It may come as a surprise that buildings and construction have been estimated to account for a massive 45% of energy-related CO2 emissions; a bigger contribution than agriculture, industry or even transportation.
As global industries work together to combat climate change, what can landlords and tenants do to ‘go green’ and play their part in tackling environmental issues?
What is a green lease?
A green lease is a lease which contains provisions that encourage (or obligate) landlords and tenants to reduce the environmental impact of their property. The term green lease is actually an umbrella term; the provisions don’t even need to be in the commercial lease itself and are often documented outside the lease, for example in a memorandum of understanding.
We often hear about green leases aiming to improve a building’s energy efficiency, which is hardly surprising as buildings are required by law to meet minimum standards. Regardless of legislative requirements, investing in a building’s energy efficiency is an attractive option for many as this can reduce running costs (where energy prices are elevated), minimise supply (where there is un-certainty about security of supply) and futureproof against ever-changing legislative requirements. These issues have never been more pertinent than in the current economic climate; green leases can not only reduce environmental impact of a proper-ty, but also save both the landlord and the tenant a significant amount of money.
Green leases are not limited to energy efficiency; with new environmental legislation in the pipeline and an increasing drive for a green revolution, it is more and more common to see wider environmental issues covered, including water use efficiency, recycling facilities, sustainable materials for repairs and electric vehicle charging points.
Key issues to consider
Most green leases will incorporate good faith and collaboration wording to ensure that any efforts to improve the environmental performance of the building are shared between the landlord and the tenant. One way of achieving this is through monitoring; the landlord may install utility meters to keep track of usage and identify areas for improvement.
Another way is through imposing obligations on both parties to disclose environmental data, which will enable targets to be set and improvements to be measured.
More progressive leases might include terms which help to futureproof by ensuring that new legal requirements are met before they are even brought into force. For example, the government has advised that they will require all non-domestic rented buildings to have an Energy Performance Certificate (EPC) rating of B by the year 2030 (at present, the minimum requirement is an E for new leases being granted but from April 1, 2023, this will apply for all existing leases). Should the new B rating be enforced, an estimated 85% of commercial rented buildings will be affected.
It is the landlord’s responsibility to make sure that their building’s EPC meets the requirements (unless the property has an exemption certificate). However, depending on how the lease has been drafted, the cost of the improvements may be re-covered from the tenant through the service charge.
Who pays for the improvements?
One of the key barriers to agreeing a green lease centres on the question of who should pay for the environmental works required or desired. It is usual for a lease to be drafted so that the landlord pays for the works. It will, however, be the tenant who benefits from any consequential reduction in energy or water bills. The landlord may be able to demand a higher rent on a new lease or higher rent on a rent review of a more energy efficient building, however in the current tenant-friendly market, this might be difficult.
A tenant taking a long lease might consider it beneficial to make improvements which will result in cost savings during the term, however in the current market most leases run for ten years which makes the possibility of achieving any financial return on the initial investment unlikely.
In order to find a balance to suit both parties, it is essential for there to be a co-operative relationship between the landlord and the tenant. Starting with initiatives which bear a minimal cost will open up the possibility of further discussions as the relationship develops, with the potential for the gradual introduction of more expensive improvements.
In some cases, it might be beneficial to agree a collaborative environmental strategy in advance of the lease being agreed; in other cases, to attend workshops which outline best practice with respect to the most prominent environmental issues. Landlords might also consider excluding forfeiture for breach of environmental terms to inspire a more collaborative approach to improving the energy efficiency of the property and its occupation.
There is still a way to go when it comes to take up of green leases and green lease provisions, however growing political commitment to environmental issues and the current economic climate are driving both landlords and tenants to consider the environmental impact and energy efficiency of their buildings.
While at present there is no legal requirement for a lease to be ‘green’, prudent landlords will plan ahead by negotiating those green lease provisions, installing utility meters and, as there is a legal requirement for minimum EPCs, checking their EPC ratings.
Howes Percival’s commercial property solicitors provide a full range of services for landlords and tenants including commercial leases, property portfolio management and dispute resolution.
For more information, contact Marcus Carter on 07814 356928 or email marcus.carter@howespercival.com or Fleur Chapman on 01908 872205 or at fleur.chapman@howespercival.com
