Lease arrangements for green commercial buildings

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This article presents issues related to the inclusion of sustainability principles into commercial leasing arrangements.

Summary

This article focuses on commercial rental properties, in particular office buildings. Problems, and possible solutions, for achieving consensus between landlords and tenants on introducing ESD principles into commercial leasing arrangements are considered in the context of new building projects and retrofitting existing buildings. In this latter context, the possible reliance on 'standard' commercial leases is considered, as well as a value proposition for tenants whose activities may be disturbed, or costs increased by, retrofitting ESD design features into an existing building. ESD-specific commercial lease terms are also briefly outlined.

The issues

What is a 'green lease'?

In this article, a 'green lease' is interpreted to mean a lease between the landlord and tenant of a 'green building' or a conventional building that is proposed to be refurbished as a 'green building'. The 'green lease' distinguishes itself from conventional leases in that it incorporates ecologically sustainable development (ESD) principles that ensure the ongoing use and operation of the building minimises environmental impacts.

For the purposes of this article, it is assumed that a 'green building' is a building that is designed and operated to achieve some or all of the following goals:

• reducing energy use, or using renewable energy. This very broad objective could include a range of possible measures, including passive solar design, energy reduction initiatives such as chilled beam air conditioning, solar panels, and making maximum use of natural ventilation and sunlight;
• water sensitive design, such as the reuse of grey water and stormwater for watering gardens, flushing toilets, etc;
• using, where possible, recycled building materials for construction fit-out that can be expected to endure for the life of the building with minimal maintenance, or can be recycled at the end of the useful life;
• healthy internal environments, such as providing airflow, cross ventilation, daylight, low levels of chemicals, allergens and other irritants, minimising reliance on mechanical heating, cooling and lighting systems, and minimising internal noise levels; and
• integrated waste management practices, to reduce the amount of waste delivered to landfill, maximising recycling and composting opportunities, and dealing appropriately with hazardous materials.
  

Matters considered in this article

This article focuses on commercial rental properties, in particular office buildings. Problems, and possible solutions, for achieving consensus between landlords and tenants on introducing ESD principles into commercial leasing arrangements are considered in the context of new building projects and retrofitting existing buildings. In this latter context, the possible reliance on 'standard' commercial leases is considered, as well as a value proposition for tenants whose activities may be disturbed, or costs increased by, retrofitting ESD design features into an existing building. ESD-specific commercial lease terms are also briefly outlined.

Most of the issues discussed in this article would equally apply to industrial or retail buildings, though it should be noted that most Australian States and Territories have retail tenancy legislation that could have a bearing upon the negotiation of green leases. Specific consideration of retail tenancy legislation is not considered in this article.

However, it is first important to understand the nature of a commercial lease so the value proposition for a tenant, landlord or property developer can be fully understood.

Commercial and legal practicalities

A lease is a contract. In return for rent, a landlord grants the right to occupy part or all of its land or building to a tenant. By entering into a lease, a landlord aims to maximise rental returns and occupancy rates, ensure its asset (the building) is maintained in reasonable condition, and minimise costs for maintaining the building.

A tenant acquires a right to exclusive possession of the part of the building or land to which the lease relates. Before deciding whether or not to enter into a lease, a tenant must satisfy itself that the building is fit for its intended purpose, will provide a safe and productive work environment, is appropriately located to suit its public image, and minimises operating costs, outgoings and rent. Prior to committing to a lease, a prospective tenant will typically compare a number of potential properties, weighing up each of these matters carefully before deciding upon its preferred property. In the current commercial property market, some of the existing buildings a prospective tenant will examine may be 'green buildings', but most will not. On the other hand, new properties on the market are more likely to incorporate ESD principles.

These commercial and legal practicalities underpin the cost-benefit analysis for both landlord and tenant in deciding whether or not to enter into a commercial lease of a building. The implications for a green lease of a building perhaps fall into the following categories:

• if the upfront costs in developing a green building are higher than a conventional commercial building of similar type and size within the same marketplace, then the owner will either need to bear those additional upfront costs itself, or recoup some or all of those additional costs from tenants through imposing a higher rent; and
• if additional upfront costs are proposed to be passed on to tenants, or the tenant's management and fit-out obligations are onerous, then prospective tenants will compare the quality and type of premises, rent and outgoings with other commercial properties in the marketplace.

All other things being equal, most tenants will not sign up to an agreement to lease of a proposed building if the costs associated with occupying a green building pursuant to a green lease are greater than occupying a conventional commercial building pursuant to a standard commercial lease.

It is true that some participants in the commercial property marketplace, in particular Government Departments and agencies or corporations which have a high profile ESD and triple bottom line commitment, may be prepared to absorb additional costs associated with owning or occupying a green building. Indeed, these organisations have been at the forefront of the development of the green commercial property market. The same might also be said of some funds managers, who are more likely to adopt a life-cycle approach to assessing the value of up-front investments in ESD design and management than a speculative property developer. However, in my view even for these types of organisations the value proposition of green buildings for both landlord and tenant must not only be commercially viable, but positively commercially attractive for both parties when compared to non-green alternatives.

