17 October, 2019
What’s greener than a green building? A green building with green occupants. This update explores how green leases may facilitate cooperation between landlords and tenants to achieve common environmental goals.
The Carbon Pricing Act (“CPA”), a tax on greenhouse gases emitted beyond a prescribed threshold, came into force in January this year.1 This was followed in September by the enactment of the Resource Sustainability Act (“RSA”).2
When it comes into force, the RSA will, amongst other things, prohibit an occupier of a prescribed building from disposing within the premises any food waste generated in the building in any place other than a facility provided by the building manager for the separate disposal of food waste; or disposing within the building any food waste mixed with any other type of waste.3 The RSA will further require the building manager of a prescribed building to provide within the premises on which the building is situated, a facility to enable occupiers of the building to dispose food waste separately from other types of waste.4 If the prescribed building is a new building, the building manager must further cause all food waste disposed of in such a facility to be treated in the building. Where the prescribed building is not a new building, the building manager can either cause the food waste to be treated in the building or within the premises on which the building is situated; or engage a licensed waste collector to send the food waste for treatment at a licensed waste disposal facility.5
Laws such as the CPA and RSA prod landlords and tenants to work together to reduce respectively, the carbon and resource footprint associated with the occupation of leased properties. Beyond passively reacting to changes to the law, landlords and tenants can proactively explore opportunities to collaborate on a more holistic approach to achieving mutually beneficial environmental goals and an equitable alignment of the associated financial costs and benefits.6
What is a Green Lease?
A green lease contains covenants between a landlord and a tenant as to how the leased premises or the building in which the premises are located is to be occupied, operated, and managed in a sustainable way. Green leases are important complements to the green design of buildings in improving the environmental performance of buildings because the actual performance of a building is often influenced by the behaviour of its occupants, green design notwithstanding. Structural elements commonly found in a green lease include, an agreed environmental management plan which provides for the tracking and sharing of environmental performance data for achieving specified targets, and the setting up of a joint committee to cooperate on the implementation of the environmental management plan. Depending on the nature of the property and the lease involved,7 and on the parties’ level of ambition, substantive obligations may include complying with agreed standards for energy efficiency, water efficiency, waste (including food waste, wastes from fitting-out works8) minimisation and recycling, and indoor air quality.9 Other environmental measures that may be addressed include, reducing greenhouse gas emissions and facilitating sustainable transport.10
‘Hard’ or ‘Soft’ Obligations?
It is not necessary for the “green covenants” to attract liability in the event of non-compliance. Green covenants can be included in the lease itself, set out in a separate instrument such as an environmental handbook, or in a memorandum of understanding. Indeed, parties are free to stipulate that such covenants are not intended to be legally binding and carry no legal consequences in the event of non-compliance, or to opt for obligations on an “endeavour” basis, or a mix of “hard” and “soft” green covenants. Parties are also able to negotiate a range of financial and non-financial incentives and consequences that follow from compliance and non-compliance of hard obligations, such as rent premiums or discounts, rent abatement, service charge abatement or surcharges, and favourable terms for end-of-term reinstatement, rent review, or lease renewal. This flexibility can be utilised to enable agreement on novel or more ambitious obligations to be reached more quickly, although the problem with non-binding covenants is that it may be insufficient to overcome a “trust deficit”, and a party may be deterred from incurring significant upfront costs to honour its own ambitious commitments to its detriment without any assurance that the other party will also honour its commitments. Where binding green covenants are to be adopted, it is important to ensure they are properly integrated into the other clauses in the base lease to maintain consistency and compatibility, and the overall integrity of the lease as a whole. Clauses that may need particular attention include obligations for outgoings, obligations for maintenance and repair, responsibility for capital improvements, landlord’s right to access premises, landlord’s consent to alterations, rent review considerations, end-of-term property reinstatement, service of notices, and dispute resolution.
Benefits of Green Leases
From the landlord’s perspective, a green lease enables the leased premises or building to be operated and maintained at a lower cost in accordance with its environmentally sustainable design. The landlord is also able to align its leases with its sustainability values, reduce its environmental social governance (“ESG”) risks, and improve its public image. Beyond attaining certification for building environmental performance such as the Building Control Authority’s Green Mark (“GM”), it can further use its offering of green leases to demonstrate leadership in the marketplace and differentiate its product to increasingly ESG-conscious prospective and existing tenants.
The tenant benefits from the occupation of healthier, and more productive and satisfactory premises. It can also benefit financially from reduced energy and water consumption and waste disposal costs. Like the landlord, the tenant can further align its leases with its own sustainability values, reduce its own ESG risks, and gain from an improved public image.
