Commercial-property Leases as a Means for Private Environmental Governance

• Publication year: 2019

Commercial-Property Leases as a Means for Private Environmental Governance

Darren A. Prum
The Florida State University, dprum@fsu.edu

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COMMERCIAL-PROPERTY LEASES AS A MEANS FOR PRIVATE ENVIRONMENTAL GOVERNANCE

Darren A. Prum^*

Abstract

Commercial-property leases as a means for private environmental governance routinely get overlooked despite their noticeable presence. The applicable theoretical models used in environmental law and the standards that typically measure legal activity fail to detect the commercial-property lease as a regulatory action as well. Moreover, the public and positive law and policy approach of the past that heavily relied on administrative authority now follows more of a private law and governance approach. The private law and governance approach responds to the marketplace where standards are set, enforcement occurs, and dispute resolution takes place between parties involved in the transaction outside of the supervision of the legislative process, the governmental agencies, or the courts. This approach toward private environmental governance in commercial-property leases occurred in response to legislation that imposed liability on landlords and other parties for a tenant's ecological transgressions and mounting pressure from highly publicized unethical and irresponsible behavior that stimulated a heightened corporate consciousness to embrace sustainability benchmarks. This article evaluates and provides evidence that the private activities of the parties involved in commercial-property leases fit within the paradigm of a new model tied to environmental governance. To this end, commercial-property leases offer a unique insight into the motivations and approaches taken by the engaging parties while providing guidance as to how best to encourage and craft ecological and sustainable solutions under a private environmental-governance model for land use.

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Table of Contents

Abstract........................................................................................727

Introduction.................................................................................729

I. Leases..................................................................................731

A. In General....................................................................733
B. Types of Leases............................................................737

1. Ground Leases........................................................739
2. Master Lease of an Entire Building or Development...........................................................741
3. Designated Space within a Building or Development...........................................................743

II. Environmental and Sustainability Goals...........................745

A. Goals from Parties to a Commercial-Property Lease. 745

1. Possible Tenants.....................................................747
2. Possible Landlords.................................................749

B. Tools for Achieving Goals...........................................753

1. Private Green-Building Certification.....................753

a) USGBC—LEED...............................................754
b) GBI Green Globes.........................................756
c) Living Building Challenge...............................757

2. Government Programs...........................................758

III. Toward a Private Environmental-Governance Approach............................................................................760

A. Can Private Environmental Governance Occur Between Parties?..........................................................762

1. Bilateral Basis........................................................763
2. Unilateral Basis......................................................764

B. Incentivizing Private Environmental Governance Through Leases............................................................767

1. Financial Incentives...............................................768
2. Nonfinancial Incentives..........................................771

Conclusion....................................................................................774

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INTRODUCTION

Prior to the passage of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) on December 11, 1980, by Congress,¹ landlords, tenants, and lenders expressed little concern over the environment when entering real estate transactions.² This approach fundamentally changed after this legislation, and subsequent enactments, because landlords could now find themselves responsible for their tenants' environmental transgressions on their property.³ As a result, leases now address a tenant's liabilities with respect to CERCLA, which undoubtedly include compliance requirements with the vast array of environmental protection laws and regulations.⁴

Similarly, a lease may include specific provisions that emanate from nongovernmental requirements.⁵ These provisions may occur due to covenants included in a mortgage loan or from suggestions made by property insurers.⁶ Although not always a requirement, a landlord may elect to specifically include these suggestions into a lease as a means for reducing potential liabilities at a later point in time.⁷

Accordingly, the desire by some landlords and tenants to impose their overarching social and environmental goals upon another party in a lease for real property creates a private regulatory framework.⁸

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This may occur, for example, when a landlord builds a core-and-shell structure that achieves some type of environmental certification followed by a requirement in subsequent leases that obligates a tenant to attain a similar recognition with any tenant improvement.⁹ Conversely, a tenant with considerable leverage may demand that a landlord receive some type of environmental certification on a building that the tenant intends to lease prior to occupancy as a precondition to any agreement.¹⁰

In considering the real property lease as a tool for private environmental governance with respect to green buildings, the analytic and synthetic approaches offer an excellent understanding of this discrete new model.¹¹ The analytic approach offers the opportunity to assess the incentives for each participant in the green building lease, the likely areas of influence, and the strengths and weaknesses of the leasing document as a form of governance; whereas the synthetic analysis identifies the shared characteristics of apparently contrasting undertakings that fall outside the standard regulatory model of positive law.¹² As such, this article explores the applicable legal doctrines alongside the motivations of the participants and the standards available for implementation and adoption to achieve the overarching goal of private environmental governance through the leasing instrument.

Part I of this article considers the leasing instrument.¹³ It turns to the longstanding property doctrines that began in medieval England, followed by the application of contract law and subsequent regulatory requirements that began governing the modern leasing document when urbanization and the Industrial Revolution occurred. Special situations that apply to the commercial real estate transaction such as ground leases, a master lease of an entire building or

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development, and a designation of a space within a structure also receive attention.

Part II examines the parties involved in the leasing agreement and evaluates whether the landlord and tenant maintain sufficient willingness to pursue the private regulatory framework needed to address a green building requirement, along with sufficient measurement tools for meeting the obligations.¹⁴ This section evaluates the corporate social responsibility (CSR) reports from market participants on the tenant and landlord sides of the transaction to gauge their interest in green buildings, followed by a survey of the various green-building assessment programs available for compliance within the agreed upon private regulatory framework.

Finally, Part III turns toward the private-governance model as applied to green buildings and leases.¹⁵ Beginning with a recognizable definition of the private environmental-governance model, the applicability of third-party certification standards, along with the manner in which the parties to a leasing agreement arrive at and incorporate the green-building provisions, receives consideration. Part III concludes with an identification of the various ways that governmental, nongovernmental, and external stakeholders may incentivize and influence private environmental governance through leases that compel green buildings.

I. Leases

As a longstanding practice that traces its roots back to medieval England, the landlord-tenant relationship describes the situation in which a lord held a large estate and conveyed the same or a smaller portion of the real property to a tenant in exchange for the performance of specified duties during the duration of the tenancy.¹⁶ A "subinfeudation" would occur when a tenant would parcel out a portion of the conveyed land to a subtenant and create a subsequent

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landlord-tenant relationship along with an additional level on the feudal hierarchy.¹⁷

Moreover, the owner of a freehold estate would commonly "lease" real property to another party for a stated period of time in order to avoid the illegal practice of usury.¹⁸ Because the economy was predominantly agrarian, a tenant would borrow money from a lender and make an agreement, in exchange for the loan, to pay back the principal along with a significant profit out of the revenues generated by working the land for a term of sufficient duration.¹⁹ This meant that the courts of the time applied contract law to those disputes concerning a lease.²⁰

Beginning in the late twelfth century, fixed-term leases that required the payment of rent along with the farming of the land...