Achieving consensus - The value proposition

A developer and building owner, aiming to maximise cash flow and minimise costs, would typically be unwilling to invest additional capital, construction or innovation costs in order to certify that a building's performance meets ESD standards. However, reports from a number of Government authorities throughout Australia suggest that building owners are increasingly adopting a life-cycle perspective in evaluating the commercial benefits of higher up-front constructions costs of a green building. For example, based on this scenario the use of materials which are designed to endure for the life of the building and beyond may, despite initially high upfront costs, result in lower building maintenance costs and expenses. Whilst it is common sense for a building owner to consider the benefits of lower building maintenance costs throughout the life of the building, the cash flow implications of higher upfront costs for developing a new building, or retrofitting an existing building, need to be understood and managed.

The irony is that the beneficiaries of implementing ESD measures are often tenants, who benefit from lower utility outgoings due to design and construction features that reduce energy and water consumption. It is counter-intuitive for a building owner to invest additional capital in the development or fit out of a green building unless those costs can be recouped through higher rental payments. Whilst this may present the commercially optimal position for a landlord by enabling the higher upfront costs to be recovered relatively quickly, that rent will still need to be commercially competitive in the marketplace. If it is not, then it will be very difficult for the owner or property developer to achieve the pre-commitments required to secure funding for the building in the first place.

Of course, if the market demands green buildings and is willing to pay the premium for them, or ESD costs become level with conventional building costs, then the problem is obviously alleviated. However, despite a growing momentum for ESD principles in the commercial property market, this does not yet seem to be the case. As far as I can tell, the majority of green buildings in Australia either involve government or institutional occupiers, or are occupied by a single tenant.

The value proposition for landlord and tenant therefore appears to be as follows:

• the cost differential between a proposed/refitted green building and a conventional building of similar size and location must be kept to a minimum. While it is true that the higher upfront costs associated with developing a green building may result in net savings for the building owner over the life of the building, this benefit is tempered by two key considerations. The first consideration is that the developer and initial owner of the building may not own that building for its entire lifecycle. In such a case, the party who has met the initial upfront costs will bear much of the onus of those costs unless it can be passed on to tenants or the purchaser of the building (see the snapshot case study on 'Value of a green building' below). This consideration will be particularly relevant to a speculative property developer, though perhaps less so for long-term property owners. Second, the cash flow considerations and the profitability of the building for the developer and initial owner need to be maximised in order to provide an incentive to develop such a building in the first place; and

• rental and outgoing costs must be competitive, and obligations regarding fit-out, waste management and the like must be reasonable. Excessive rental payments are obviously uncommercial, but a balance between rental payments on the one hand, and possible savings in outgoings and waste disposal costs and hopefully greater worker comfort (and hence productivity) on the other, needs to be part of the 'pitch' to prospective tenants.

Green leases

Key features of conventional commercial leases

A conventional lease for a commercial rental property will typically contain certain features:

• it confers a right of exclusive possession on the tenant. A landlord is usually only entitled to enter and remain upon the leased premises in limited, defined circumstances. Allied to this are the landlord's implied covenant to the tenant for quiet enjoyment, and non-derogation from the grant;
• it will define the amount and method for paying and reviewing rent and outgoings. Outgoings are usually comprised of utility bills, rates, repairs and maintenance costs and insurance calculated as a proportion of total leasable floor area in the building occupied by the tenant;
• it will impose obligations on the tenant to only use the leased premises for a permitted purpose, and to comply with obligations defined in the lease to ensure the tenant does not damage (and thereby affect the value of) the leased premises; and
• it will define limited powers for the landlord to enter and remain upon the leased premises for repair and maintenance.
  

Green leases

A green lease builds upon these features but includes additional commitments from both landlords and tenants. For example, a new or refurbished building designed to achieve a particular rating under Green Star or the Australian Building Greenhouse Rating (ABGR) scheme will typically be the responsibility of the landlord, but only with the co-operation of the tenant. Although this article does not address the various rating systems for green buildings, it is worth noting that some of the requirements of the rating body might be referenced in the lease. The ABGR scheme has a range of commitment agreements for those committing to ABGR ratings in their new buildings, refurbishments, including for tenancies and fit-outs. Depending upon the circumstances, reference to these agreements may be incorporated into the lease.

The green lease will therefore require key specific features:

(a) Targets and benchmarks

Setting measurable targets and benchmarks for environmental performance is extremely important to enable the landlord and tenant to measure their own and each other's performance. For example, the lease for the police headquarters at Parramatta specifies the building must achieve a 4.5 star ABGR rating over the life of the lease, evaluated every year for the entire term of the lease. This is the landlord's obligation, and if it is not achieved then the tenant's rent is reduced by the amount of any increased outgoings in energy and water costs arising as a consequence of losing the rating.

