Law Note - GHG Clauses in Leases and Agreements 


Fall 2010 - (InBrief Fall 2010 )

InBrief Fall 2010

The Real Estate Group recently undertook to look into how greenhouse gas ("GHG") and carbon trading issues should and do affect our day-to-day practices when entering into purchase agreements, carrying out appropriate due diligence and negotiating leases and offers to lease.

It is clear we are moving towards a system of much greater control over greenhouse gas emissions, either through some kind of regulation, tax and/or formal trading systems or through voluntary changes as entities strive to become carbon neutral.

The Real Estate Group particularly examined two recent Ontario real estate documents that focused on these issues – the REALpac Green Lease, released in March of this year, and the Request for Proposals issued prior to that by the Bank of Montreal. The REALpac Green Lease includes a series of new definitions such as "Carbon Offset Costs," "Carbon Offset Credits," "Carbon Taxes" and "Greenhouse Gases" and outlines, in a relatively landlord-friendly way, the costs or taxes to be paid by a tenant and the credits to be received by a landlord to help its building achieve lower greenhouse gas emission levels.

The REALpac Green Lease includes an Environmental Management Plan which contains detailed provisions concerning those costs and introduces controls to ensure that the tenant will use the building in a way that it is compliant with the plan. The plan also incorporates building standards, like the Leadership in Energy and Environmental Design ("LEED") standard. It is a very current attempt to define the kinds of issues that need to be faced by landlords and tenants in dealing with greenhouse gas emissions and environmental sustainability.

The REALpac Green Lease is now being examined by a number of interest groups, including the Canadian chartered banks, and there will be much debate as it gets settled into some kind of appropriate form for landlords and tenants to use.

The other recent source was a detailed Request for Proposals issued by the Bank of Montreal in January of this year to First Canadian Place and other Toronto landlords in respect of the possible relocation of the Bank's premises. Because the Bank has formally adopted a carbon neutral goal, it asked a large number of prominent landlords to respond to how their building would help the Bank comply with LEED standards, greenhouse gas emission reductions and environmental sustainability issues. All of a sudden these theoretical, future environmental issues became an immediate and urgent requirement in order for landlords to put their best foot forward with a major prospective tenant. That kind of approach will be followed by others looking to become carbon neutral.

The Real Estate Group considered what changes we should make to our standard Real Estate documents so we can raise these issues to help clients protect their interests. The green lease is a separate topic – what we focused on for these purposes was our standard Purchase Agreement, our purchase and lease due diligence process and a standard Offer to Lease.

An article that includes the amended sections of the three documents was prepared and published in our firm's "Environment, Energy and Emissions Trading Brief" and is available by contacting our marketing department, but we strongly suggest that you speak to your lawyer, ideally one of us in the Real Estate Group at Lang Michener, before you use any of them.

The philosophical approach taken in making these amendments was to adopt a practical, minimalist approach to redrafting. As environmental issues bubbled up in the early 1990s, it became commonplace to have a long, complex set of environmental representations, warranties and covenants. Actually, the REALpac Green Lease is like that – its greenhouse gas definition requires you to obtain a copy of the February 16, 2008 Canada Gazette to understand it. We generally found those early provisions complicated with a tendency to obscure the issue, and we have now evolved to relatively concise and specific environmental provisions. So, we tried to amend our standard forms in only those ways specifically necessary to obtain disclosure and to raise with our clients the advisability of obtaining additional information and/or covenants with respect to greenhouse gas emissions, environmental sustainability and certification standards.

By Bruce McKenna

This Law Note appeared in the Lang Michener LLP InBrief Fall 2010