Can green leases help the property industry become more environmentally responsible?

Annie Button has written an article that assesses whether green leases help the property industry become more environmentally responsible.

Cast your mind back to 2009 and you may remember the Green Lease Toolkit being launched by the Better Buildings Partnership, a collaboration of the UK’s leading commercial property owners including The Crown Estate, City of London, Grosvenor, Invesco, M&G Real Estate and Savills Investment Management, to mention just a few. The idea then, as it is now, was to work together to improve the sustainability of existing commercial building stock to address growing environmental concerns. If anything, those concerns have intensified.

The real estate sector has one of the highest carbon footprints, accounting for 40% of carbon dioxide emissions. According to a recent report, 10% of commercial office space in London may become unusable in 2023 on account of EPC ratings that fall short of minimum energy efficiency standards of E or above, due to come into force next year. Only a fifth of all properties currently have an A or B EPC rating. What’s more, there are plans to enforce minimum EPC standards of C by 2027 and B by 2030.

Adopting a ‘green lease’ is one way to ensure properties are more sustainable. While their use until now has been far from widespread, perhaps now is a good time to revisit this option.

Going ‘green’ has a number of advantages beyond the immediate goal of improving energy efficiency in a building. These include achieving operational cost savings, attracting environmentally responsible tenants and supporting corporate sustainability objectives that enhance the company’s brand image.

What is a green lease?

A green lease is essentially a regular lease that has additional clauses incorporated for environmental obligations, mutually agreed by the landlord and tenant about sustainable operations of the property.

Here are some examples of clauses that could be included in a green lease:

A joint commitment for landlord and tenant to work together to improve the building’s energy performance
An extension to the landlord’s right to enter the property, specifically to undertake environmental work
A restriction on tenant’s alterations that would negatively affect the property’s energy efficiency rating
Setting joint goals for reducing waste, waste collections and emissions, for instance by setting recycling targets
Specifying that cleaning and other contracts must be using ‘green’ products and minimise the use of resources (light, heat) when carrying out their work

The aim of a green lease is for landlord and tenant to use a collaborative approach to reduce the property’s environmental impact. Green leases are primarily used for commercial real estate at present; however, the residential sector should be following suit in the near future. The provisions of the lease are legally binding and remain in force for the duration of the lease term.

How green can you go?

The Grosvenor Estate was one of the first landlords to engage with the concept of a ‘green lease’, adding new clauses to their standard lease in 2020 and detailing their sustainability commitments on their website. Many other commercial landlords are now also looking at making changes as a result of a greater general focus on Environmental, Social and Governance (ESG) criteria, which increasingly puts their assets’ environmental performance and sustainability firmly in the spotlight.

In practice, the adoption of ‘green lease’ clauses depends on the negotiations between the two parties. Leases can vary from ‘light green’ to ‘dark green’ – it all depends on how far each party is prepared to go with the extent of their environmental obligations and how onerous these might be. Of course, the specifics of the building – primarily its age and type – must also be taken into account.

Mutual agreement is a key factor here, and this not only applies to new leases but also to lease renewal negotiations and lease variations. In a recent case, a landlord’s attempt to unilaterally introduce additional ‘green’ clauses into a lease renewal were rejected by the County Court. The Court argued that “adding obligations on tenants to attempt to reduce the landlord’s liability [to comply with energy efficiency regulations] will not be considered fair or reasonable in the context of lease renewals.”

Memorandum of Understanding

For parties who already have a lease in place and in cases where negotiating a variation in order to introduce green clauses is proving difficult, the Green Lease Toolkit offers the alternative option of a Memorandum of Understanding (MoU).

This is a separate voluntary agreement between landlord and tenant, setting out how the property’s energy performance will be managed and improved. A MoU may be a good solution for existing leases that are difficult to amend for whatever reason. It can run alongside an existing lease for a time-limited period and is a valuable tool if the goal is to effect swift change.

The key difference between a green lease and a MoU is that the latter is not legally binding. While both agreements can address the exact same ‘green’ issues, a Memorandum cannot be legally enforced should either party be in breach of their obligations.

What does the future hold?

For property owners and occupiers eager to engage in making their new or existing premises more sustainable, there are now two existing frameworks that can be used to deal with environmental issues: Formal green lease clauses or an informal Memorandum of Understanding. Both are suitable for addressing matters such as environmental performance including the monitoring and sharing of data and taking measures to improve it.

Energy efficiency and sustainability in the real estate sector are rising concerns that are being given increased attention, both nationally and internationally. And while it is currently not mandatory to include any green clauses in a standard lease, or to enter into any voluntary agreement, further legislation is a strong possibility.

It is likely that green leases will become more popular and widespread as a way to bring landlords and tenants together to collaborate towards a more sustainable future. However, a formal document is only as powerful as the spirit behind it and the firm commitment to implement clauses as they are intended.