Similarly, a landlord and tenant may jointly agree and commit to targets for energy and water consumption, waste disposal and recycling. Commercial lease terms to achieve these objectives could include any or all of the following:

• an obligation on the landlord to separately meter the energy and water consumption of each tenant;
• establishing a mechanism for the appointment of a qualified and independent consultant to monitor energy and water consumption and reuse and assess compliance with the targets and benchmarks prescribed by the lease are achieved;
• setting targets to reduce waste consumption and disposal and increase waste recycling; and
• on an annual assessment of whether improved levels of certification under ABGR or other rating tools can be attained.

In addition, penalties for failing to comply with the lease obligations or achieve prescribed targets should be considered. It is important that the parties assess and agree to a penalty that provides sufficient incentive for them to comply with the lease terms and achieve environmental targets and performance criteria prescribed by the lease. For example, as discussed above the lease for the Parramatta Police Headquarters requires a reduction in the rent commensurate to the increased utilities costs associated with the building owner's failure to achieve a 4.5 star AGBR rating.

Another variation involves tying the landlord's fixed annual rent review to achievement of a defined rating (such as a 5 star ABGR rating). In the event that the landlord fails to maintain the rating, then there will be no rent review for that period. A more stringent variant is the right to terminate the lease if the building fails to meet the requisite rating for a certain period of time (commonly 90 days). Presumably, more conventional landlord remedies such as step-in or termination would be available to the landlord in the event of a breach by the tenant.

(b) Tenant's obligations and building rules

Commercial properties typically have building rules, and these rules could prescribe the tenant's ESD obligations. These obligations could include a range of matters relating to:

• indoor air quality such as carbon dioxide monitoring and ventilation efficiency monitoring;
• incorporating energy and water use performance criteria into fit-out design and equipment selection, such as zoned automatic switching;
• ensuring materials used in the building fit-out are recycled or are capable of being recycled; and
• prescribing minimum benchmarks of building occupants with access to natural daylight and views, etc.

The ACF's 60L building in Melbourne has an environmental management plan for the building, which the landlord and tenants must comply with. Typically, an environmental management plan or system is more likely to work if an organisation has ownership of the design and implementation of that plan or system. Conversely, in my experience a system that is imposed upon an organisation is less likely to work in practice. If the EMS model is being considered by a landlord, it should carefully consider two approaches. First, should it prescribe the form and content of the EMS? Alternatively, should it merely prescribe the environmental targets and objectives and prescriptive building rules, and leave it for the tenant to develop its own system to achieve these targets and comply with those rules?

(c) Fit-Out

In conventional commercial leases, fit-out is usually the responsibility of the tenant, but subject to approval by the landlord. A landlord of a green building may wish to impose obligations on the tenant regarding the nature or type of materials used in the fit-out to achieve ESD goals, or require tenants to comply with a fit-out policy annexed to the lease. For example, the ACF's 60L building has a Tenancy Fit-out Manual and Fit-out Schedule. Compliance with such documents could be enforced by annexing them to the lease or agreement to lease. A landlord may wish to ensure that the tenant uses recycled or recyclable materials in the fit-out where practicable, or that the fit-out is designed so that a prescribed percentage of occupants of the leased premises are exposed to natural sunlight and ventilation.

As with all other aspects of the lease, the tenant will need to undertake a cost-benefit analysis and decide whether such obligations are unacceptably onerous. Using the above example, the tenant will need to weigh up the cost of recycled materials (which may in fact be cheaper than new materials), whether materials for quality or design required by the tenant are actually available, and the feasibility of achieving a prescribed percentage of occupants exposed to natural sunlight or ventilation post-fit-out. A fit-out requirement that imposes additional cost burdens for a tenant is only likely to be commercially palatable for long-term leases.

(d) Landlord's obligations

The landlord will also have obligations. If a measurable target, such as a rating under the ABGR scheme, Green Star or other rating tool is prescribed by the lease, then the landlord's obligations might include:

• ensuring all fundamental building elements and systems are installed and operated to maximum efficiency. This may require certification by an engineer with relevant qualifications;
• banning the use of CFCs in air conditioning systems, and banning smoking;
• ensuring that an easily accessible and dedicated area for recyclable collection and storage of waste is set aside;
• monitoring and, where necessary, adjusting air conditioning levels to reduce energy use;
• ensuring recyclable waste is actually being recycled;
• reducing waste sent to landfills;
• incorporating the use of native and drought tolerant plants in landscaped areas;
• providing bicycle storage, changing rooms and showers, and providing only the minimum amount of car parking spaces required by a planning authority; and
• reporting obligations relating to the rating certification (e.g., Green Star, ABGR).

