19 May 2011 – Green leases, which include clauses and agreements designed to ensure energy efficiency and sustainable operation of buildings, were not so long ago hailed as progressive. These days it is an outdated concept, according to many of those working in sustainable property, because all leases should aim for this as a matter of course. But that is far from the reality with many accepted practices and clauses in leases causing inefficiency, particularly with tenant fit outs where wastage is rife. It’s time for an overhaul say experts who spoke to The Fifth Estate.

When a new “green” building hits the market, there is a lot of buzz about its sustainable credentials – after all new technology and great design is exciting. The everyday running of a building and the way tenants behave is not so sexy. But this is where the biggest impact on energy and water savings and waste comes from. And it seems it is also where the biggest change is needed – too often tenants are dragging the chain when it comes to taking responsibility for getting the most out of their green buildings.

One industry source told The Fifth Estate that the efficient operation of some of the newest and greenest buildings in Australia are being compromised by tenants who put their work culture before operational efficiency. Companies with hierarchical work cultures, that insist on installing separate offices for senior staff around the periphery of a building, thus blocking air flow, light and dispersion of heating, were some of the worst culprits, said the source.

If this is the case it begs the question: Why aren’t owners of sustainable buildings insisting on tenant lease clauses that specify fit out requirements and operational behaviour? After all that is the basis of a green lease.

Lexia Wilson, partner at law firm Norton Rose, said that such clauses could well become more common as the market swings around in favour of landlords again.

“Landlords can insist on contractual obligation for tenants in terms of fit out and the way the building is used. But most landlords are not pushing these things contractually because the market has been difficult as a result of the GFC [global financial crisis],” says Wilson.

Instead they have put a lot of energy into educating tenants about using sustainable materials and fittings and using the building in an efficient way.

“But as the pendulum swings and the market improves we will most likely see landlords pushing more for contractual agreements, the emphasis being on tenants working with landlords rather than against them for a better outcome for the entire building, not just the base building.”

The time has come, says Wilson, for tenants to accept that achieving energy efficiency in buildings is a two-way street.

“Many tenants when making decisions about moving into new premises are keen to lease a building that has a particular sustainability rating and that is seen to be green. But tenants are not always aware that the Green Star rating is not a performance rating and that the NABERS rating required under mandatory disclosure is about the base building performance and is completely separate to the impact the tenant has on energy use in that building.

“Fit out decisions are crucial and tenants must make a commitment to sustainable decisions right from the beginning. A landlord can only go so far,” says Wilson.

Anz Docklands

And while minimum NABERS ratings of 4.5 stars upward have been mandatory for government tenancies for years, even some government tenants don’t want to commit to more sustainable fit outs or to changing the way they use a building, says Wilson. This means that building owners are sometimes forced to modify green clauses in leases to protect themselves because they are unable to achieve the required efficiency rating without the co-operation of the tenant.

“Sometimes government tenants can be quite selective in what they pursue. Too often tenants, generally, like the idea of being green without a commitment to changing their behaviour,” says Wilson.

It would require ongoing education about the benefits for companies of more sustainable operation of buildings, such as cost savings on energy bills and happier, healthier and more productive employees, says Wilson. Even though these things may seem obvious there was still considerable resistance to behavioural change.

When green leases first appeared the main focus was energy use. Mostly government tenants saw them as a means for ensuring building owners were creating energy efficient buildings. But now, say those pushing for better operation of buildings, leases need to encompass all aspects of sustainability from energy and water use, waste and indoor environment quality through to fit out practices.

Fit out churn a major problem
Robin Mellon, the Green Building Council of Australia’s Executive Director for Advocacy and International, told The Fifth Estate that a key area for change in leases is the ‘make good’ clause where tenants are required to remove all fittings when they vacate the building. This results in considerable waste of resources and materials.

“There is so much work to be done in the area of fit outs. We have to aim for more flexibility and adaptability and look at how long these materials last. The bizarre thing is office furniture and furnishings often have a 15-year life but they are being thrown out after a few years.

“Most leases contain a ‘make good’ clause which requires the tenant to pull out all the fittings when they move out. These clauses cause millions of dollars of waste each year,” says Mellon.

The GBCA is working with the Royal Institution of Chartered Surveyors, RICS, and facility managers to change this says Mellon.

“We have to start changing practices and the lease is certainly a place to start. It can be quite a conversation, particularly if tenants are used to doing things a certain way.”

And it’s not just about rethinking make good clauses. Tenants need to start thinking about whether they really need all the things they put in buildings.

“If you don’t need a suspended ceiling don’t put one in,” says Mellon. “Our building has a plain ceiling with pipes and cables exposed and painted white to match.”

John Goddard

John Goddard, chairman, RICS Oceania Sustainable Steering Group, said RICS is committed to changing wasteful practices in the property industry. To this end RICS has produced a Guide to Greening Make Good to help reduce waste at lease end. This, says Goddard, can be achieved by valuing the materials used and trying to avoid waste through planning, agreement, sharing responsibility and ensuring that the parties that will do the work will do so in an environmentally acceptable manner. The guide has been one of RICS most popular publications.

“Millions of square metres worth of materials are being stripped out of buildings every year and dumped. The embodied energy in the materials that are wasted far outweighs the operational energy savings that can be achieved from running the tenancy energy efficiently, which is where all the focus is at the moment. The waste of energy and resources is astronomical and nothing is being done about it,” says Goddard.

“Most leases last five years and the make good clause nearly always means that everything is taken out so the space is as it was at the beginning of the lease. To make matters worse this is a three stage thing – ex-tenants remove fittings and then paint or do other work on the space, then the landlord often re-paints and puts in new carpets, and then the new tenant will come in and re-paint and rip up the carpet to put in their own floor coverings.”

