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THE TENANTS & LANDLORDS GUIDE TO HAPPINESS

BEST PRACTICE AND GREEN LEASING

PRINCIPAL AUTHOR LYNNE BLUNDELL

CHAPTER 5 THE MODEL LEASE:

HERE IT IS!

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Getting your lease right is critical to having a workspace that is productive, healthy and pleasant to work in. Not to mention energy and water efficient. And if you don’t get it right at the very beginning it will be a battle to change things later on.

Achieving this is not always easy. Both tenants and landlords can be reluctant to move away from the familiar.

Just like the rest of us.

The problem with many standard lease clauses is that they are inflexible, discourage cooperation and tend to deny both landlords and tenants financial and operational benefits. They hark back to a time when the status quo was an adversarial relationship between landlord and tenant and “green”

or “best practice” was not in the leasing vocabulary.

And it is worth remembering that if you sign a lease that is prescriptive and inflexible you will be stuck with it for a considerable length of time.

To solve some of these issues, Sparke Helmore Lawyers has worked with the Better Buildings Partnership to change the way tenants and landlords approach leases.

They championed the key project of developing model lease clauses accompanied by information about the potential risks and benefits of each clause.

These model clauses have now been released and are available through the Better Buildings Partnership website.

5CHAPTER FIVE: The Model Lease is here at last –and it’s all in the wording By Lynne Blundell

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NEw MODEL LEASE CLAUSES BENEFIT BOTH SIDES – AS THEY SHOULD FOR A GOOD

RELATIONSHIP

According to Better Buildings Partnership co-chair and head of property management and sustainable performance at AMP Capital, Emlyn Keane, model lease clauses will lead to greater acceptance of better practice and greener leases across the industry.

“These clauses will facilitate changes to leases for the mutual benefit of landlords and tenants,” Keane says.

“We have already established why high-performing buildings are important, and these clauses provide the how.”

Keane says the real purpose of green leases and the new clauses is to encourage collaboration for the greater good. And it shares the load much more fairly with the tenant.

“Even if a landlord has introduced extreme measures to reduce carbon emissions we are only half way there as tenants control half of the building’s energy consumption and water use,” he says.

COLLABORATION RULES, FORGET THE STICkS

The clauses are another step to ensure a better working relationship between landlord and tenant. They are designed for cooperation rather than a system of penalties for the errant party.

BBP members already use many of the new clauses in leases across their own portfolios, championing these as best practice, but now these can be shared with the rest of the industry.

“we have already established why high-performing buildings are important,

and these clauses provide the how.”

— Emlyn keane

Image courtesy of Norton Rose Fulbright.

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SO HOw TO DO SOME HEAVY LIFTING… wITH jOY

The objective of the new model lease clauses was to create something that could operate as a real mechanism for change in the industry.

Experience shows that while green issues are increasingly raised in leasing negotiations, they are also often quickly taken off the table if an objection is raised by the other party.

Some companies avoid them because of unfamiliarity – or there might be a lack of understanding of some of the content in green lease clauses, such as new technologies, legislation and operating methods.

It takes time and resources to work through and find answers.

Hashman says if it’s too hard, companies will often reject the clauses since there is already more than enough to discuss in a leasing negotiation.

It is easy to see why green issues, often considered as “nice to have” rather than essential, are quickly taken off the table.

wHAT DO THE MODEL CLAUSES LOOk LIkE?

The model clauses are designed to give landlords and tenants tools in the form of sample clauses.

These can be used as standalone clauses in leases, inserted into green lease schedules or used as a reference point when assessing draft leases.

FLExIBILITY AND FAIRNESS ARE PART OF THE SOLUTION

Interestingly, the clauses provide for flexibility for different commitment levels such as “must” or

“reasonable endeavours”.

And crucial to the success of the new clauses is that they have been written without bias to either side.

The model clauses have been designed to help people in all types of organisations to make a business case for better performance and productivity outcomes, collaboration and green leasing without the need for extensive input from legal or sustainability advisers.

According to Sparke Helmore lawyer Claire Hashman, while there is now a much better understanding of the benefits of sustainable buildings, there is still a resistance to including green clauses in leases.

Hashman credits the BBP with doing much work to change this and proving the business case for sustainable building management, including through the Leasing Lifecycle Tool and site selection briefs.

Other industry groups and government agencies in Australia and internationally have also

contributed, and many people now have a degree of understanding about the benefits of sustainability in the built environment and are keen to introduce green practices in their businesses and operations. But Hashman says change is slow to make its way into leases.

Part of the motivation for this work was to collaborate with the BBP to look at why this was the case.