Depending upon the lease, some of these obligations may also be joint commitments with the tenant. Environmental targets prescribed by a lease must be achievable. A landlord should be in a position to demonstrate to a prospective tenant that the building can, under normal operating circumstances, achieve the proposed environmental targets provided the tenant conducts its operations in a particular manner. Depending upon the circumstances, the landlord may need to rely upon the design and construction of the building by its architect and/or developer when it markets its building to prospective tenants as a green building. If a tenant requires warranties from the landlord regarding the design specifications and performance of a new or re-fitted green building, then the landlord should procure back-to-back warranties from the developer in its development agreement.

A tenant's due diligence will also be important in this regard, as it will need to satisfy itself that if it complies with its management and fit-out obligations under the lease, then the building will achieve the desired environmental performance. Where commercially feasible, a tenant should seek warranties from the landlord in this regard.

(e) Who is responsible for what? The importance of dispute resolution

A green lease should not only specifically define the responsibilities of the landlord and tenant, but ideally should include a dispute resolution mechanism in the event of a disagreement between the parties as to why a particular target or objective prescribed by the lease is not achieved.

The Green Lease Schedules (Department of the Environment and Water Resources) developed by the Commonwealth government for lease transactions involving its agencies and departments attempt to avoid disputes by requiring the parties to work together earlier through joint remedial plans. In the event of a failure of the remedial plans, the lease provides for adjustments to the ABGR rating required under the lease. Specific provisions for breaches of remedial plans are laid out, all of which may ultimately be referred under the dispute resolution mechanism. This form of green lease aims to achieve outcomes which are shared by landlord and tenant.

The manner and form of the dispute resolution mechanism is, as always, negotiated on a case-by-case basis. If however the lease includes a requirement for an annual independent audit as suggested earlier in this article, then the lease could include a requirement that the auditor's brief advise not only on the performance of the building, but also include:

• an explanation as to why the building is not achieving a prescribed target; and
• advice on who, in the auditor's opinion, is responsible for that non-performance.

Depending on what the parties can agree to, the auditor's report may be binding upon the parties or form the basis of triggering the dispute resolution mechanism.

Retrofitting Existing Buildings

The problem

For new buildings, provided the value proposition of the green building for both the developer, landlord and tenant stacks up, then negotiating and implementing tenancy arrangements should not be difficult provided the building is fit for purpose, is capable of achieving the environmental performance targets and benchmarks prescribed in the lease, and the parties understand and agree to their mutual obligations to achieve those targets and benchmarks. However, where a building has not been designed to achieve environmental performance targets and benchmarks or implement ESD principles, the situation is more difficult.

Generally speaking, retrofitting ESD principles into an existing building will be driven by the building owner. The building owner will therefore be confronted with two possible scenarios. The first scenario is that the owner wishes to undertake substantial retrofit works that require an empty building. To achieve this, the building owner will in most circumstances need to reach a commercial accommodation with tenants to end their leases. This in itself is a potentially significant cost, though for multiple tenancies one presumes a landlord would wait until most of the lease terms have ended and the premises vacated before such action is taken.

The second scenario is where the landlord wishes to undertake works while the tenants remain in occupation of the premises, or where the landlord wants the tenant to comply with new obligations that have particular environmental objectives. In this scenario, theoretically the changes could be either landlord-driven or tenant-driven. However, tenants usually have limited powers to undertake physical works in respect of the leased premises (fit-out excepted). Moreover, tenants have no power over how other tenants conduct their activities or where utilities are sourced or measured. Only through persuasion or threatening not to renew a lease can a tenant hope to influence a landlord to retrofit ESD principles into a building, and even then the value proposition for the landlord will need to 'stack up'. There appears to be a growing trend of tenants demanding that new buildings meet certain green specifications, and this no doubt will spill over into retrofits of existing buildings.

Nonetheless, if the value proposition entails capital expenditure by the landlord, which for a physical upgrade of the building will necessarily be the case, then each tenant may end up paying for that fit out through higher rent. Depending upon the magnitude of the refurbishment works, a tenant may also need to agree to accept reasonable interruption or interference to its use of the leased premises arising as a consequence of the refurbishment.

A recent example of a successful retrofit of an office building with multiple tenants is 500 Collins Street in Melbourne. The refurbishment of the 28-level CBD site took place over a number of years while tenants were still in the building. Upon completion, the retrofit of the building was rated 5 Star under the Green Star rating tool. That this is one of the first such retrofits of a large commercial building in a CBD indicates the difficulty of achieving green refurbishments in multi-tenanted facilities (Australia's largest green CBD commercial refurbishment Green Building News).