Green Leases in Singapore
The Building Control Authority (“BCA”) launched the Green Mark scheme in 2005 and published its “Green Building Master Plan” the following year. In its “3rd Green Building Masterplan” published in 2014, BCA announced its plan to go beyond the greening of the design of buildings to “engage building tenants and occupants more actively to drive energy consumption behavioural change and to address the well-being of the people”.11 Pursuant to the Masterplan, BCA has published as part of its Green Lease Toolkit, an “Office Green Schedule 2014” and a “Retail Green Schedule 2014” to promote green leases. These schedules suggest minimum and recommended standards for “monitoring and improving energy efficiency, water efficiency, outdoor and indoor air quality, sustainable material and waste management, through a target based approach applicable to office [and retail respectively] buildings and tenants”.12 It has also introduced a green building award with two tiers, the BCA Green Mark (“GM”) Pearl Award and GM Pearl Award Prestige to encourage green occupation within green buildings. The award is given to building owners/landlords who meet the threshold number of tenants/occupants or threshold net lettable area occupied tenants who are GM certified under the GM occupant- centric schemes13 within a base building which is GM GoldPLUS or higher.14
Some landlords and tenants in Singapore have already taken the lead in adopting green leases. For example, all of City Development Limited’s tenants have signed up to a Green Lease Memorandum of Understanding. This and other initiatives have earned it the BCA Green Mark Pearl and Pearl Prestige Awards.15 JTC Corporation requires all their tenants in JTC developments that are Green Mark Gold or Platinum certified to enter into green leases.16
Conclusion
Green leases play a critical role in aligning incentives to shift buildings from a linear economic model and into a renewable and circular economy throughout their life cycle, including the occupation stage.
As corporate sustainability takes on increasing prominence and environmental issues come under greater regulatory, investor, employee, and public scrutiny, green leases have become more common even though they are not mandatory.
With the recent introduction of new legislative requirements to raise the minimum environmental performance standards of building, it is timely for landlords and tenants to consider greening their leases.
1 See our Client Update, “An Overview of the Carbon Pricing Regime in Singapore”, (January 2019), <https://www.shooklin.com/images/publications/2019/January/An-Overview-of-the-Carbon-Pricing-Regime-in-Singapore.pdf>
2 See our Client Update, “The Resource Sustainability Bill – Are We Going in Circles?” (August 2019), <https://www.shooklin.com/images/publications/2019/August/The-Resource-Sustainability-Bill-Are-We-Going-in-Circles.pdf>
3 RSA s 25.
4 RSA s 26.
5 RSA s 27.
6 See for example, Michael Long, “Giving Food Waste a New Lease of Life”, (22 January 2019) The Business Times.
7 Considerations include whether the lease is gross or net utility costs, the scope for environmental improvement and costs involved, whether the property is single- or multi-tenanted, and the tenure of the lease.
8 See The Fifth Estate, “NZ’s Circular Economy Model Office Project Tackling Fitout Churn”, (5 June 2015) Eco-Business.
9 See for example, the Building Control Authority, “Office Green Schedule 2014”, <http://www.bca.gov.sg/GreenMark/others/Office_Green_Schedule.docx>; and Building Control Authority, “Retail Green Schedule 2014”, <http://www.bca.gov.sg/GreenMark/others/Retail_Green_Schedule.docx>.
10 See Real Property Association of Canada, Green Lease Guide for Commercial Office Tenants (January 2010); Council of Australian Governments National Strategy on Energy Efficiency, The Green Lease Handbook (September 2012).
11 Building Control Authority, 3rd Green Building Masterplan (2014), p 2, <https://www.bca.gov.sg/GreenMark/others/3rd_Green_Building_Masterplan.pdf>.
12 Building Control Authority, “Office Green Schedule 2014”, p 2; and Building Control Authority, “Retail Green Schedule 2014”, p 2.
13 Green Mark occupant-centric schemes have been created by BCA for office interiors, restaurants, retail premises, supermarkets and laboratories. Criteria include energy efficiency, water efficiency, sustainable management and operation, indoor air quality. See Building Control Authority, “BCA Green Mark Assessment Criteria, Online Application and Verification Requirements”, <https://www.bca.gov.sg/GreenMark/green_mark_criteria.html>.
14 See Building Control Authority, “BCA Green Mark Pearl Award 2019 – Eligibility Criteria & General Terms of Participation”, <https://www.bca.gov.sg/GreenMark/others/GM_Pearl_Award_2019.pdf>.
15 See City Developments Limited, “Green Leases”, <https://www.cdlsustainability.com/cdl-six-capitals/manufactured- capital/green-lease-tenant-engagement/>; and Building Control Authority, “BCA Green Mark Pearl Award 2019 – Eligibility Criteria & General Terms of Participation”, <https://www.bca.gov.sg/GreenMark/others/GM_Pearl_Award_2019.pdf>.
16 JTC Corporation, “JTC Pledges Support for Singapore's Year of Climate Action 2018 by Announcing Climate Action Commitments”, <https://www.jtc.gov.sg/news-and-publications/press-releases/Pages/20180601(PR).aspx>.