It turns out that despite “all of the great information in the marketplace”, the actual implementation of green leasing was simply “too hard” for many people.

THERE IS RESISTANCE – AND IT NEEDS TO BE MET

Sparke Helmore lawyer Claire Hashman.

while green issues are increasingly raised in leasing negotiations, they are also often quickly taken off the

table if an objection is raised by the other party.

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wHAT ARE THE kEY ISSUES?

The new clauses cover a wide range of issues. Sparke Helmore’s leasing specialist Wayne Kaplan says the aim is to provide as many types of clauses as possible, so that landlords and tenants can see the many opportunities to achieve their in-principle agreements to improve their workspaces and buildings by improving the leases and collaborating with one another.

Some of the clauses relate to:

• new legislation, for example the Local Government (Environmental Upgrade Agreement) Amendment Act 2010 NSW, which helps facilitate a finance scheme for retrofits

• new standards that are coming out of agencies such as the Green Building Council of Australia and their Green Star – Performance rating tool

• new management opportunities in the marketplace, such as landlords on-selling electricity and water to tenants.

Between the lawyers and the collaboration with the BBP, the idea is to develop something that allows a user to “pick and choose the clauses that are relevant to their situation,” Kaplan says.

Not all of the clauses are exclusively “green” clauses. Some tweak the clauses you would find in most standard leases, such as market rent review, to show how green issues might be incorporated.

Hashman says many large companies already have well developed green lease clauses in place within their

“precedent” leases or in green lease schedules. For those in the top tier who already use some of these, the clauses will provide guidance on informing where green lease clauses may have been non-binding before and should now become binding.

Other top-tier companies have already used this new list of model clauses to identify gaps in their precedent positions and will draft additional clauses using the model clauses as a base, she says.

“We also understand that some of the larger companies may use the model lease clauses as a resource for internal up-skilling of employees who are unfamiliar with green leasing.”

“We also understand that some of the larger companies may use the model lease clauses as a resource for internal up-skilling of employees who

are unfamiliar with green leasing.”

SMALLER COMPANIES wILL LOVE THE CLAUSES

Hashman says smaller companies will benefit greatly from the clauses.

“We’ve met people in the property industry from smaller organisations who are passionate about making a difference and want to get involved in green leasing, but simply don’t have the time or resources to make it happen.

“Addressing this challenge has been the motivation for developing these clauses.”

THE BIG END OF TOwN ALREADY GETS IT

“we’ve met people in the property industry from smaller organisations who want to get involved in green leasing, but don’t have the time or resources to make it happen. This has been the level that our clauses have been developed for.”

— Claire Hashman

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There are two key areas where changes to lease clauses have great potential to achieve sustainable outcomes in buildings – those relating to make good and capital upgrade works.

Kaplan describes make good as a classic example of an activity governed by a lease where the interests of landlords and tenants are not aligned.

Essentially it means that the tenant is obliged to restore the premises to their former state, even if it means removing improvements and a reasonably good quality fitout.

Landlords don’t want to be prevented from making the tenant remove alterations if the landlord thinks it will improve the chances of re-letting the premises. Tenants, understandably, want to avoid the cost of make good, especially where the fitout being removed is in good condition.

Most leases currently have blanket requirements for the removal of tenants’ alterations.

Kaplan says this may give the landlord certainty as to what the premises will look like at the end of the lease. However, it can lead to unnecessary waste and inefficiencies, especially if the make good is to reinstate the premises to a design that is 10 years old.

As a way around these problems, one of the new clauses drafted by Sparke Helmore brings the parties together before the end of the lease to discuss how the premises should be reinstated.

One of the possibilities is that the fitout might be re-used. This minimises waste, reduces the cost to the tenant and also assists the landlord in finding a new tenant more quickly.

Make good and waste from fitouts will be covered in future chapters of The Tenants and Landlords Guide to Happiness, but addressing it in the lease framework is essential to progressing the topic more broadly.

ISSUES INCLUDE:

1. Cooperation and management – these clauses highlight the importance of the parties working together to achieve the aims of the green lease provisions and set out a structure for doing so, such as forming a building management committee to oversee the implementation of the green lease obligations. These clauses also include data sharing, reporting and information provisions. This helps assess green performance, without having to worry about confidentiality or the costs of gathering the information.

2. Consumption, waste and recycling – this is a group of clauses that sets out practical ways each party can lessen their impact on the environment. They also look at how parties can collaborate to achieve an environmentally beneficial outcome in traditional lease areas, such as “make good”.

3. Specifications and standards – these clauses explain and set out targets for the parties to achieve with reference to industry accepted and standard ratings tools such as NABERS and Green Star.

