The various shades of green leases

What is a green lease?

A green lease is a concept rather than a standard document. It could be a clause, a schedule or an entirely separate document. With so many variations and options it is easy for landlords to be creative in their approach, which ultimately results in “shades” of green. 

The transition to green leases may not be a one-step process. It might be that a landlord starts with a lighter form of agreement, or perhaps considers introducing an environmental management plan before introducing full and more onerous schedules. Green landlord/occupier forums allow for the management and recording of environmental improvements. An alternative to green leases is a memorandum of understanding which sets out how the parties intend to address environmental matters. This can sometimes be a more palatable option for tenants. As this approach is not usually legally binding on the parties and is intended to be fluid and cost effective, it can be a useful tool where property portfolios are already under lease. Landsec, for example, has an environmental memorandum of understanding aimed at improving the environmental performance of a building.

Behaviours and attitudes are evolving. With a number of key industry players already working together to improve environmental performance (using groups such as the BBP), collaboration and more onerous green lease provisions may not be such a shock to the system.

However, we are now seeing a move towards darker shades of green in leases of high-class/new-build offices. Investor landlords also have tougher environmental requirements for acquiring new properties as they cement their green credentials and look to the long-term investment values.

Where a green approach can be adopted

There are certain clauses in leases which lend themselves to becoming green. Key areas include:

• General obligations: Some “light” green leases may simply contain a general obligation on the parties to work to improve the environmental performance of the property and/or building. Darker green leases will set out specific objectives to: reduce greenhouse gas emissions; reduce the carbon footprint of the building; offset residual emissions; protect and enhance existing ecological features in the building; minimise pollution; and minimise water usage.
• Alterations & repair: Landlords are considering the impact of carrying out any proposed works. For alterations, landlords are stipulating the use of sustainable materials, use of local suppliers and avoidance of materials that increase the embedded carbon, and can even go as far as restricting the carbon emissions in the method of carrying out the works. Similarly, any repairs carried out by landlords will aim to follow the same sustainability requirements.
• Alienation: Tenants can be restricted from assigning or underletting premises to any party which the landlord considers will not comply with the green lease provisions.
• Dilapidations: Tenants are not being required to reinstate any tenant’s alterations which would adversely affect the environmental performance of the property. This means there is less wastage of materials and fit out, which can be reused by future incoming tenants.
• Service charge: Generally, landlords will seek to recover many of their costs associated with environmental provisions via the service charge. This could include installation of new technologies, the purchase of carbon allowances and carbon offsets. Tenants, however, will seek to carve out energy-related improvements and services. Tenants will not want to invest in improvements to increase energy efficiencies unless they are to receive a benefit – perhaps in the form of reduced utility bills. Landlords will be reluctant to invest in what can ultimately be very expensive schemes unless they are confident of a return. 
• Rent review: A tenant will want the effect of any energy efficiency works paid for by the tenant to be disregarded on rent review, as ultimately the works will increase the value of the property and drive up rents. Equally the landlord will want any works they have funded to be included on rent review, creating a better investment value.
• Regulations: These can include provisions dealing with water management, waste management, and measures to ensure the workforce travelling to and from the building do so in a sustainable way (with the inclusion of vehicle charging points, cycle racks and showers). 
• Environmental: A tenant may be required to educate its employees on sustainability or have the ability to introduce new or improved biodiversity features such as living walls and roofs.
• Data monitoring and sharing: In order to monitor the energy performance of the building, the landlord will want the tenant to share information and monitor the energy and other resource consumption at the property on a regular basis.
• Green building management groups: Landlords are creating environmental groups to allow tenant representatives to come together and review the energy performance of their buildings and share strategies for environmental performance improvement.
• Reservations: Landlords will often need to ensure they have sufficient rights so they can carry out their environmental performance reviews and measurements, and to carry out works to improve the energy efficiency of the building and comply with any legislation.

Old v new

It is, of course, easier to apply green lease provisions to the standards of building found in new developments. However, the majority of commercial property stock was built prior to the drive towards sustainability and energy efficiency. Therein lies the challenge. Existing properties need to be upgraded and updated to reduce the carbon footprint and improve energy efficiency. The difficulty for older buildings lies in how this is going to be implemented and who will take on the responsibility and bear the cost. Will this be the landlord, the tenant or a collaboration? The answer for the most successful schemes is likely to be a collaborative approach.

Shades of green

Green lease provisions are having a wide impact on tenant covenants. Before including environmental provisions, it is important for a landlord to consider whether there will be a collaborative approach between the landlord and the tenant. Will the onus be on the landlord or will they have to work together to ensure that the building or property in question becomes a more environmentally friendly place? The difficulty for landlords is in trying to enforce these darker-shade-of-green clauses. Tenants of shorter-term leases will not want to bear the cost of implementing some of the greener improvements in order to make a building more energy efficient, particularly if they themselves will not realise the full benefit.

Despite the fact that darker shades of green may be considered onerous, it has been seen that buildings with green strategies in place are attracting higher rental values. Assuming this trend continues, introducing green lease provisions and deploying capital to turn buildings into greener, environmentally friendly properties may be a worthwhile landlord investment.

The negotiation and acceptance of green lease provisions is still a work in progress. At present, it depends on the ESG priorities of the parties and the type of building, eg new/old. The interest among landlord clients remains mixed. Some are keen to have a dialogue with their tenants, with a view to introducing dark green provisions and wellbeing schedules, while others continue to roll out their usual precedent documents. But it is not just landlords that need to demonstrate their ESG credentials and hit carbon emission targets. The office sector is leading the way with its green leasing but, with the push towards zero carbon emissions, other sectors will follow.

Unlike other clauses in leases, the adoption of green lease provisions and sustainability wording has the potential to transform the real estate landscape. However, for these words to have the desired effect, collaboration and initial investment are key. With so many shades of green still in the market, what is reasonable is difficult to determine. Ten years ago, green leasing was very much at the lighter end of the scale. Will shades of green still be in existence in another 10 years? Perhaps not.

Guidance

While there is no industry-wide standard, guidance on how to adopt green leases can be found in the Green Lease Toolkit by the Better Building Partnership