Here’s a scenario I encounter regularly: a tenant wants to upgrade to LED lighting to cut their energy bills, but the landlord owns the fittings. Or vice versa—a landlord wants to upgrade common areas, but tenants benefit from lower operating costs.

Who pays? Who benefits? How do you negotiate fair outcomes?

Understanding the Baseline

First, establish what your lease says about:

Ownership of fittings: Are light fittings part of the landlord’s base building, or tenant’s fitout? This varies by property and lease.

Responsibility for maintenance: Who maintains and replaces lighting? Often tenant’s responsibility within their premises.

Operating cost recovery: In gross leases, landlord covers operating costs. In net leases, tenants pay operating costs (including electricity) directly or via outgoings.

Alterations and improvements: What approvals are needed? Who owns improvements at lease end?

These factors determine who has the incentive to invest and who captures the benefit.

Common Scenarios

Scenario 1: Tenant Pays Electricity, Landlord Owns Fittings

The tenant pays energy bills directly. But the fittings are part of the base building owned by the landlord.

Tension: Tenant wants efficient fittings (lower bills). Landlord has no incentive to upgrade (doesn’t pay the bills).

Possible solutions:

Tenant-funded upgrade with landlord permission: Tenant pays for upgrade, captures all savings. May need to address make-good provisions at lease end.

Shared funding: Split costs based on who benefits. Tenant covers portion equivalent to energy savings during remaining lease term. Landlord covers the rest (capital improvement to their asset).

Rent adjustment: Landlord upgrades, tenant agrees to modest rent increase reflecting improved premises (and lower operating costs).

Scenario 2: Operating Costs Recovered via Outgoings

Common in retail and commercial leases. Landlord pays operating costs, recovers them from tenants via outgoings.

Tension: Landlord has limited incentive to invest in efficiency—lower costs just mean lower recoverable outgoings.

Possible solutions:

Tenant pressure: Tenants (especially anchor tenants with leverage) can request efficiency improvements.

Building rating considerations: Landlords pursuing NABERS or Green Star ratings have incentive to improve efficiency regardless of outgoings recovery.

Marketing and asset value: Efficient buildings attract quality tenants and command better rents.

Scenario 3: Gross Lease, Landlord Responsible for Everything

Landlord provides everything including utilities. Tenant pays a single gross rent.

Tension: None, really. Landlord pays for energy, landlord benefits from efficiency. Clear incentive for landlord to upgrade.

This is the simplest case: Landlord makes the investment decision based on their own payback calculation.

Scenario 4: Short Remaining Lease Term

Either party might be reluctant to invest if the lease ends soon.

Considerations:

Tenant perspective: “Why invest if I might not be here in two years?”

Landlord perspective: “Why invest if the tenant might leave and the next one has different needs?”

Possible solutions:

Tie to lease extension: Tenant commits to lease extension in exchange for landlord-funded improvements.

Short-payback focus: Do only the upgrades that pay back within the remaining term.

Portable vs fixed: Some lighting improvements (task lights, plug-in fixtures) are portable. Tenant can take them when they leave.

Negotiation Strategies

For Tenants

Document the savings: Show the landlord the financial case. “This upgrade will save $15,000/year in energy. Here’s the calculation.”

Offer to contribute: A contribution shows good faith and might break a deadlock.

Leverage upcoming renewals: “We’re happy to extend the lease if you’ll invest in these improvements.”

Point to market standards: “Similar properties we’re considering have LED lighting throughout.”

Highlight comfort and productivity: Energy savings aren’t the only benefit. Better lighting improves tenant satisfaction.

For Landlords

Consider asset value: Modern, efficient lighting increases property value and marketability.

Factor in tenant retention: Efficient buildings are more attractive. Happy tenants renew.

Explore rebate programs: ESC/VEEC rebates can cover 30-50% of costs, improving the business case significantly.

Bundle with other works: If you’re doing other base building upgrades, add lighting to achieve economies of scale.

Communicate the story: Tell tenants you’re investing in the building’s sustainability. It’s a positive message.

Structuring the Deal

Capital Contribution Split

Calculate who contributes based on who benefits:

Example:

• Upgrade cost: $50,000
• Annual energy saving: $12,000
• Remaining lease term: 4 years
• Tenant captures: $48,000 in savings
• Rebates available: $18,000

One approach:

• Rebates offset cost: $50,000 - $18,000 = $32,000 net
• Tenant contributes equivalent to savings during remaining term: $32,000 (capped at net cost)
• Landlord contributes: $0 (but gets upgraded asset at lease end)

Or split differently based on negotiation.

Rent Adjustment

Rather than capital contribution, adjust rent:

Example:

• Landlord funds entire upgrade
• Tenant agrees to rent increase of $3,000/year (representing $12,000 saving minus $9,000 retained by tenant)
• Landlord recovers investment over time

This preserves cash flow for both parties.

Make-Good Considerations

Standard leases require tenants to “make good” at lease end—return premises to original condition.

If the tenant installs LED fittings, do they need to remove them and reinstall old fluorescents? That’s wasteful and absurd, but some leases technically require it.

Solutions:

• Negotiate an exclusion for efficiency improvements
• Document landlord’s written consent that improvements remain at lease end
• Consider removable/portable solutions for short-term tenancies

The Rebate Factor

Energy efficiency rebates (ESCs, VEECs, REES) can significantly change the economics and negotiation dynamics.

Who captures the rebates?

This depends on:

• Who owns the equipment being replaced
• Who is named on the rebate application
• What the parties agree

Often the party funding the upgrade claims the rebates. But this is negotiable.

If rebates cover 40% of project cost, they might enable a deal that wouldn’t otherwise work.

Documentation Matters

Whatever you agree, document it:

• Written landlord consent for alterations
• Agreement on funding split
• Clarification of make-good obligations
• Ownership of fittings at lease end
• Who claims any rebates

Verbal agreements cause disputes later. Get it in writing.

When to Walk Away

Sometimes negotiations don’t work. The landlord won’t engage. The tenant won’t contribute. The remaining lease term is too short.

It’s okay to walk away from a deal that doesn’t make sense. Not every property needs to be upgraded right now.

Focus your energy (and capital) on opportunities where the stars align.

The Bigger Picture

The landlord-tenant dynamic in commercial property often works against efficiency investment. Neither party fully captures the benefit, so neither fully invests.

This “split incentive” problem is well-known in property economics. There’s no perfect solution, but:

• Open communication helps
• Understanding each party’s interests helps
• Creative deal structures help
• Rebate programs help
• Long-term relationships help

LED lighting retrofits in leased premises are possible. They just require more conversation than owner-occupied properties.

Have the conversation. Find the deal that works for both parties.