4. Compliance and costs – it’s always a challenge in green leasing for the parties to decide on the consequences of non-compliance with the green lease clauses. Different options are offered to allow the parties to settle on a level of commitment that meets their comfort levels. The clauses also deal with how to allocate costs associated with environmental best practice. Benefits to each party are explained to lessen the likelihood of resistance to allocation of costs, for example, initial capital expenditure only allowed as a recoverable outgoing if it results in a cost saving over a fixed period during the term.

SO wHAT DO THE MODEL GREEN LEASE CLAUSES COVER?

wHAT wILL HAPPEN NOw? SOME BIG CHANGES

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EUAS TACkLE SPLIT INCENTIVES

Capital upgrades are often hindered by what is known as the split incentive, which is where a landlord pays for capital upgrade works to a building but the tenant profits from the works through reduced operational costs.

This problem is addressed in some states through Environmental Upgrade Agreements, or EUAs. This financial product provides landlords with access to long-term capital, and allows them to recoup the costs of building upgrades that achieve energy efficiency outcomes through a special council levy.

Tenants are also protected by conditions that mean they would be no worse off under an EUA.

The new model clauses include an EUA clause as well as a capital upgrade clause that achieves a similar outcome, but does not require an EUA to be in place.

TALk AND MORE TALk… IT wORkS

But it is communication and cooperation that will really bring about lasting change for more sustainable buildings, both in attitude and in practice.

It is an area where there is considerable inconsistency across

the property sector and now the BBP’s model clauses will provide flexibility for both sides, with a building management section to address communication and cooperation between the parties.

This section requires commitment: that the landlord and the tenant to each have representatives who meet and exchange information and discuss green issues on a regular basis.

Kaplan says for many companies it’s not common to do this, “even when they have these requirements in their leases.”

Some landlords prefer to meet all of their tenants at once in a committee style meeting and others prefer to add green issues to the agenda for meetings that regularly occur between tenants and landlords. Another approach is for landlords to distribute sustainability newsletters to tenants.

Kaplan says it’s important that the communication approach between the parties needs to reflect the resources, organisational structure and practices of the parties.

“With that in mind, we have drafted clauses that can be amended to cover a variety of options relating to communication and cooperation around sustainability,” he says.

Sparke Helmore leasing specialist Wayne Kaplan.

“we have drafted clauses that can be amended to cover a variety of options relating to communication and cooperation around sustainability.”

— wayne kaplan

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FLExIBILITY IS THE GREAT ENABLER, YET THE LEGALS wANT CERTAINTY

Achieving better economic, environmental and social outcomes needs greater flexibility. Yet the main driver for legal outcomes is certainty.

The lawyers say that from a legal perspective, it is important to create certainty in contracts and to ensure that both parties have a good understanding of what they’re going to get out of the relationship and what their obligations are under the lease.

Yet prescriptive measures can lead to outcomes that are not in the best interests of either party.

Currently, says Kaplan, “if there is a change in legislation and both sides want to take advantage of it, they may not be able to due to the prescriptive nature of the lease.”

This is particularly relevant for sustainable building management, where new opportunities continually become available due to changes

in technology and where people are increasingly looking at building management and operations differently.

“We saw an opportunity to change this by providing model lease clauses that could introduce flexibility into the relationship. Often people base the effectiveness or ‘green-ness’ of a clause on how binding they are and how they compel the other party to act,” Kaplan says.

“But we consider that it is also just as important to enable parties to change how they engage with each other over time. So when a business case for sustainable building management presents itself, the parties are in a position to take advantage of it.

Under the new clauses the parties can select a variety of options for levels of commitment.

There’s even commentary in the model lease clauses so both sides can become quickly informed about how green leasing issues operate and not be as easily discouraged from using them,” Kaplan says.

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THERE’S A LONG wAY TO GO

He believes there is still a long way to go in terms of getting tenants and landlords aligned on green lease clauses, without challenging each other’s motives and intentions.

“When it comes to the work that the Better Buildings Partnership is doing around developing best practice lease clauses, there is still a lot of scepticism about what is motivating that,” Loader says.

The response to this scepticism is a genuine desire for continuous improvement to building stock, workplace productivity and increased value that better buildings

have measured from increased collaboration.

wHAT’S GOING ON wITH THE AIRCON?

An area where there needs to be more flexibility and less mistrust is in building temperature. Standard leases have gazetted temperature settings and often specify that during business hours temperature will be set at between 21 and 22 degrees Celsius.

“Having a greater scientific knowledge of indoor environment, now we

Brookfield, a BBP member, has used the new model lease clauses to assist with a review of its own lease templates.