If a landlord or tenant is proposing a retrofit of an existing building, or alternatively introducing improved environmental practices to minimise energy and water consumption and maximise waste recycling and reuse, then the parties should first consider the terms of their existing lease to see if it can accommodate any or all of the green measures they are seeking to achieve. For example, a commercial lease may contain clauses:

• requiring the tenant to keep the leased premises clean, and for that purpose to use the services of cleaners and waste and garbage removalists contracted or engaged by the landlord. Through this clause, a landlord may be able to use recycling contractors and limit the availability of general waste contractors that collect and dispose of waste to landfill;
• that allow the landlord or its authorised agent to enter and remain upon the leased premises to carry out any repairs to the premises deemed necessary or desirable by the landlord. Such clauses usually denote that the building must be damaged in some way before this power can be exercised, but the scope for such a clause to give the landlord an opportunity to make energy and water saving modifications to the building should be contemplated by a landlord; and
• providing that a tenant shall not without the consent of the landlord make alterations or additions to the leased premises or building, including partitions, carpets, etc. Depending upon the clause, this may empower the landlord to veto any refurbishment proposal that did not use recycled materials, or materials that could endure for the life of the building.

There could be many more possibilities to accommodate green measures that careful examination of an existing commercial lease could reveal. From a landlord's perspective however, it will need to be careful to ensure that any retro-fit works undertaken in respect of the leased premises do not breach the implied covenant for quiet enjoyment (under which the landlord promises that the tenant can 'peaceably hold and enjoy' the leased premises without interruption by the landlord or their agents - Goldsworthy Mining Ltd v Commissioner of Taxation (1975) 132 CLR 463) or the landlord's obligation not to derogate from the grant (which obliges a landlord not to do anything on the leased land that will render the leased premises unfit, or materially less fit, for their permitted purpose - Brown v Flower (1911) 1 Ch 219 at 226, Aussie Traveller Pty Ltd v Mark Lea Pty Ltd (1998) 1 Qd R 1).

However, a substantial retrofit of a building that involves substantial construction works and imposing additional obligations on a tenant will require a variation to a lease, or substitution of a new lease. The Green Lease Schedules address the possibility of retrofitting and adopt a cooperative approach to fit-outs. 'Major Refurbishments' are defined under the leases, and require both parties to be involved in the subsequent ratings under the ABGR rating tool, including any further variations for adjusted ABGR ratings.

Variation or substitution of lease - general principles

A variation of a lease or the grant of a new lease is usually required if any of the following changes are involved:

1. an increase or decrease in rent or operating expenses;
2. corrections of errors or omissions in the lease;
3. alteration of lease covenants, for example by providing for the removal of fixtures or permitting the landlord to enter or carry out work for the purpose of monitoring the building's green rating;
4. alterations in the size of the lease premises; and
5. alteration of the duration of the lease, including by adding further options for renewal.

A key issue here is whether a variation is so substantial, or covers particular topics, that it constitutes a surrender of the existing lease and the creation of a new lease. Generally, even very substantial alterations in lease conditions, including the rent, will not constitute a surrender and can take effect as a variation: Jenkin R Lewis & Son Pty Ltd v Kerman (1970) 3 All ER 414 at 419-420. Lang's Commercial Leasing in Australia suggest that changes to items 1-3 above would normally be by variation, whereas changes to items 4-5 are more likely to constitute a surrender of the existing lease and the creation of a new lease.

Assuming the proposed lease changes can be affected by a variation, in most instances this would be achieved by the landlord and tenant executing a Deed of Variation, although in some states the variation will need to be achieved by executing and registering prescribed statutory forms.

What would be addressed in a Deed of Variation of Lease?

A Deed of Variation of Lease could address the type of matters considered earlier in this article in the context of new leases: they can empower the landlord to enter and remain upon the leased premises for the purpose of undertaking physical alterations to the building to increase solar access or ventilation, install wastewater storage and recycling facilities, plants and associated infrastructure, new lighting systems and the like.

Likewise, a Deed of Variation of Lease could require a tenant to accept new responsibilities in conducting its use of the premises, such as implementing energy and water efficiency practices, waste collection and recycling, complying with an EMS, and prescribe fit-out obligations. However, if the parties agree that the tenant is to remain in occupation of the premises, the interference of the landlord's works on the tenant's use of the leased premises and possible rent increases associated with capital costs of the landlord's upgrade of the building would hopefully be offset by reduced outgoings to utilities and marketing benefits for the tenant. However, unless the commercial, legal and altruistic benefits are aligned for both landlord and tenant, it is difficult to envisage a landlord being able to retrofit ESD principles into an existing commercial building, particularly where the retrofit requires substantial physical works to the building, unless the building has been vacated. In that scenario, commercial issues associated with pre-commitments and funding outlined earlier in this article in respect of new building projects will equally apply to retrofitting existing buildings.

Market regulation

The need for regulatory intervention?

