Green Leases – Going, Going, “Green”

16 / 03 / 2021

If you ask the wrong question, of course, you get the wrong answer. We find in design it’s much more important and difficult to ask the right question. Once you do that, the right answer becomes obvious.

Amory Lovins, physicist, environmental scientist and writer

As you may have gathered from the quote above, this is not a balanced argument as to whether a greater emphasis on sustainability is a good or bad thing.  I was the co-author of the “light green” lease clauses that Hammerson launched in the mid 2000s, have sat on the policy committee of UK Green Building Council and currently chair Revo’s Sustainability and Community Engagement Committee.  If you don’t agree that our built environment has an impact on climate and energy usage, then you may want to skip the rest of this article.

So, what are the “right questions” when it comes to green leases?

What is a “green lease”?

A green lease attempts to ensure that the occupation and use of the premises demised minimises its environmental impact.  Since leases continue to be relatively long-term arrangements green lease clauses provide a framework under which both landlord and tenant can achieve and maintain energy efficiency and other sustainability goals throughout the lease term. 

Why isn’t there a standard form of “green lease”?

People have tried.  The most well-known resource in the UK market is the Better Building Partnership Green Lease Toolkit.  The best green leases encourage a co-operative approach throughout the life of the lease and thereby transforms the usual adversarial landlord-tenant relationship into one of shared purpose and benefit. 

So where is the problem? A generous view would be that no two buildings or form of lease are the same and it is difficult to compare them against each other – as we know from rent review negotiations.  More truthfully, the industry’s preference for taking provisions that were designed to strike a fair balance between landlord and tenant and skew them to their own purposes means that there is no standard position.

That is why some landlords promote the use of a memorandum of understanding that sits outside the terms of the lease.

Who should be pushing for “green leases”?

Historically, Government has identified landlords as having the power to change the market.  Hence the restrictions on letting properties with a low EPC rating implemented through the MEES regime.  That approach makes sense in a market where lease lengths are shorter than at any time in living memory since the landlord has the long-term interest in making the property attractive to new tenants.  More energy efficient buildings should mean long term cost savings for tenants. 

Increasingly, it is investors that are expecting “green lease” clauses to be included.  They are driven by both global requirements on Environmental and Social Governance and de-risking their property portfolios from becoming obsolete.

If there isn’t a standard “green lease” where should I look for “green” clauses in a lease?

Sometimes you will find the “green” clauses helpfully set out in one clause or a separate schedule.  More often than not they will be scattered through the lease.  The most common and relatively uncontentious provisions would be:

  • Obligations on the landlord and tenant to co-operate and collaborate in operating the property more efficiently
  • Restrictions on the tenant making any alterations that adversely affects the energy efficiency of the building as a whole or would reduce the EPC rating of the property
  • Data sharing and metering

Where it gets difficult is where compliance with environmental obligations on either side involves a financial commitment such as:

  • The landlord’s ability to recover the costs of alterations to the building that improve energy efficiency (operational costs) through a service charge
  • The landlord taking control of the procurement of “green” energy for the building which the tenants are then obliged to buy rather than negotiating with providers themselves

Both landlords and tenants can take comfort in the implementation of the RICS “Professional statement – Service charges in commercial property” (the Code).  Where service charges are run by a RICS surveyor then they should be operated fairly and subject to the principles of cost v benefit.

However, where there is a conflict between the terms of the lease and the terms of the Code then the terms of the lease will prevail.  This may not be an issue where the term is short or if a service charge cap has been agreed but the parties want to be clear on where the costs of environmental improvements lie then they need to agree it in the lease itself. 

Also watch out for obligations to comply with “Building Regulations”.  That is sometimes where green provisions have been set out in order to avoid the issue of retro-fitting them into existing leases.

Seeing the bigger picture?

The key is to make sure that all the provisions in a lease work together.  If not there is always the potential for conflict:

  • Acting for a landlord on a renewal lease, we were told that adding light green obligations on the tenant to discuss energy efficiency was unreasonable notwithstanding that the tenant publicly trumpeted its green credentials
  • Acting for a tenant on a new lease, we were asked to accept an obligation to comply with a refreshingly forward thinking environmental policy for the operation of the building but the tenant was being obliged to reinstate to an obsolete specification at the end of the term in 15 years time

The future?

Until we find a way to compare environmental performance of buildings against each other then we are some way away from seeing true green leases in the market.

However, our view is that:

  • the ESG obligations of investors
  • the risk of obsolescence for landlords
  • tenant demand for efficient building management

will all contribute towards buildings being developed, let and managed more efficiently.  That will flow down into lease drafting. 

No-one doubts that the best known landlords and tenants will continue to lead the way since there is an obvious commercial and reputational advantage in owning and operating “the best” properties.  The key will be for owners, occupiers and their professional advisors to work together to ensure best practice flows down into the rest of the market.  That may mean a change in approach from all sides:

  • tenants may need to step-back and understand why a landlord wants and needs all tenants in a building or portfolio to engage in its sustainability initiatives
  • landlords may have to accept that their well meaning and forward thinking environmental policies are balanced by tenant protections against paying above market costs for no discernible benefit

Are “green leases” the future?  That is yet to be seen.  What is certain is that well drafted and well understood green lease provisions will be beneficial for all interested parties.

KEY POINTS

  • Understanding environmental impact is a key investor metric
  • Ignoring the green agenda risks obsolescence
  • Both owners and occupiers need to understand and benefit from green lease clauses