Green Leases – a renaissance?

Laurence Lacey, Commercial Property Partner and Dale Edwards, Strategic Consultant – Green Energy share their thoughts on why developers, landlords and occupiers need to look more closely at green lease provisions.

Over the last decade environmental considerations have become more important to individuals and businesses in their decision-making processes, with expectations rising in many areas of their lives and activities. Through the recently published Energy White Paper the Government is in the process of addressing these expectations in the face of the global climate emergency.

Common to our lives, whether an individual or a business, is the buildings we occupy: a flat, an office, a manufacturing plant, or a house. Homeowners and businesses have been making changes to their own properties by introducing energy efficient light bulbs, improving insulation, or installing more efficient heating systems. These changes not only benefit the environment but can reduce outgoings once the initial investment has been made. In some cases, grants may be available.

The position is more complicated when occupiers are letting property. Funding energy efficiency measures in commercial property is particularly tricky. Tenants in those sectors where short lease terms are common, have no long term interest in the property and are very reluctant to pay for improvements for which they will see little or no benefit. Landlords are under pressure to ‘green’ their properties as Regulations impose minimum energy efficiency ratings on lettings.

What are green leases?

Commercial properties are increasingly subject to “green leases”, or leases which contain green clauses to a greater or lesser extent. The term has been around for some time and is used to describe a lease that includes a range of environmental measures agreed between a landlord and tenant. These provisions aim to encourage the landlord and tenant to reduce their environmental impact, in turn making the property more sustainable.

How will landlords and developers be affected?

Without question green leases will become far more common as a result of the measures outlined in the Government White Paper. Currently the Minimum Energy Standards Regulations (MEES) do not allow a landlord to let a commercial building if its Energy Performance Certificate (EPC) is below an E rating. Draft legislation has not yet been presented to Parliament but the intention in the White Paper is that rented non-domestic buildings will need an EPC B rating by 2030, with a planned stepping stone of a C rating by 2027. There will be some exceptions.

This is a potentially significant challenge for landlords and developers. In August 2021 an article by Colliers found, as a result of their analysis, 57% of central London offices have D to G energy ratings, with only 20% with an EPC rating of A or B. If this was replicated across the UK it would indicate that large scale work will be required to meet the new Government objectives.

It is clear that commercial landlords and tenants need to work together to address the environmental and regulatory challenges. These changes can be negotiated at various stages either at the outset or during the term of an existing lease providing any changes are agreed by both parties.

The range of green measures that could be brought into a new lease is too wide to cover here in detail, but may include such things as the installation of bike racks and EV charging points, zero landfill recycling, and requiring only sustainable materials to be used when the tenant carries out alterations to the property. Similar considerations need to be followed through in service charge provisions allowing a landlord not only to repair but to upgrade to more energy efficient apparatus when replacing fixtures and fittings. Both these measures could increase service charges and rents although tenants may find some savings in their energy bills.

Landlords may find themselves without an alternative if they are to comply with MEES and need to work out when to carry out the works to minimise the time the property is vacant. On the positive side, a more energy-efficient building may be more appealing and be part of both landlords and tenants’ corporate social responsibility or net zero strategy, delivering added value benefits.

An alternative to fixed covenants in green leases, and to assist when dealing with leases which contain no appropriate clauses, is to use the Better Building Partnership’s memorandum of understanding (MOU) to jointly work together to improve the fabric of the building in terms of energy efficiency and sustainability. Whilst not legally non-binding it gives landlords and tenants an opportunity to collaborate and potentially to develop environmental policies which may, at a future date, be written into a new form of lease agreed between the parties.

Summary

The time has come for both commercial landlords and tenants to embrace green leases to create better and more sustainable buildings for the benefit of their respective businesses and the employees who occupy them. Whilst we are still some way from the inclusion of green lease provisions in all leases, the environmental and sustainability agenda from both investors and tenants, as well as the legal requirements associated with EPC ratings, are all having an impact in terms of creating a drive to create better and more sustainable buildings for the future. This trend will increase as time goes on, so understanding these provisions is important and may ultimately avoid buildings becoming obsolete in the future.

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