Property and Climate Change

12 February 2008

Moving towards environmentally sustainable buildings

With the growing focus on the effects of climate change the current trend, both nationally and locally, is for both tenants and landlords to move towards environmentally sustainable buildings.

Almost 10% of Australia’s national greenhouse emissions comes from commercial office buildings and current estimates expect this to double by 2010. The vast majority of the environmental impact from buildings is attributable to the operation of existing buildings. With greater emphasis on all sectors having to reduce greenhouse gas emissions coupled with the greater demand by tenants for ‘green buildings’ environmentally sustainable buildings has become a hot topic.

The environmental sustainability of a building’s operation can be measured by a number of different rating systems.

NABERS (National Australian Built Environment Rating System) - is a performance-based rating system that measures an existing building’s overall environmental performance during operation.

NABERS OFFICE - is the rating system for existing commercial office buildings and is tailored for use by building owners, managers and tenants.

As part of NABERS separate ratings are available for energy (ABGR) and water (NABERS Water).

Ratings for waste, indoor environment (indoor air quality and occupant satisfaction), site management (refrigerants, storm water, toxics and landscape diversity) and transport are being developed.

ABGR (Australian Building Greenhouse Rating) - is a rating system which benchmarks a building’s greenhouse performance in relation to carbon emissions on a scale of one to five (one being the worst, five the best). The star rating is derived from the actual amount of energy used by a building and/or an individual tenancy, using energy data from the previous 12 months. Approximately 29% of the national office market (calculated by net lettable area) has been rated using the ABGR system. Star ratings can be awarded for whole buildings, central services of a building and/or an individual tenancy.

Green Star - is a national rating scheme that assesses the environmental design of buildings at a conceptual stage and at a ‘as built’ stage. It differs from NABERS in that it does not take into account the actual operating performance of the building.

What does this mean for developers, tenants, landlords and financiers?

With the growing demand for environmentally sustainable buildings developers, tenants, landlords and financiers will need to become familiar with the rating systems and what it means for their particular industry.

Developers

Developers need to be familiar with the Green Star rating in the design and construction phase of buildings as well as NABERS as it relates to operational aspects of a building/premises. Developers need to understand how the two rating systems operate in conjunction with each other and consider appropriate assignment of the risk for non-compliance with a contracted rating once the building/premises are completed and operational. Developers should carefully consider the warranties they will seek from their contractors as well as the warranties that they can provide to the ultimate building/premises landlord or tenant regarding the rating of the building/premises post completion.

Tenants

Tenants prior to entering into leases need to be aware of what a building’s rating means and how the rating will affect the individual premises they are leasing in terms of outgoings, as well as the costs of the tenant’s individual fit out and the rating that the tenant’s fit out may need to achieve and maintain. Careful consideration needs to be given to the lease provisions themselves particularly in relation to the maintenance and repair of services, including services which are separately metered or sub-metered as well as the landlord’s obligations to maintain the rating of the building and penalties for non-compliance.

Landlords

With both Commonwealth and State policies setting environmentally sustainable building benchmarks in respect of all premises in which they are a tenant, landlords need to be aware of NABERS and the rating which their building must achieve and continue to achieve for the life of the lease. In addition landlords will need to be familiar with the obligations of the Green Lease Schedule and ramifications of non-compliance with the Green Lease Schedule currently utilised by all government tenants as a mandatory requirement of all new government leases and in particular circumstances pre-existing leases.

With a greater number of corporate tenants requiring an environmentally sustainable building landlords will need to carefully consider how the operational cost of an environmentally sustainable building can be passed onto the tenant. Landlords will also need to consider how the risk of maintaining ratings can be abated.

Tenants and landlords

Tenants and landlords should also be aware of their potential obligations under the National Greenhouse and Energy Reporting Act (Act) which came into effect in September 2007. This Act has been further supplemented by The National Greenhouse and Energy Reporting System Regulations Policy Paper (Policy Paper) released on 4 February 2008 which contemplates the following:

• guidelines for who needs to comply with mandatory reporting. The Policy Paper provides that the corporation who has ‘operational control’ over greenhouse emissions is the party responsible for compliance. The corporation having ‘operational control’ is not always obvious as it may not in practice be the owner of the builder as in some cases the tenant will be deemed to have assumed ‘operational control’ and therefore be responsible for mandatory reporting
• the provision of reports by corporations not meeting the thresholds who therefore do not need to submit data under the Act regarding their greenhouse emissions but must submit a report stating that they are outside the threshold. This represents an expansion of the reporting obligation from that contained in the Act.

Financiers

Financiers offering finance for developers who have agreed to construct environmentally sustainable buildings will need to understand what the ratings mean, having an awareness that the cost of construction of an environmentally sustainable building may have a significant upfront cost, greater than that which may be the case for a non environmentally sustainable building. Financiers will also need to consider whether standard mortgage terms should be amended to take into account the assignment of risk as between the developer, its contractors and the building owner.

We would like to acknowledge Julia Taylor of the Commercial Property Group for her assistance in the writing of this article.

For further assistance or enquiries please contact:

Stephen Jones on 07 3233 8973
Brad Russell on 07 3233 8786
Susan Lynch on 07 3233 8561.