To date, green building initiatives have been driven by various stakeholders: regulators, government tenants, conservation organisations (both in the capacity as lobbyists and, in the case of the 60L building in Melbourne, as landlord) and the property and development industry itself. Where the commercial, legal and altruistic benefits for the landlord and tenant of occupying an existing or proposed green building measure up for both parties, then the process of drafting, negotiating and executing the lease should be comparatively straight forward. I am aware of examples where the cost-benefit analysis and commerciality of introducing ESD principles into buildings has measured up, and I have no doubt that in many instances this will continue to happen.

However, to the extent that green building initiatives impose additional capital costs upon a landlord or management costs and higher rent on a tenant greater than conventional commercial properties, then prospective owners and tenants of green commercial buildings will be at a competitive disadvantage in the marketplace. I believe this will be the case despite arguments that support the lifecycle cost-benefit analysis of introducing green initiatives into commercial premises, providing a comfortable and pleasant workplace (and hence achieve productivity benefits), and the marketing benefits for owners and tenants of green buildings. The result will be that some new or refurbished buildings will be green buildings, and some will not.

In my view, this competitive disadvantage will only be overcome across the board when a level playing field is introduced which requires all new commercial buildings, or the fit out or expansion of existing buildings, to achieve prescribed environmental performance targets and benchmarks. To date, there have been a number of planning requirements, policies and government initiatives for green building requirements. Though a start, I am reluctantly of the view that green commercial leases buildings will not become the norm without regulatory intervention.

Victoria government initiatives

(a) Building rating tools

In Victoria, where I work, the Victorian Government has implemented a Five Star Energy Rating by State-specific variations to the Building Code of Australia (BCA), and regulations under the Building Act 1993 (Vic) for residential buildings. With some variations, from 1 July 2005 all new houses and apartments (BCA Class 1 and 2 buildings) in Victoria are required to meet an energy rating of 5 stars.

Nationally, the Australian Building Codes Board incorporated energy efficiency measures for office buildings in BCA 2006. The measures cover building fabrics, roofs, walls, floors, external glazing, heating, ventilation and air-conditioning systems and lighting and power. Such efforts assist in achieving the wider adoption of green building practices.

Other States have also developed sustainability assessment tools, such as BASIX and the High Quality Sustainable Design assessment process, which once again are principally designed for new residential buildings.

Recognising some of the inherent difficulties in relying upon purely voluntary green building initiatives, some Victorian planning authorities have introduced planning policies and controls to ensure that new or fitted out residential and commercial buildings achieve minimum environmental performance criteria.

(b) Victorian examples

The highest profile examples arise from VicUrban, Victoria's urban development agency, and the Docklands. Through the unique commercial and planning regimes that apply to the Docklands precinct, the former Docklands Authority (now incorporated into VicUrban) introduced a mandatory sustainability score card approach as part of its Ecologically Sustainable Development Guide (Nov 2003). This score card describes performance indicators in tables which apply to both commercial and residential building types, and which are used to assess the design performance of buildings. The assessment and performance indicator areas are biodiversity, soil, water, atmosphere, transport, energy, building materials, indoor environmental air quality, waste and innovation. Some requirements in the performance indicators are mandatory, and must be met in design proposals regardless of certification level. The rating of buildings is primarily by self assessment, but the assessment must accompany applications for planning approval when required.

VicUrban has extended the Ecologically Sustainable Development Guide through the creation of the VicUrban Sustainability Charter. It applies to VicUrban developments, and sets out guidelines that promote VicUrban's sustainability vision, objectives and principles. The Charter places a priority on commercial buildings scoring a minimum of 4.5 Stars under the ABGR system.

Sustainability Victoria has developed the Commercial Office Building Energy Innovation Initiative in order to provide limited financial assistance to project developers for green buildings. This funding applies for major refurbishments, tenancy fit outs, building services upgrades, and new buildings.

Other planning authorities in Melbourne have introduced planning policies dealing with ESD principles. For example, the City of Melbourne in Amendment C60 incorporated provisions for environmentally sustainable office buildings in its municipal strategic statement. Through this amendment, planning policy encourages greenhouse gas reduction, energy efficiency, water efficiency, waste management, and minimising overshadowing. In terms of sustainable offices, it specifies requirements for smaller and larger office buildings that are tied to the ABGR and Green Star rating tools. The development or change in use of an office building with a gross floor area of more than 5,000m^2^ will be required to achieve a minimum 4 Star rating under the Green Star system. This attainment of this 'Performance Outcome' will be measured by meeting the two following criteria:

• a minimum 4.5 star base building rating under the ABGR rating tool; and
• a maximum water consumption of 30 litres/day/person using the Green Star Water Calculator.

For the development of or a change in use to an office building with a gross floor area of between 2,500 and 5,000m^2^, a 4.5 star building rating under ABGR is required. The Melbourne planning scheme also states that office buildings with a 2,500 square metres of floor space or more must meet the performance outcomes discussed above. It is uncertain whether this provision applies to existing buildings except in the case of refurbishments.

