Green leases crucial to achieving net zero in the built environment

‘Net zero’ requires emissions to be reduced as far as possible, and for the remaining (or ‘residual’) emissions to be removed or captured to achieve a net balance between carbon emissions and removals. The UK has set a 2050 net zero target in the Climate Change Act 2008 that aims to ensure its net zero transition is aligned with the Paris Agreement target of limiting global warming to well below two degrees, and ideally, to 1.5 degrees Celsius. Emissions related to the operation of leased premises where the tenant has operational control will form part of the carbon footprint of both the tenant and the landlord, and are therefore relevant to either party’s net zero goals. That’s where green leases come in.

A particular complication arises in the case of lease renewals under the Landlord and Tenant Act 1954 (the 1954 Act) where the tenant is, of course, entitled to a lease on similar terms to its existing lease. The introduction of green lease terms in these circumstances continues to be quite an unchartered area. The recent 2022 case of Clipper Logistics Plc v Scottish Equitable Plc provided an interesting example of the approach the court may take as regards the introduction of such terms in lease renewal proceedings brought under the 1954 Act. The landlord and tenant in question were in the process of negotiating the new renewal lease terms, but there were a number of clauses on which they couldn’t agree, including the following:

• prohibition of tenant alterations that would result in the property having an energy performance rating below E
• an indemnity for the cost of a new EPC certificate should the tenant or other occupiers make such alterations
• a tenant obligation to ensure: that the present EPC rating be maintained; the premises be returned to the landlord with that same EPC rating; and works be swiftly carried out to restore the EPC rating if it were to fall (the Reinstatement Obligation).

Defining widely, green lease terms are those clauses that have the intention of reducing the negative impact the property in question has on the environment. This will involve obligations being placed on both the landlord and the tenant to work together on matters such as greenhouse gas emissions, energy use, water consumption and reduction of waste. These are matters that can of course be addressed at the negotiations stage of new leases. However, the problem lies in the fact that a significant proportion of existing commercial property leases do not incorporate green provisions. One practical way forward would be for the landlord to approach their tenant in order to enter into a variation to incorporate such green clauses, but this will clearly depend on the respective will of the parties to do so.

The court concluded that it would be unfair to include the proposed obligations because they would impose upon the tenant beyond those included in the previous lease and were accordingly not ‘fair and reasonable’. Particular focus was placed on the fact that MEES obligations fall to the landlord rather than the tenant in any case. However, the court did agree that part of the Reinstatement Obligation could be included so that the tenant would be required to return the property with the same EPC rating as at the start of the lease on the basis that without this obligation, the landlord would be without any real protection against inaction by the tenant. This was a County Court decision and accordingly not binding. However, it does show both an awareness by the courts of the difficulties now faced in this area by landlords in terms of the requirements of buildings that are effectively outside of their control and also their willingness to take steps, albeit limited, to assist in overcoming these difficulties.

Turning to the matter of new leases, the key focus needs to be future proofing for ESG, starting with addressing green related provisions in the Heads of Terms. In addition to green clauses being included within the lease itself, an additional obligation on the tenant to, for example, comply with environmental policy would be a good idea, as well as containing green related obligations in tenant regulations/handbooks. These can all also then feed in to forming part of a managing agent’s green strategy for each building.

Looking further ahead, one of the key benefits from green lease clauses is the resultant data they can provide. Landlords need to be able to measure energy performance in order to establish the all important baseline to make improvements. Some commentators have suggested that the UK government follow the lead taken by other European countries by obliging every tenant to communicate energy usage to its landlord. I would agree not least given how key that data visibility is to moving forward effectively to achieve those ESG objectives.

What is clear is that regardless of how we get there, the future focus for leases will be very green indeed.