Retail Lease Modifications Can Improve Efficiency

Green buildings

by | Jul 22, 2013

Green buildingsLengthening the lease period, discussing alternative lease types and installing utility submeters are among 13 green lease modifications suggested in a new primer aimed at better managing commercial buildings’ environmental performance.

Retail landlords and tenants may not know where to start when it comes to discussing investing in technology and processes that improve the efficiency and sustainability of their facilities. To help with this, the Institute of Market Transformation and the Retail Industry Leaders Association have come up with a Retail Green Lease Primer.

The primer focuses on provisions in the standard lease agreement that can be modified so tenants and landlords can achieve their environmental and sustainability goals, reduce waste, water and energy use, and lower operational costs. Among the top suggestions:

  • Lengthen the lease terms, which will enable both sides to invest in efficiency upgrades that offer better paybacks and reduce waste from additional tenant build-outs.
  • Pursue alternative lease types instead of the traditional “triple net” lease where the tenant is responsible for paying its own interior utility expenses since then the landlord is not interested in making efficiency improvements. If the landlord makes the investments, there is assurance on return on investment if utility costs are split and tenants benefit from a fixed, monthly operating cost.
  • Specify permitted use for tenants that restricts them to specific operations — for example, in the case of a dry-cleaner, specify the types of chemicals they use — to limit the environmental impact.
  • Identify tenant build-out specifications — so they meet mutually agreed upon sustainable building practices and/or material standards.
  • Allow landlords to amortize and recover capital costs associated with sustainable improvements to building and common areas — many retail leases don’t allow the owner to recover capital improvement costs from tenants. Provisions that require tenants to pay for a portion of capital costs for certain efficiency projects that benefit them can be added to the lease terms.
  • Allow landlords to put the costs for building controls and water conservations measures as operating expenses, which will enable the owner to pass the costs on to tenants on a pro-rated basis.
  • Install submetering for utilities so tenants pay for what they use — this contradicts the alternative lease type suggestion — but the primer also includes this for cases where tenants make efficiency improvements, so they see payback on their investments.
  • Share utility information with each other, so each side knows about total building maintenance and operating costs and can work on joint efficiency efforts.
  • Specify whether tenants will participate in the landlord’s waste and recycling efforts — since bundling such services can lead to cost savings.

In February, UK retailer Marks & Spencer unveiled a “green” property lease policy that has many of the primer’s suggestions. With the green lease policy, M&S intends to better manage new buildings’ environmental performance, and retrospectively add green clauses to 70 existing leases.

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