Addressing the problem of fit out churn was not cut and dried but awareness must be raised, says Goddard. One solution might be for the tenant to pay a bond towards ‘make good’ at the end of the tenancy. If the landlord is able to re-lease the space with the existing fittings then the tenant would get some of that bond back.

Putting the onus back on the landlord to undertake fit outs would encourage better standard of work as they have the resources to do the work and more incentive to do it well, says Goddard.

He would like to see the Green Building Council of Australia include green leases in the point schedule for its new Performance tool, currently being developed. And the leases should emphasise all aspects of operation – energy, water, waste and fit outs.

“It wouldn’t be that hard for the GBCA to award points to building owners who insisted on green leases. Tenants should be encouraged to tread lightly in buildings just as they would in a rainforest. We are wasting precious resources – don’t change things unless it is necessary.

“We have people taking off floor and wall tiles installed by the landlord and replacing them with stone. Then this stone that has traveled halfway round the world to go in the building is ripped off a few years later and dumped. It is appalling,” says Goddard.

Andrew Aitken

The GBCA’s executive director – Green Star director Andrew Aitken says the GBCA is very conscious of the “symbiotic relationship that exists between base building and occupiers” and will design the Green Star – Performance tool to recognise this.

“The Green Star – Office Interiors rating tool currently encourages and recognises the inclusion of lease clauses that align the interests of the building owner/manager and tenants to improve the environmental performance of the building, including monitoring and reporting of energy, water and waste from ongoing operations, “ says Aitken.

“This is essentially the idea behind ‘green leases’.  Green Star – Office Interiors also rewards points where management is contractually required to implement these environmental initiatives from a base building perspective.”

Craig Roussac, general manager sustainability for Investa, says that while fit out churn is an issue an even bigger one is getting the fit out right in the first place. With an eight year lease one of the main reasons for a tenant to leave is a poor quality fit out and too often landlords have ignored the problem.

A pioneer of green leases, Investa developed a Green Lease Guide , which is used as a guide by the NSW government when structuring green leases. Investa has green leases in operation in all its buildings and uses the guide to encourage its tenants to make the right fit out and other operational decisions.

“We are keen for our tenants to stay. It is very expensive to re-do the fit out so if they get it right in the first place they are unlikely to want to leave. We have a 90 per cent retention rate so it does pay off,” says Roussac.

Investa has rejected tenant fit outs where they do not meet its sustainability requirements. And because the company manages its own buildings it is able to keep a much tighter control over such matters.

Roussac says that because fit outs are not included in building valuations, there is little incentive for building owners to take responsibility for them. But expecting valuers to take into account those factors that make a building operate more efficiently would require wholesale change within the industry.

“Valuers, like engineers, are sued if they get things wrong. If engineers don’t build in enough capacity they can be sued and so they build in too much. For both engineers and valuers it is about managing risk and so blunt instruments are introduced. If you are removed from the risk this is particularly the case but for Investa we are very close to the details in the running of our buildings so we can build in flexibility,” says Roussac.

This means the company has been able to develop innovative provisions in its leases to overcome the problem of the split incentive, that is where the building owner pays for building improvements but only the tenant benefits. This includes agreements where if the tenant benefits financially from an upgrade, say to the air conditioning, Investa can recoup some of the costs on an amortisation basis.

“This overcomes the problem of the owner not having an incentive to do improvements. Most landlords scrimp and save and then offer massive incentives to tenants not to leave them. For us it is about working with our tenants so they don’t want to leave,” says Roussac.

Environmental upgrades legislation
The recent introduction of legislation in NSW and Victoria which gives building owners access to cheaper funding for environmental upgrades – in NSW the Local Government Amendment (Environmental Upgrade Agreements) Act 2010 and in Melbourne the City of Melbourne Act 2001 – will also give building owners more incentive to do spend money on their buildings.

The legislation enables the environmental upgrade loan to be repaid via an agreed extra council rate. This means loans can be secured more readily and at a lower interest rate. At present a landlord cannot pass through the cost of energy savings measures that directly benefit tenants via lower energy bills. But under this new legislation because the loan repayment will be via a council rate charge, the portion of the project cost that will benefit the tenant can be passed through. The Bill includes a provision to ensure that no tenant would pay more as a result of the agreement, unless specifically agreed.

But while green leases are there to protect both parties and ensure better building performance is there a risk of tenants suing building owners or other organisations if the building doesn’t deliver?

This has happened in the US where the US Green Building Council has been sued over its LEED building rating system. New York City building energy consultant, Henry Gifford, has sued the USGBC for US$100 million claiming it has committed fraud, unfair competition, deceptive trade practices, and false advertising because he says the LEED system doesn’t save energy the way the USGBC claims it does.

Gifford claims consumers have spent extra money for worthless credentials and that professionals have wasted money getting LEED certified.

Is it possible for the same thing to happen in Australia? Lexia Wilson of Norton Rose says there’s technically no reason why it couldn’t.

“We could get cases under the Consumer Competition Act, which replicates Section 52 of the old Trade Practices Act. We already have a lot of greenwash issues in Australia beyond the built environment and there has been quite a lot of litigation regarding that. We have identified it as an area where the built environment needs to be careful,” says Wilson.
Property agents for example need to be very careful about what they are promising, as they sometimes tend to create a hybrid of GBCA and NABERS ratings when promoting the green credentials of properties.

“There is some confusion in terminology and education is missing. Tenants need to understand that the NABERS rating required under BEED [Building Energy Efficiency Disclosure] legislation is not the same as the GBCA rating and is also different to the ‘as built’ rating the GBCA is working on. There is a tendency to confuse all these,” says Wilson.

“Many tenants want to be green but don’t understand what it really means.”

lblundell@thefifthestate.com.au