Are green dilapidations on the ESG horizon?

Green lease clauses in commercial leases are increasingly being discussed by landlords and tenants wishing to meet their own ESG credentials.

The sustainable operation of buildings is moving higher up the agenda for commercial owners and occupiers to fulfil their net zero carbon ambitions. Principles of the circular economy and the idea of re-using and reducing waste of materials is being applied to dilapidations.

The traditional dilapidations model requires a tenant to reinstate the premises to the condition as at the grant of the lease. The lease will usually contain covenants requiring a tenant to return the premises to the landlord when they vacate in a good state of repair as determined by the terms of the lease. At the expiry of a commercial lease, a landlord will often serve a terminal schedule of dilapidations on the outgoing tenant setting out the steps which they should take to leave the property in repair and the estimated cost of the repairs.

Usually, this requires the tenant to put the premises back into the same condition as at the date of the grant of lease. Tenants will remove their fit outs and the landlord will then have empty premises to re-let to another tenant ready for them to install their fit out for their occupation. If a tenant does not comply with the terms of the lease, the landlord and tenant’s surveyor will usually negotiate to agree a dilapidations settlement or if agreement cannot be reached, a landlord may issue proceedings for damages for terminal dilapidations.

Practically, a landlord is often required to serve notice to reinstate on the tenant before lease end. This can mean that due to the timescales set out in the lease there is little flexibility to seek to agree anything other than a full reinstalment at the expiry of the lease.

However, in a circular economy model, the focus would be on the landlord and tenant working together to seek to agree what elements of the tenant’s fit-out could remain for an incoming tenant. Extending the principles more widely could mean exploring whether landlords market units with a basic non-bespoke fit-out in situ potentially reducing the materials to be removed at the end of a tenancy. The numerous potential uses for a unit makes it difficult for landlords to cater for every incoming tenant but units where there is a green dilapidations model may be seen as more desirable by a tenant seeking to fulfil sustainability criteria.

The Chancery Lane Project has published Aatmay’s clause specifically aimed at green dilapidations which encourage landlords and tenants to re-use goods and materials. Whilst the use of green clauses in general is increasing, use of green dilapidations clauses is not widespread. This in turn means that whilst it remains open to landlords and tenants to discuss how premises are to be returned at lease expiry, the majority of dilapidations claims are currently negotiated under the traditional model. There will of course be advantages and disadvantages of both models but until there is more widespread adoption of green dilapidations clauses into commercial leases, the green dilapidations model may remain on the horizon.