Best Practice Leasing. A Better Buildings Partnership workshop & symposium in association with the University of NSW Faculty of Law

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1 Best Practice Leasing A Better Buildings Partnership workshop & symposium in association with the University of NSW Faculty of Law

2 Professor Sue Bright Faculty of Law, Oxford University Solicitor, Visiting Professorial Fellow UNSW

3 Green Leases: International Best Practice

4 Leases that support and promote better environmental performance: Challenges and Opportunities

5 The Complexity of the Challenge No one size fits all solution New build green (1-2% a year) Old stock: in need of refurbishment No submetering Sub-metered Refurbished stock

6 Tenant Reps Design Team Goals: technical Goals: secure best (financial terms for tenant) Investor Landlords Goals: standard leases, net rent, energy costs paid by tenants Tenants Goals: running profitable business, create employment, minimise outgoings Leasing Agents Goals: secure lettings, agree heads of terms Facilities Managers Lawyers Users of Spaces Goals: finalise lease arrangements Employees, public, customers Goals: security, safety, maintenance, energy, waste

7 The Complexity of the Challenge Length of Leases The Split Incentive Distrustful Relationship Adversarial Relationship Silence on Environmental Issues Landlord responsible for plant and equipment; Tenant pays energy cost What landlords want (investment return) what tenants want (to run business) Rigidity of Lease Terms Environmentally Negative Terms

8 The Complexity of the Challenge

9 The Complexity of the Challenge Interaction with strata title and stratum

10 Both a technical and social challenge Does anyone know what the lease says? Traditional Leases Does the lease allow technical change? eg. Installation of sub-meters Multi-tenanted buildings: more stakeholders, different lease lengths, different priorities *People use energy, not buildings* Building management outsourced Multiple Stakeholders Variety of Building Stock

11 The Negotiations TENANT TENANT REP LANDLORD AGENT LANDLORD HEADS OF TERMS TENANT LAWYER THE LEASE LANDLORD LAWYER

12 Opportunity: Greening the Negotiations TENANT TENANT REP LANDLORD AGENT LANDLORD HEADS OF TERMS TENANT LAWYER THE LEASE LANDLORD LAWYER

13 Finding New Ways Of Engagement Building Operators Owners Tenants Employees

14 Opportunity: Changing Lease Patterns Promoting Co-operation Light Green/Dark Green Environmentally Sensitive Terms Flexible Lease Terms Environmental Targets Sharing Data: require monitoring and reporting of consumption Energy Management Plans

15 Opportunity: Producing Toolkits & Guides Green Lease Toolkit London BBP BOMA Green Lease Guide (US: Building Owners and Managers Association) REALpac Green Office Lease Canada available online

16 Opportunity: Addressing the split incentive problem In a NYC Mayor s Office survey of commercial property owners, 60% of respondents stated that the split incentive problem inhibits them from undertaking energy retrofits. The respondents included firms that own or manage over 310 million square feet of commercial space in NYC.

17 Split incentive problem in the UK Resistance to change: net rent lease heavily entrenched in market practice London BBP Toolkit silent: the working group has not made any recommendations as to how the costs of installing any equipment or making other physical changes to the property will be borne or how any savings associated with improvements will be allocated EU Energy Efficiency Plan 2011, p 7: Will bring legislative provisions requiring Member States to address the split incentive problem

18 Energy-Aligned Lease Language: Solving the split incentive problem See PlaNYC website: Explanation of how lease works and model lease language Interactive financial model showing how the lease language affects payback for the owners and the tenant PowerPoint presentation explaining the EAL

19 Opportunity: Doing Things Outside the Lease Promoting a memorandum of understanding

20 Promoting Green Leases Rely on the Market: UK Government-led approach: As in Australia (EEGO= Energy Efficiency in Government Operations) Regulation: France (Grenelle Environment)

21 Promoting Green Leases Appoint an Evangelical Building Operator Show that it is a win-win opportunity it pays and it feels better Promote co-operation

22 An Australian Perspective Challenge is to balance interests of all stakeholders Legislative Changes: Commercial Building Disclosure Environmental Upgrade Agreements Carbon Pricing Mechanism

23 Carbon Pricing How is the property sector impacted? We re not entirely sure! Property Council of Australia The Allen Consulting Group Report The Carbon Price Mechanism and the Property Sector (October 2011)

24 Considerations As a landlord Can energy suppliers pass costs through to you? What is your ability to pass costs through to your tenants? As a tenant What obligations has the landlord imposed on you? What does your outgoings clause say? Does the lease contemplate sustainability initiatives in the future? (and if in doubt, speak to your lawyers!)

25 sydneybetterbuildings.com.au