Planning permit applications will need to be accompanied with a statement from an accredited energy consultant verifying that the development will achieve the energy consumption target prescribed by the policy.

An interesting element of the policy is that permit applicants must consider the potential development of adjacent sites when proposing solar collecting devices or passive solar elements, and avoid locations that may be compromised by the development of adjoining sites.

It is noteworthy that the City of Melbourne has endeavoured to introduce such a policy in spite of the fact that the Council went to great efforts in its greenhouse gas strategy (Zero Net Emissions by 2020 - A roadmap to a climate neutral city (Business Outlook and City of Melbourne)) to develop a model for its 'sustainable business matrix' and provided case studies of green buildings where the building owners and tenants have made a substantial cost saving in introducing green and ESD initiatives. The City of Melbourne's new ecologically sustainable buildings policy suggests that the Council does not believe the marketplace will deliver significant and uniform benefits across the property development and building industry.

National obligations to report greenhouse gas emissions

(a) Overview

Under the Commonwealth National Greenhouse and Energy Reporting Act 2007 (the Act), from the 2008 financial year corporations meeting threshold emissions requirements must report their greenhouse gas emissions, as well as information on their amounts of energy consumption and energy production. Corporations may also report greenhouse gas projects designed to offset or abate their greenhouse gas emissions. These corporations will be placed on a National Greenhouse and Energy register, and the reported information will be publicly available.

A corporate group may qualify for the reporting obligations if it emits, produces or consumes the following amounts of greenhouse gases or energy:

• greenhouse gas emissions equal to or exceeding 125,000 tonnes in 2008-09; 87,500 tonnes in 2009-10; or 50,000 tonnes annually from 2010-11;
• energy production equal to or exceeding 500 terajoules in 2008-09; 350 terajoules in 2009-10; or 200 terajoules annually from 2010-11; or
• energy consumption equal to or exceeding 500 terajoules in 2008-09; 350 terajoules in 2009-10; or 200 terajoules annually from 2010-11;.

The reporting requirements may also be imposed on corporations due to its activities at a single facility. If a corporation has operational control of a facility which annually:

• emits 25,000 tonnes or more of greenhouse gas emissions; or
• produces 100 terajoules or more of energy; or
• consumes 100 terajoules or more of energy;
  then the reporting obligations will also apply.

'Operational control' includes possessing the authority to implement operating policies, health and safety policies, and environmental policies. One of the interesting questions under the Act is whether the reporting obligations fall on the tenant or the landlord of a commercial building. The definition of 'operational control' is broad enough to encompass a corporation's operation of a commercial office building as a tenant, and potentially also as a landlord.

It is understood that only the very largest of commercial buildings, such as large shopping centres for example, are likely to trigger the single facility reporting obligations (Pers. comm. Robin Ormerod, Pacific Air and Environment – The reporting obligation, if relevant, would in most instances activated by the energy consumption trigger). However, large public, institutional and private companies which own a large number of commercial buildings may trigger the corporate reporting obligations under the Act.

(b) Implications for commercial buildings

It remains to be seen what effect the reporting obligations under the Act will have in incentivising building owners and developers to reduce their carbon footprint, and hence avoid the reporting obligations under the new Act. While there have been a number national and state-based initiatives over the last decade which have encouraged the public reporting and dissemination of environmental information, I am not convinced that these initiatives have driven behavioural change. While I support the Act insofar as it will inform the public and shareholders about the extent of greenhouse gas emissions, it alone is unlikely to reduce greenhouse gas emissions from the property industry, or indeed from any other industry.

Nevertheless, buildings owners who believe they may trigger the reporting obligations under the Act will need to implement arrangements to collect, interpret and report the information required by this Act.

National emissions trading scheme

A national greenhouse gas emissions trading scheme would also affect landlords and tenants under green leases. Although a trading scheme has not yet been developed for Australia, at this stage it would appear that such a scheme is likely to be introduced by no later than 2012 (2010 if there is a change of Federal Government at the upcoming election).

The Australian Emissions Trading Scheme launched by the Federal Government in July 2007 proposes to adopt and incorporate various state-based renewable energy targets and establish a scheme which will include the following key features:

• the scheme will be based upon an 'all sources, all sinks' cap-and-trade model with initial exclusion of emissions from agriculture and land use and with a wide range of available carbon offsets;
• the scheme will impose direct liability for greenhouse gas emissions on large facilities and indirect liability through upstream fuel suppliers for other emitters;
• permits to emit are specific quantum of greenhouse gases will be issued on a free-periodic basis to trade-exposed emission-intensive industries for so as long as international competitors do not face similar carbon constraints, and on a free but once-only basis to existing businesses identified as likely to suffer a disproportionate loss of value due to the introduction of a carbon price, and by specific periodic auctioning and other cases;
• there will be a 'safety valve' fee for exceeding the emissions for which the entity holds permits, but that fee will be set relatively low in the initial stages; and
• there will be potential to link with other comparable national and regional schemes.