Jamie Loader, Brookfield’s national operations and sustainability manager, says while the review revealed that Brookfield already included the model clauses in its standard lease template, it reaffirmed the importance of communication between landlord and tenant.

Critical areas are those that require the tenant and landlord to work together to monitor the various outcomes for water and energy – and the clauses that reflect both parties’ commitment to reduce consumption.

“The clauses are written in such a way that they bind both parties to committing to looking at energy and water consumption and challenging the metrics,” Loader says. “This is the ultimate key to getting results.”

wHAT THE LANDLORD THINkS – BROOkFIELD

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know we can challenge that and set the temperature points a little higher provided you get the mix between temperature and humidity correct and that it won’t have a detrimental effect on people’s comfort levels. But it will save a lot of energy,” Loader says.

See The Fifth Estate’s coverage of increasing comfort while saving power.

As a landlord Brookfield would obviously like to address this in its leases.

“Ultimately you need tenants to participate and that means having lease clauses set up in such a way that they explore these opportunities. And having organisations committed to pursuing a common goal is a key step in making that work,” Loader says.

COMFORT IS kING (AND qUEEN)

The wording of the new model clause that encourages this focuses on building “comfort” rather than temperature.

“A partnership approach, where there are not unrealistic expectations of either side of one another, is more conducive to getting a result environmentally,” says Loader.

One of Brookfield’s most progressive

tenants is IAG at 388 George Street Sydney, a 40,000 square metre, 30-year-old building. Brookfield co-owns the building with Investa and also manages it, which is the model the company uses globally.

Brookfield signed a long term lease with IAG eight years ago and as part of that committed to upgrading the property and achieving certain metrics, including 4 Star NABERS Energy and 4 Star Green Star ratings. The upgrade was completed floor by floor with the tenant in situ to minimise disruption. The tenant committed to retaining its fitout to reduce waste.

The result was higher than target, achieving a 4.5 Star NABERS Energy rating, 4 Star NABERS Water rating, 5 Star Green Star – Office Design v2 rating and 4 Star Green Star – Office As Built v2 rating.

“The key is to continually monitor,” Loader says. “We monitor on a monthly and annual basis and review those metrics to ensure we continue to hit all the key targets that we originally set out.

“And we work with the tenant – they help us out. We do things like challenge the amount of after hours use of lights and the amount of airconditioning the tenant is using. I think it’s a great example of tenant and landlord working together.”

“A partnership approach, where there are not unrealistic expectations of either side of one another, is more conducive to getting a result environmentally.”

— jamie Loader

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kEY FEATURES INCLUDE:

• Supplementary airconditioning systems controlled using passive infrared sensors to ensure the system is operating only when required and the systems are automatically disabled when they are not required

• All electrical systems are metered and low power consumption lighting fittings are controlled via Digital Addressable Lighting Interface automation systems

• Transport facilities are a key consideration, cycling facilities are available and there is proximity to public transport

• Good Environmental Choice Australia, or GECA, certified sustainable furniture and the more widespread use of sustainable materials

• Reduced water consumption through the adoption of more efficient fixtures

• An overall improved internal environment with high quality ventilation with more fresh air, good natural day lighting and external views, and reduced incidence of occupant glare at workstations

Law firm Norton Rose Fulbright places great emphasis on improving the environmental performance of its office tenancies around Australia through best practice leases and a cooperative relationship with its landlords.

Lindy Mace, national facilities and procurement manager, told The Fifth Estate the firm has found the benefits of green buildings extend beyond improved community and environmental outcomes of reduced waste, lower emissions and improved transport. 

“Lower emissions equates to reduced operating costs over time,” Mace says. “There are positive effects on culture too in enabling staff to help reduce waste and excess consumption. 

“And client relationships can be strengthened. Clients require their legal service providers to be proactive in adopting more sustainable ways of doing business and building performance is a key area where the impact of a firm on the environment can be reduced.”

Energy efficient premises, effective waste management systems that reduce the amount

of waste to landfill, the use of the latest technology in fitouts and effective relationships with building management are important considerations for all of the firm’s tenancies.

The 111 Eagle Street office in Brisbane, a building owned by GPT, is the firm’s flagship sustainable tenancy. The building is designed to 6 Star Green Star principles and has submitted an application to the Green Building Council of Australia for a 5 Star rating on the Norton Rose Fulbright tenancy.

According to Mace, the firm’s experience with 111 Eagle Street demonstrates that improved environmental outcomes and reliability of building services, which is critical to operations, can co-exist.

