Green leases for commercial property

It is often said that real estate is responsible for 40% of global annual CO2 emissions and 40% of natural resource use so it is no surprise that property owners and occupiers are looking for ways to reduce the adverse effect that real estate has on climate change.  One such solution is the implementation of green leases.

What is a green lease?

A green lease is not a specific type of document and there currently is no market standard ‘Green Lease’.  The term encompasses a combination of ambition and expectation to become more environmentally sustainable and it essentially refers to a lease of a property, or a lease supplementary document, that includes clauses which are intended to help manage and improve the environmental and social performance of a building.  As a result, both landlords and occupiers can benefit from mitigating sustainability risk and the subsequent improvements.

What might be included in a ‘Green Lease’?

The contents of a Green Lease will differ depending on the type of property, its layout and its use, but there are some common inclusions:

• Co-operation: This is the most common inclusion in a ‘Green Lease’ for a schedule to be included to document the co-operation between the landlord and the tenant to improve environmental performance. There may be goals and requirements specified in the lease or it may only refer to a joint wish to improve the energy efficiency by way of sharing data such as performance figures or meter readings. There is often also an obligation to discuss the environmental performance of the property where there is a large estate within a forum.
• Alterations: In most leases, tenants are prevented from installing work or plant that may negatively impact environmental performance and/or the existing Energy Performance Certificate rating.  When a new EPC is required, the tenant is often required to ensure the landlord is involved in this renewal and landlords may specify the assessor that should be used and retain the right of access onto the property to carry out energy improvement works.
• Yielding Up: In most leases, the tenant is required to remove any alterations at the end of the term of the lease.   However, some landlords are opting to retain the right to waive this reinstatement obligation where the tenant’s works have improved the efficiency of the property or where their removal would have an adverse impact.
• Service Charge: The landlord may try to charge a service charge to offset the cost of any energy-improvement projects. Although it is arguable that a higher level of energy efficiency will save the tenant’s expenses, the capital cost will probably be a point of negotiation for the parties.

Green Lease Clauses

Some green lease clauses which can be included are:

• energy efficiency measures, including obtaining and/or maintaining an EPC
• data sharing – including, for example, utilities consumption
• waste reduction and management and recycling
• using sustainable materials for repairs and alterations
• water efficiency
• measures to comply with statutory environmental standards and/or achieve target certifications such as MEES and Building Research Establishment Environmental Assessment Method (BREEAM)
• consideration of wider adverse climate impacts

When can “Green” clauses be introduced?

These can be introduced both at lease inception and during the term.  Landlords and tenants can agree to include green provisions in existing leases by entering a Memorandum of Understanding.  The landlord may also create a ‘handbook’ setting out their sustainable practices.

At lease renewal, a landlord may try to include a range of green provisions but may be faced with opposition.  Under the Landlord & Tenant Act 1954, the new lease must have regard to the old lease and the starting point therefore is to seek renewal on the terms of the old lease.  If one of the parties requires a change in the terms, it is for that party to justify the change.  A court will look at whether, by including new clauses, the landlord is merely attempting to remove existing obstacles to environmental improvement or whether it is shifting greater obligations onto the tenant.  One approach is that modest improvements to the environmental provisions of a lease are justifiable as fair and reasonable improvements.  Reported cases, however, suggest that landlords may struggle to persuade judges to allow this.

Why should I consider a green lease for my commercial property?

As well as the overriding benefit for the community and the environment that can be provided by improving your efficiencies, the following are some further reasons:

• Operational savings – reviewing the energy efficiency of premises and making improvements could reduce overall costs towards a tenant’s energy bills; a particularly important consideration during the current climate.
• Landlords are now liable for compliance with the MEES.  Properties with enhanced green credentials may be able to command higher rents and overall present greater value and returns for owners, making them an all-round more attractive proposition.
• The UK government has set a national legislative target of a 78% reduction in greenhouse gases by 2035 and a net zero target by 2050, and for this goal to be achieved the real estate world is going to have to make a raft of positive environmental changes in the way that buildings are used and operated.
• Attractive prospect for investors – while there would be an initial outlay to switch to more energy efficient suppliers or make improvements to the building, over time, a greener building may also increase its value, benefiting the landlord directly and also potentially catching the eye of keen forward thinking investors.
• A positive image as an employer – climate change is not only on the agenda for the Government and business owners but also in our employees’ lives, with many of the younger generation using the values and environmental commitment of a business to determine their employment options.

Regardless of the size or age of the premises, those who are taking their environmental policies seriously ought to take into account the advantages of green leases. It goes without saying that you should carefully weigh the responsibilities imposed by green leases; knowing the benefits and drawbacks will help you decide which approach is best for you and your business.

If you’re interested in learning more about how our commercial property services can support sustainable practices and help you implement green leases, please visit our Commercial Property webpage. We’re here to assist with tailored solutions that meet both your business needs and environmental goals.