Real Estate Purchase Agreements or Offers to Lease – Clauses to Consider Regarding GHG Reduction Concepts or Investigations 

publication 

Summer 2010 - (Environment, Energy & Emissions Trading Brief Summer 2010)

Environment, Energy & Emissions Trading Brief Summer 2010

In the Real Estate Group, we wanted to see how greenhouse gas and carbon trading issues should be affecting 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.

We looked particularly at two recent Ontario real estate documents that focused on these issues – the REALpac Green Lease which was released in March 2010 and a January 2010 Request for Proposals issued 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 LEED (Leadership in Energy and Environmental Design) 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 2010 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.

We considered what changes we should be making to our standard Real Estate documents so we can start to 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.

This article includes the amended sections of the three documents, but we strongly suggest that it is important 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 we took 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 and that they tended 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.

Agreement of Purchase and Sale

The first agreement is our standard real estate Agreement of Purchase and Sale. The first group of changes are to the definitions.

The definition of environmental law is as follows:

" Environmental Law " means all applicable federal, provincial, municipal or other regulatory authority laws, by-laws, rules, regulations, policies, guidelines, orders, codes, directives, approvals, licences, permits, standards and judgments now or at any time hereafter in effect relating to or imposing liability or standard of conduct concerning the natural or human environment (including the air, surface water, groundwater, land surface, subsurface, waste, moveable and immovable property, sustainability, building operations, recycling or resource consumption), land use, public or occupational health and safety or the storage, treatment, manufacture, processing, distribution, disposal, use, reuse and recycling of a substance, hazardous or otherwise;

The new definition incorporates some language improvements and shifts the laws covered from laws that deal with contaminants or hazardous substances, to laws for all substances that are regulated – which would now include greenhouse gas emissions, something that was not covered.

We included a definition of "environmental management plan" which purchasers should be asking about because it may impose liabilities or provide benefits to a new owner/landlord.

" Environmental Management Plan " shall mean an environmental plan for the Property setting out the environmental objectives on the part of the Owner/Landlord [and the Tenants] [including a series of specific accreditations and objectives] and the manner in which such objectives will be implemented;

Greenhouse gas emissions are now defined in a relatively simple way:

" Greenhouse Gases " shall mean carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, perfluorocarbons, hydrofluorocarbons or any substance designated as a greenhouse gas by Environmental Laws from time to time;

We added only the following two new representations and warranties:

1. the Property has had the Environmental Management Plan in place since approximately [date] and [all of the Leases include] [to the extent set out in the Leases such leases include] copies of the Environmental Management Plan and provisions [incorporating the same] [obliging the tenants to comply with the Environmental Management Plan and pay the costs of the same as part of operating costs];

2. the building on the Property currently has achieved or qualifies for the following accreditations, ratings or certifications: [NTD: choose as applicable]

a) LEED® for New Construction and Major Renovations ("NC") certified [(silver, gold, platinum, as applicable)];

b) LEED® for Core and Shell ("CS") certified [(silver, gold, platinum, as applicable)]; and/or

c) LEED® for Existing Buildings: Operations and Maintenance ("EB:O&M") certified [(silver, gold, platinum, as applicable)];

d) [NTD: add any other specific accreditation]

While in time environmental sustainability standards, ratings systems, emissions reporting and carbon issues may become standardized and amendments to representations and warranties will become important, at this time we felt it was premature to include them and instead focused more on disclosure.

The deliverables added were:

1. a copy of the Environmental Management Plan, if any, for the Property;

2. full particulars of:

a) any LEED or other similar certificates, ratings or accreditations;

b) any sustainability program or reporting or environmental management system (IOS 14001 or other) carried out by the Vendor;

c) any data known to the Vendor, whether or not formally gathered or reported, relating to energy emissions, Greenhouse Gas emissions or waste disposal; and

d) any carbon offset costs, carbon offset credits, carbon taxes or similar items in respect of the carbon foot print of the Vendor remitted to or by the Vendor and copies of any contracts relating thereto,

in each case, as applicable to the Property;

The five areas of disclosure to consider are: 1) does the property have an environmental management plan; 2) what efforts have been undertaken in respect of sustainability planning; 3) what are the LEED or other environmental ratings or certificates for the property; 4) what information has been gathered or reported about greenhouse gas and other emissions; and 5) the rights, costs, taxes and agreements relating to the carbon footprint of the property.

The final change is a technical one. If any carbon trading contracts are delivered as set out in 2(d) above, they are to be assigned on closing if the Purchaser elects. It is appropriate to consider whether such contracts are assets to be assigned to a Purchaser along with other contracts. That is particularly important where the carbon credits are benefitting tenants, as there may be material costs involved in purchasing those credits in the market.

Purchase Due Diligence

The next aspect of the purchase transaction is the due diligence that is carried out on behalf of a purchaser. Clients are going to have to consider, in carrying out their physical due diligence, whether investigations into emissions are appropriate or necessary. The existing standard provision is:

During the Approval Period, the Purchaser shall have the right to do the following, all at its own expense:

a) examine the documentation and information delivered under Section 3.1 hereof;

b) conduct such physical and environmental inspections, tests, assessments and investigations of the Property (including, without limiting the generality of the foregoing, the building, fixtures and improvements located thereon and soil and groundwater conditions thereof) by such agents, consultants or other persons as it deems necessary;

c) make such enquiries and investigations regarding the Property as it determines;

In our view, the existing due diligence provisions dealing with the physical and environmental condition of the property are drafted broadly enough to encompass those investigations without amendments to our standard form – we just have to ask our clients to consider making those investigations.

Lease Due Diligence

The other aspect is in our lease due diligence and we have added to our standard lease due diligence checklist references to environmental costs and taxes, special environmental rights and any environmental management plan, so that those issues are highlighted for our clients.

Offer to Lease

The last two documents to be considered were our standard form Offer to Lease and a schedule taken from the REALpac Green Lease of a draft of a landlord's Environmental Management Plan. The Environmental Management Plan in the REALpac Green Lease includes the entire manner in which the cost of offset credits and compliance with greenhouse gas emission standards can be dealt with, except for the potential assessment of carbon taxes. It is useful as a checklist.

Accordingly, we added to the Offer to Lease the tenant's obligation to comply with the Environmental Management Plan in force from time to time and the obligation to pay carbon tax, if any. It would seem prudent to be raising these issues and asking these kinds of questions of both tenants and landlords at the time an offer to lease and lease are entered into, so it does not become a matter of dispute at a later date.

Click for copies of both the Environmental Management Plan and the Offer to Lease.

In the Real Estate Group, it is our intention to start to raise these greenhouse gas and carbon issues with our clients when they are disposing of or acquiring properties or entering into leases, so that our clients can decide how they want these matters to be handled. Initially, this will involve only a few minutes time and most commonly the deletion of the proposed provisions. In due course, however, we expect this to be a standard part of our real estate documents, like environmental provisions are today.

By Bruce McKenna

Ed.: This paper was originally presented as part of a Lang Michener LLP seminar entitled "Greenhouse Gas Emissions – Issues Every User of Real Estate Will Need to Face" on June 2, 2010.

This article appeared in Lang Michener's Environment, Energy & Emissions Trading Brief Summer 2010 .