News

26 January 2010

Green Leases – How environmental are your property credentials?

As buildings are responsible for around 50% of our carbon dioxide emissions, improving the energy efficiency of buildings will play an important role in climate change policies.  The move towards “green leases” is one part of the government’s strategy to improve the UK’s environmental credentials.

"Green leases" are leases of real estate containing provisions requiring, or encouraging, the landlord and tenant of a commercial or public sector building to reduce the environmental impact of the let premises. They are still in their infancy in most jurisdictions, including the UK, and are potentially contentious, particularly in relation to the allocation of costs involved in implementing improvements to existing buildings.

There are a number of ways in which landlords and tenants can agree to meet environmental and wider sustainability standards, enabling a building to be occupied and managed in a more environmentally-friendly fashion, so reducing the building’s environmental footprint. This may take the form of mandatory or discretionary provisions incorporated into the lease or it may take the form of aspirational objectives, set out in the lease or in a separate Memorandum of Understanding (MoU). Introducing green lease clauses to the landlord and tenant relationship will impact on a number of areas of the lease, including service charge provisions, consent for alterations, reinstatement at the end of the term and remedies for breach. The extent to which any such provisions can be enforced will depend on the wording and the nature of the document containing the provisions.

Green leases are commonly referred to as being of various shades of green: "light", "medium" and "dark". The more mandatory and legally binding the requirements are, the "darker green" the lease is said to be. Provisions included in a green lease will vary depending on a number of factors, including the age and existing green credentials of the building, the sustainability goals of the parties and the level of time, commitment and financial investment the parties are willing to make.

In general, a great deal of emphasis is placed on the energy efficiency of a building, primarily because energy consumption in a building (electricity, heating and cooling) is an important source of carbon dioxide emissions.  In the UK, it is estimated that buildings are responsible for around 50% of our total carbon dioxide emissions, so improving the energy efficiency of buildings plays an important role in climate change policies.

Green leases however, are not limited to just provisions dealing with the energy efficiency of a building. They can cover wider environmental and sustainability issues such as:

  • water usage
  • waste management, such as minimising waste and recycling facilities
  • using sustainable materials for reparations and alterations, for example using energy efficient, recycled, non-polluting or local materials
  • green transport facilities such as showers, cycle racks and car-share schemes.

It is not just about how buildings are constructed, but also how they are used. Different considerations will apply depending on whether the building is an existing building, which may limit what the parties can do in practice unless they invest in upgrades, or a new build which can meet high levels of energy efficiency and sustainability from the start of the lease.

In addition to the obvious global benefits of reducing carbon dioxide emissions, there are a number of other benefits from a business perspective to signing up to a green lease, including:

  • Cost savings. Green lease provisions usually centre around reducing energy and water consumption, as well as waste reduction. The cost of installing energy and water efficient measures may ultimately be offset by the savings in utilities bills,  though the payback period may be longer than some landlords and tenants would like. Over time, the energy and other utility costs may be significant, particularly as energy prices and supply can be volatile.
  • EU legislative drivers. In the EU, the EPB Directive requires Energy Performance Certificates to be provided when a building is constructed, sold or leased. These requirements are designed to make the energy performance of a building more visible to stakeholders, and can therefore provide an incentive to improve performance. It is also likely that the new draft EPB Directive, which is currently being negotiated, will apply stricter minimum energy performance standards, so there could be benefits for landlords who are willing to "future proof" their buildings now and therefore avoid potentially costly alterations or penalties further down the track.
  • UK Carbon Reduction Commitment (CRC). The forthcoming CRC scheme may provide landlords and tenants in the UK with a financial incentive to improve their energy efficiency, which could potentially be done through green leases.
  • Corporate social responsibility (CSR). Many larger tenants and landlords have made public commitments to sustainability through their CSR programmes. Green leases can enhance a company's environmental image and potentially avoid damage to the company's reputation from owning or leasing unsustainable or energy inefficient buildings.
  • Building valuation. While building valuations may not currently take account of sustainability specifications, this may change in the future.
  • Securing a tenant. As more tenants begin to require sustainability criteria, those buildings that meet high sustainability requirements will be better placed to attract and retain tenants in the long term.
  • Well-being benefits. There may also be certain well-being benefits for employees and occupiers of sustainable buildings. For example, it may result in better heated or ventilated buildings, which can make for a more comfortable working environment.

Some of the challenges involved in implementing green leases include:

  • Allocation of costs. A significant barrier to the widespread implementation of green leases is the perceived cost of introducing sustainable measures, and how these costs will be shared between the landlord and tenant. Landlords will want to ensure that any improvements they make will be reflected in the rental income they receive, the service charge or the capital value of the property. Tenants, on the other hand, will want to ensure that they receive the benefit of costs savings if they contribute to sustainable improvements. One of the other issues is the length of the payback on certain improvements. For example, tenants with short leases may not benefit from the cost benefits if the payback period is longer than the duration of their lease. They may also be discouraged from making environmental improvements if the lease requires reinstatement of the premises to their original state when the lease ends.
  • Retrofitting existing buildings. For new buildings, negotiating and implementing green lease provisions may be relatively straightforward, as the building may have been constructed to meet certain sustainability criteria required under, for instance, the EU EPB Directive and UK Building Regulations, and will therefore be capable of achieving high environmental performance standards. However, existing buildings will probably not have been designed to achieve environmental performance targets, and major and costly alterations may be required.
  • Changing tenant and landlord behaviour. Successfully implementing a green lease requires a change in the mindset of landlords and tenants, and for the parties to work in a closer partnership than ever before. Parties may need to acquire new skills and resources, and change their business practices. This shared focus will require a collaborative approach, in which communication, education and co-operation are the key.

If you would like to discuss how you might move towards greener leases for your properties as part of your environmental or CSR strategy, then please contact Jacqueline Morris or Adele McDermott on 01782 205 000.

 

 

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

 

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