“This building stands out for a number of reasons and, importantly, provides a first class working environment for staff. Our lease has been an important enabler of this and we have worked closely with the landlord to ensure operation of the building and fitout achieve absolute best practice in sustainability,” Mace says.

wHAT THE TENANT THINkS – NORTON ROSE FULBRIGHT

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SAMPLE LEASE CLAUSES

BETTER BUILDINGS PARTNERSHIP  MODEL LEASE CLAUSES   Sparke Helmore Lawyers has drafted the clauses as stand-alone options and any use of them should not be construed as Sparke Helmore providing legal advice or creating a solicitor – client relationship. Always seek specific legal advice for your particular circumstances from a lawyer with relevant expertise.

Introduction

NABERS Ratings

Specifications and Standards3

NABERSGreen StarOperational Performance StandardsBEED Act 2010

Consumption, Waste and Recycling2

WorksMinimising Waste from Make GoodCleaningOperations and MaintenanceEnergy ConsumptionWaterWasteIndoor Environment Quality

Compliance and Costs4

Dispute ResolutionAssignmentRent ReviewOn-sale of UtilitiesCapital Works for EfficiencyEnvironmental Upgrade Agreements

Cooperation and Management1

Environmental SustainabilitySustainability Management ComitteeBuilding Management SystemMeteringAlternative Transport ProgramSustainable Procurement

Clauses Summary

The BBP Model Lease Clauses have been developed with the aim of:l educating landlords and tenants (and

other stakeholders) on how buildings may be managed in a more sustainable way by providing options and examples of strategies that may be implemented in office buildings;

l providing examples of wording that may be inserted into a variety of leases; and

l explaining the concerns that tenants and landlords my have with accepting these types of clauses and strategies to mitigate such concerns.

Users should note:l The clauses are designed as standalone

options to assist parties that seek to implement more collaborative or green clauses in their leases.

l The clauses are numbered for ease of referencing. Numbering should be amended as appropriate when clauses are to be implemented into leases.

l The clauses are not mandatory under any legislation, or for BBP Members (who typically have their own amended green lease clause versions which share the intentions of these clauses).

l There is some repetition across the clauses. This is because the clauses are designed to be standalone clauses that may include overlapping subject matters.

l The list is not exhaustive, although many options have been provided. Many clause variations/combinations are also possible.

Information

BETTER BUILDINGS PARTNERSHIP  MODEL LEASE CLAUSES   Sparke Helmore Lawyers has drafted the clauses as stand-alone options and any use of them should not be construed as Sparke Helmore providing legal advice or creating a solicitor – client relationship. Always seek specific legal advice for your particular circumstances from a lawyer with relevant expertise.

Environmental Sustainability

NOTES CLAUSE CONCERN/RISK MITIGATIONnone noted 1.1 Commitment

The Landlord and the Tenant are each committed to managing and operating the Building and the Premises to promote energy efficiency and minimise the environmental impact of the use and occupation of the Building.

none noted none noted

NOTES CLAUSE CONCERN/RISK MITIGATIONThese are positive, high-level commitments that can be placed in a lease document where more structured commitments may be problematic to agree.

1.2 Co-operation

(a) As part of their commitment in clause 1.1, the Landlord and the Tenant will cooperate with each other and act in good faith to:

(i) positively contribute to the working environment of the occupants of the Building and the Premises;

(ii) promote the efficient use of resources in the management and operation of the Services, the Building and the Premises; and

(iii) improve and be accountable for energy efficiency in the Premises and the Building wherever possible.

(b) In order to achieve the outcomes in clause 1.2(a), the Landlord and Tenant will, wherever practicable and reasonable, cooperate with each other’s initiatives to:

(i) reduce energy consumption, water consumption and waste; and(ii) increase and improve recycling,

having regard to:(i) the extent of any works or operational change required to do so;(ii) the cost of such works or operational change; and (iii) the extent of interference to occupiers of the Building arising

from any such works or operational change.

Tenants may be concerned that the wording “must not do anything” is broad and will impose unforeseen obligations or costs on the Tenant.

Listing specific activities that constitute interference may be more acceptable to a Tenant then a blanket statement.

OVERVIEW CONCERN/RISK MITIGATION

These clauses may be used instead of or in addition to other clauses relating to Environmental Sustainability.

Parties may be concerned that clauses relating to environmental sustainability will result in significant costs and/or disruption to building operations

These clauses compel co-operation but are limited by what is practical and reasonable. If costs or operations will be adversely affected by activities under these clauses they may not be enforced.

Cooperation and Management1

THE TENANTS & LANDLORDS GUIDE TO HAPPINESS

ISSUE 05. DECEMBER 2013

©2013 The Fifth Estatewww.thefifthestate.com.au

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