Green Leases and Sustainability in Real Estate

In commercial real estate, there are many possible lease agreement types out there - including gross leases, triple net leases, and percentage leases, to name a few!

One growing in popularity rapidly over the last decade is the green lease. Since their inception in the 2000s, green leases have served as a key tool for helping owners and occupiers improve the environmental and social performance of a building. They are an integral part of implementing ESG practices into commercial real estate operations, and enable both tenants and landlords to meet specific sustainability goals.

In this blog post, we’ll be taking a closer look at exactly what green leases entail, and how they can function as one of the main drivers of sustainability in commercial real estate.

What Is a Green Lease?

A green lease, also known as a sustainable or energy-aligned lease, is a rental agreement that promotes eco-friendly practices in commercial real estate by aligning the interests of both property owners and tenants toward sustainability goals. Green leases were developed as a response to the growing need for environmental responsibility in the commercial real estate industry, which historically faced challenges in balancing cost-effectiveness with energy efficiency and sustainability initiatives.

Originating in the 2000s, these types of leases became popular as property managers and tenants began seeking ways to reduce carbon footprints, energy consumption, and operational costs collaboratively. By incorporating clauses that encourage energy-efficient upgrades, waste reduction practices, and resource conservation, green leases can support the transition to more sustainable building operations, benefiting both the environment and the stakeholders involved.

How Do Green Leases Help Meet ESG Goals?

Green leases play a huge role in advancing ESG goals within the commercial real estate sector by embedding sustainability practices directly into lease agreements. These leases align the interests of landlords and tenants around a common commitment to reduce environmental impact, improve energy efficiency, and promote responsible resource use, all of which contribute to long-term ESG objectives.

By establishing shared standards for energy management and sustainability, green leases provide a structured pathway for reducing energy consumption and utility costs. According to the Institute for Market Transformation, implementing green lease provisions can lower utility bills by up to $0.51 per square foot, which translates to an 11% to 22% reduction in energy use in office buildings. When applied across the U.S. office market, this would amount to an impressive $3.3 billion in annual savings, which is quite the incentive for the industry to embrace this approach.

Beyond financial savings, green leases also serve as a valuable asset in attracting and retaining tenants and investors who prioritise ESG values. As companies seek properties that reflect their sustainability commitments, green leases offer a clear demonstration of environmental responsibility and cost-efficiency. As 72% of investors carry out a structured review of ESG performance promoting accountability for energy and water consumption is vital for keeping stakeholders happy.

How Do Green Leases Differ From Other Lease Types?

Green leases differ from standard lease agreements in that they explicitly integrate sustainability into the landlord-tenant relationship. Unlike traditional leases, such as triple-net leases, where operational costs and resource efficiency are typically managed solely by the tenant, green leases create a shared commitment between both parties to reduce energy consumption, conserve water, and minimise waste.

In practice, this shared responsibility is often realised through joint efforts like energy-efficient upgrades, the implementation of eco-friendly cleaning protocols, and the adoption of responsible waste management practices. Both landlord and tenant benefit from these efforts; landlords may see improvements in property value and long-term cost savings, while tenants can enjoy lower utility bills and a healthier, more sustainable workspace.

Green leases also typically include detailed clauses that outline the monitoring and reporting of energy usage and other sustainability metrics. These clauses specify how performance will be tracked (often through regular reports from third-party sustainability auditors or property managers), and may include requirements for periodic adjustments based on the results.

This transparency ensures that both parties can monitor progress toward environmental goals, identify areas for improvement, and make data-driven adjustments to their practices as needed.

Green Lease Provisions

Green leases include various provisions to promote sustainability, but since they aren’t standardised, there is no "definitive" green lease. The specific "green" clauses included depend on what the landlord and tenant negotiate. Common provisions might cover energy efficiency (like energy-efficient lighting or HVAC systems), water conservation (such as low-flow fixtures), and waste reduction (e.g., recycling programs). Some leases may also address indoor air quality by requiring low-VOC materials.

Implementation of these provisions varies. Landlords might handle energy upgrades, while tenants may manage water usage or waste practices. Monitoring and reporting mechanisms, such as third-party audits, help track progress toward sustainability goals. The flexibility of green leases allows both parties to tailor the agreement to their specific environmental objectives.

What Are the Benefits of Green Leases?

Green leases offer significant benefits for both tenants and landlords by creating a framework that promotes energy efficiency, cost savings, and environmental responsibility.

For Tenants

• Reduced Operating Costs: Lower utility bills through energy-efficient upgrades that decrease overall energy and water consumption.
• Healthier Workplace Environment: Improved air quality, natural lighting, and use of sustainable materials contribute to a healthier, more productive workspace.
• Reinforced ESG Commitment: Aligns with tenants’ corporate sustainability goals, which can appeal to employees, customers, and investors who prioritise environmental responsibility.
• Shared Resource Management: Streamlined services for waste reduction, recycling, and energy management are managed collaboratively with landlords, easing the tenant’s operational burden.

For Landlords

• Increased Property Value: Enhanced energy efficiency and sustainable upgrades make the property more attractive to tenants and investors, potentially boosting asset value.
• Attraction of High-Quality, Long-Term Tenants: Sustainability-focused tenants are often willing to commit to longer leases in eco-friendly buildings, reducing vacancy rates.
• Cost-Sharing for Sustainability Improvements: Provides a framework for sharing expenses related to energy-saving technologies and other green initiatives, balancing investment with tenant contributions.
• Enhanced Marketability and Compliance: Aligning with ESG standards positions the property favourably with regulators and investors, while also safeguarding it against future sustainability regulations.

Are There Any Drawbacks of Green Leases?

While green leases offer many benefits, they can also present challenges for both tenants and landlords. One of the main drawbacks is the potential for higher upfront costs associated with implementing energy-efficient upgrades, sustainable materials, and advanced monitoring systems. For landlords, these investments can be significant, and while the cost may be partially shared with tenants, it could still impact profit margins in the short term.

Tenants, on the other hand, may face higher rent due to these green improvements, which can be a deterrent, especially for smaller businesses.

Green leases also require consistent cooperation and communication between landlords and tenants to ensure sustainability goals are met, which can add complexity to lease management. For some, navigating these added clauses and responsibilities may feel like a bit of a burden, particularly if sustainability initiatives do not align closely with their business priorities.

Key Takeaways

By aligning interests around shared environmental goals, green leases help reduce energy consumption, lower operating costs, and enhance the long-term value of properties. While not standardised, the flexibility of green leases allows both parties to tailor provisions that suit their specific sustainability objectives. As the demand for eco-friendly spaces continues to grow, green leases offer a powerful tool for integrating ESG practices into commercial real estate operations.

Make the Most of Your Green Lease With Noda

Want to make energy reporting effortless? Request a demo of Noda’s Smart Energy Reporting Solutions and see how our platform can help both tenants and landlords manage energy usage, streamline benchmarking, and track carbon footprints.

About Noda

Noda is a data and analytics company on a mission to make every building smarter, more efficient, and more sustainable. Recently ranked in the top 10 tech companies leading the charge on climate action, its AI-powered suite of products surface unique insights that empower real estate teams to reduce costs, decrease time spent on routine work, and find and act on opportunities to save energy and carbon. Discover how Noda's solutions can unlock the potential of your assets and accelerate the transition to net zero. Visit us at noda.ai to learn more.