Aligning Landlords and Tenants on Sustainability Goals

Sustainability is becoming an essential focus in Canada’s commercial real estate sector.

With the government’s commitment to achieving net-zero emissions by 2050, alongside its goal of reducing greenhouse gas emissions by 40-45% by 2030, businesses are increasingly pressured to adopt environmentally conscious practices. The real estate industry is a major player in this effort, as buildings account for a substantial portion of national energy consumption.

Therefore, the alignment of sustainability goals between landlords, corporate entities, and franchisees is critical to achieving these national targets. In the commercial real estate sector, a large proportion of buildings are rented rather than purchased. This means that tenants often do not own the spaces they occupy, which can lead to differences in interests and objectives with property owners, particularly regarding sustainability. This situation is often taken for granted, although the distinction is crucial. Indeed, tenants and owners sometimes have diverging priorities, which can complicate the implementation of sustainable strategies.

However, despite the growing recognition of sustainability’s importance, there remains a significant gap between the interests and objectives of different stakeholders in the real estate industry. The priorities of landlords, franchisees, and corporations do not always align, creating a disconnect that hinders meaningful progress toward common sustainability goals.

 

 

 

 

 

 

 

 

Diverging Interests Among Stakeholders

One of the primary challenges in achieving sustainability in commercial real estate is the differing priorities among key stakeholders—franchisees, corporate entities, and landlords. Each group faces its own unique set of incentives and challenges when it comes to implementing sustainable practices.

Franchisees are often focused on the day-to-day operation of their businesses and must balance corporate mandates with the demands of their local markets.

For franchisees in Canada, this can mean prioritizing short-term financial performance over longer-term sustainability investments, especially when the immediate benefits are not apparent. A 2022 report from the Canadian Franchise Association (CFA) highlighted that franchisees are often concerned about the upfront costs of sustainability initiatives, even though these changes could lead to operational savings over time. For example, energy-efficient equipment can reduce operational costs by up to 30% over time, but the initial expense can be a deterrent for small business owners. Meanwhile, corporate entities tend to take a broader, more long-term approach to sustainability, setting ambitious global targets and implementing policies that franchisees are expected to follow. While these corporations recognize the long-term benefits of sustainability, they often struggle to ensure that their goals are effectively implemented at the local level. Franchisees may lack the resources or motivation to fully adopt these initiatives, leading to inconsistent results across different locations. According to a 2021 survey by the International Renewable Energy Agency (IRENA), many corporations cite local enforcement as a key obstacle in achieving their sustainability goals.

 

 

 

 

 

 

 

 

 

 

 

However, while landlords may be willing to invest in sustainable building infrastructure, their efforts are often undermined if tenants, such as franchisees, are not equally committed to reducing energy consumption. The potential benefits of green buildings can only be fully realized when both landlords and tenants actively work together to achieve sustainability goals.

 

Challenges of Incentives and Financing

The financial aspect of sustainability poses one of the biggest challenges for achieving alignment between landlords, franchisees, and corporate entities. Landlords who invest in energy-efficient upgrades often struggle to recover the costs if their tenants are not incentivized to share in the expenses or participate in energy-saving efforts.

This financial disconnect can be partially addressed through the use of green leases. These agreements include sustainability clauses that outline the shared responsibilities of landlords and tenants regarding energy performance, waste reduction, and other environmental goals. According to a 2020 report from REALPAC (Real Property Association of Canada), green leases can help reduce operational costs by up to 20%​. Despite their potential, adoption rates of green leases in Canada remain relatively low. Only 12% of Canadian commercial tenants currently operate under green leases, which represents a significant opportunity for improvement​.

Another major barrier to achieving sustainability in commercial real estate is the perceived high cost of green investments. While the Canadian government offers incentives such as the Canada Greener Homes Grant to help offset the costs of sustainability upgrades, many franchisees and landlords are either unaware of these opportunities or find the application process too cumbersome. Additionally, even with incentives, the initial costs of green infrastructure—such as energy-efficient lighting, heating systems, and renewable energy installations—can be intimidating, particularly for smaller franchisees with limited financial resources.

 

Opportunities for Better Alignment

Despite these challenges, there are clear opportunities for better alignment between landlords, corporate entities, and franchisees when it comes to sustainability. One promising solution is the increased adoption of green leases. By including sustainability clauses in lease agreements, landlords and tenants can share both the financial responsibilities and the benefits of sustainability initiatives. For instance, a lease agreement might outline specific energy performance targets, incentivizing franchisees to reduce their energy consumption in exchange for lower rent or other financial rewards. In turn, this motivates all parties to work together towards common environmental goals.

Collaborative investment in renewable energy solutions is another avenue for driving sustainability in commercial real estate. For example, landlords and franchisees could jointly invest in solar panels or energy-efficient heating systems, leading to shared energy savings. In some cases, such investments can reduce energy costs by 20-50%, depending on the size of the installation and the energy demands of the property. Such collaborative initiatives demonstrate that when both parties work together, they can achieve substantial environmental and financial benefits.

 

 

 

 

 

 

 

 

 

 

 

Corporate-franchisee partnerships also have the potential to drive energy efficiency across multiple locations. Some corporate entities have already begun assisting franchisees with the cost of sustainability upgrades, offering financial support or bulk-purchasing discounts for energy-efficient equipment. In the food service industry, for example, energy-efficient kitchen equipment can reduce energy consumption by 10-20%, leading to significant operational savings for franchisees. By sharing the financial burden of sustainability investments, corporate entities and franchisees can both reap the rewards of reduced energy costs and improved environmental performance.

 

Education and Communication

In addition to financial incentives, ongoing education and communication are essential for ensuring that all parties are aligned on sustainability goals. Studies show that businesses that implement regular sustainability training are more likely to adopt green practices at a higher rate. Ongoing education ensures that franchisees understand the long-term financial and environmental benefits of sustainability initiatives, while regular communication between landlords, franchisees, and corporate entities helps address concerns, resolve conflicts, and track progress towards shared goals.

 

Conclusion: Mutual Benefits of Alignment

Aligning the sustainability goals of landlords, franchisees, and corporate entities offers substantial mutual benefits. By adopting green leases, making joint investments in renewable energy, and providing ongoing education, all parties can work together to achieve their environmental goals while realizing financial savings. As Canada continues its journey towards net-zero emissions by 2050, collaboration in the commercial real estate sector will be essential. The alignment of sustainability goals across all stakeholders not only supports the country’s broader climate objectives but also helps businesses reduce costs, increase property value, and improve tenant satisfaction. The potential for long-term financial gains makes sustainability a win-win proposition for everyone involved, paving the way for a greener and more prosperous future for the Canadian commercial real estate industry.

 

---

References

• Canada Green Building Council. (2021). LEED in Motion: Canada
• Government of Canada. (2020). Canada’s 2030 Emissions Reduction Plan.
• International Energy Agency (IEA). (2023). Energy Technology Perspectives 2023
• International Renewable Energy Agency (IRENA). (2022). Renewable Energy and Jobs – Annual Review 2022
• Natural Resources Canada. (2021). Canadian Greenhouse Gas Emission Trends
• Real Property Association of Canada (REALPAC). (2020). Green Lease Guide for Commercial Office Tenants
• U.S. Green Building Council. (2020). LEED Certification: Commercial Buildings