With Extinction Rebellion taking to the streets this week for a city-wide protest, it would appear that beyond the pandemic, environment and sustainability will be the key issue that the UK is faced with. Within the commercial property market there are a number of ways in which landlords and tenants can create more environmentally friendly properties, including entering into a green lease.
A green lease is a term used to describe a lease that includes a range of environmental obligations agreed with a landlord and tenant. The obligations will usually be drafted to encourage the landlord and the tenant to reduce their environmental impact, in turn making a property more sustainable.
There is no perfect green lease in the same way that there is no such thing as living a completely sustainable life, however, green lease commitments do ensure that both parties will co-operate to improve the sustainability of a building.
A green lease can be used to improve the energy efficiency of a building or to preserve an existing standard. By 2030, the government plan to enforce a minimum energy performance certificate (“EPC”) standard of ‘B’, with a lower minimum standard of ‘C’ to be achieved by 2027. Most of the impetus in developing green lease agreements has historically emerged from the private sector, however, as the EPC deadline approaches many commercial landlords may seek to improve the energy performance of buildings with more force than previously seen.
In London, according to Colliers, about 20 million square feet falls short of the minimum EPC standard of E to be introduced in England and Wales in 2023, with only 20% of all properties currently classed as A or B on the EPC rating scale. Conversely, according to Savills around 80% of buildings standing today will still be in use in 50 years’ time.
When considering green commitments most parties choose to focus on energy efficiency on the basis that this is a key factor in tackling climate change both within the UK and on the international stage, however, a green lease can include a range of obligations, such as:
- improving service and waste management;
- ensuring that alterations and repairs are carried out using sustainable materials;
- enhancing transport facilities such as bike racks and showers; and
- giving all parties the opportunity to host environmental forums to agree future targets and strategies.
Historically, the key reasons that a company might enter into a green lease are usually corporate reporting or environmental, social and governance policies. These have an impact on a range of company objectives but they often result in improved public relations and boosted employee recruitment and retention. Additional considerations also include:
- improving energy efficiency;
- reducing utility bills;
- future proofing your business and premises; or
- enticing new tenants.
If a landlord and a tenant decide to enter into a green lease both must commit to their joint objectives in minimising the environmental impact of the premises. Often by the time that heads of terms are agreed between the landlord and tenant, the environmental impact and sustainability of both the building and the tenant’s occupation are low on the agenda. However, a green lease requires a collaborative approach between parties in which communication, education, and cooperation are key. This will impact the service charge provisions, consent for alterations, reinstatement at the end of the term and remedies for breach of contract.
Commitments within a green lease can range from soft to harder, which are often referred to as light green and dark green clauses. A light green clause may not be legally binding or limited in scope whereas a dark green clause is usually legally binding, substantial in its level of commitment and broad in its scope.
As with all leases, a green lease can be negotiated at various stages of a transaction with agreement from both parties:
- Before the lease has been agreed the landlord and tenant can mutually agree to environmentally conscious clauses that could be enforced under the lease. These can be specific in nature to allow for simple enforceability, or broader in scope to commit both parties to principles rather than setting specific rules. Any breach could result in forfeiture under the lease unless agreed otherwise.
- During the term of the lease a landlord and tenant can also agree to improve the sustainability of the lease. Many leases require a tenant to comply with the regulations provided by the landlord. As these are often incorporated into the lease by reference they are legally binding and if a landlord chose to do so, they could amend the regulations without the tenant’s consent without scope to negotiate the terms.
Alternatively, the landlord and tenant could agree to enter into a memorandum of understanding. This involves both parties giving the other a non-binding commitment to work together to improve the environmental impact of a property. It can involve sharing information on energy consumption and occupation of the property along with committing both parties to consider environmental good practice, energy and water efficiency and waste reduction. Parties must work together in good faith and remember that it can be terminated at any time.
If you would like to discuss entering into a green lease or any other issues raised in this blog, please contact a member of our team.