to-day compliance issues. The lease would need to set out the ombudsman's authority expressly (and possibly, a mutual selection process).

In some situations, non-monetary remedies may be appropriate. In certain buildings, listing in a lobby a directory of those tenants actively participating in green programs could serve as a “carrot.” The corresponding “stick” could be threat of removal from the directory as a result of tenant non-compliance. A “wall of shame” listing offending tenants could be effective, but no doubt overly offensive to tenants.

Conclusion

As the green lease is first and foremost a business relationship concerning occupancy of real estate, the remedies for enforcement of the “green provisions” should strike an acceptable balance within that relationship. Breaches that give rise to material, identifiable, and adverse consequences to the landlord must be expressly described in the lease and distinguished from less consequential violations. For those less consequential violations, landlords and tenants should negotiate provisions that work in the context of property management and allow each party to conduct its primary business while accomplishing the building's “green” agenda.

Ronald W. Ruth is Managing Partner of Sherin and Lodgen LLP, a Boston-based firm with substantial involvement in commercial real estate, leasing and litigation. He is a LEED Accredited Professional, and has practiced real estate law for over 25 years.