The Emissions Trading Scheme is proposed to focus on large emitters and upstream fuel suppliers, and is expected to cover 70-75% of total greenhouse gas emissions at the outset. Of interest is the proposal to initially exclude agriculture and 'land use' for the scheme due to the high number of emission points, limited data on greenhouse gas emissions and the higher transaction costs per tonne of carbon dioxide of emissions. Despite this, the intention is to progressively introduce agriculture, land use and the waste industry into the Emissions Trading Scheme as the data quality and the economic effects of such measures are fully understood (Of interest is that in 2005, it was estimated that commercial buildings produced 8.8% of Australia's total greenhouse gas emissions, generating up to 46.4 million tonnes of carbon dioxide equivalent emissions, and are increasing by 3% per annum: ESD Design Guide of Australian Government Buildings, Department of Environment and Heritage, June 2005).

Tenants and landlords under green leases may be better placed to meet their emissions targets, and ideally come well below the target under such a scheme. Moreover, depending upon the energy efficiency and carbon footprint of a commercial building, parties may be able to add additional value to their investment in a green office by selling their unused emissions credits on the carbon market. This could help to offset any higher costs generated by incorporating ESD principles into the building project.

Leases for green commercial buildings will also need to reflect the ability of the tenant and landlord to both meet their emissions targets and realise the gain from the on-sale of any excess carbon credits and make it clear who will benefit from the sale of carbon credit under the scheme.

Green building landlords and tenants may already participate in the carbon market in New South Wales. Under the Greenhouse Gas Reduction Scheme (GGAS), parties in New South Wales and the Australian Capitol Territory with ABGR-rated office buildings (of generally a minimum of 4 stars) may apply for accreditation. Accreditation may be conferred on either a single building or a portfolio of buildings. NSW Greenhouse Abatement Certificates (NGACs) are generated based on the emissions levels of the building/s. The NGACs may then be sold on the market operating under GGAS.

The emissions trading policies proposed by the Commonwealth government in Australia's Climate Change Policy (2007) support the use of green leases, ESD principles in building and energy efficiency. While the scope and details of a trading scheme remain to be seen, those operating under green leases are set to be well-placed when regulations are announced.

Government as landlord and tenant

A number of State governments have adopted preferences for green buildings where the government is either the tenant or the owner of the new or refurbished building. While these policies reflect an attempt to nudge the market towards more ecologically sustainable practices, they also highlight that institutions such as government and large, long-term owner/occupiers dominate the green building market.

The Victorian government has imposed green building standards on its own facilities. The Office Accommodation Guidelines 2005 require both Green Star and ABGR accreditation. Four star requirements under the Green Star rating tool are imposed for new office accommodation. ABGR ratings of 4 stars are required for the base building of existing offices, 4.5 stars for the base building of new offices, and 5 stars for new or existing offices where the Victorian government is a tenant.

Similar policies have been adopted by the South Australian government with requirements for 5 Star Green Star ratings.

The Commonwealth government, through its new Energy Efficiency in Government Operations policy, adopted a series of minimum energy performance standards for new office buildings, major refurbishments and new leases. These include a general requirement of 4.5 Stars under the ABGR scheme. However, they allow the option of meeting lower performance standards where it is practical or cost effective.

Conclusion

There have been many attempts through planning scheme amendments, government preferences and commercial endeavours to strengthen ESD principles in commercial buildings, and these have no doubt had some effect on the property market. All signs indicate that the market for green office buildings continue to grow. However, this growth is uneven, with the majority of developments to date occurring in the government and single tenant sector. The incentives for many properties, including the bulk of multi-tenant office facilities, remain too few.

While it is certainly difficult to achieve uniformity in environmental performance criteria and building design and location, I believe it is inevitable that planning schemes and instruments and building legislation will require new or refurbished commercial premises to achieve minimum environmental performance criteria. While perhaps a naïve dream on my part, it would be desirable for such standards and regulation to be standardised across all Australian states and territories.

Such 'command and control' regulation may be augmented by synthetic markets which ascribe a price signal for carbon. Only once this occurs, in my view will the required level playing field be achieved to move the green building debate from the fringe to the central core of the property development and building in this industry in this country.

References

Green Lease Schedule - Commonwealth of Australia version 20, Department of the Environment and Water Resources, Australian Greenhouse Office.

The Dollars and Sense of Green Buildings (2006), Green Building Council of Australia.

Zero Net Emissions by 2020 - A roadmap to a climate neutral city, Business Outlook and City of Melbourne.

ESD Design Guide of Australian Government Buildings (June 2005), Department of Environment and Heritage.