The green lease: back for good?

It is well over a decade since the Green Lease Toolkit was first launched by the Better Buildings Partnership in 2009, following an increasing focus on environmental concerns at that time.

The use of green leases remains far from widespread, but the renewed push for the property industry to become more energy and environmentally efficient – including through the upcoming tightening of the Minimum Energy Efficiency Standard Regulations – means that attention is returning to this option. So, will the return of the green lease be more successful than previously, or do fundamental challenges remain?

What hurdles have green leases faced?

There are a number of factors to be acknowledged when it comes to the difficulties of achieving the wider adoption of green leases, including:

• The historic leaning towards an adversarial – rather than a collaborative – landlord and tenant relationship;
• The economic challenges of the past 15 years (recently added to by Brexit and Covid-19), raising issues as to who will bear the costs of any energy efficiency works;
• The unknown impact of green lease provisions and the adoption of greener technologies on costs and values, leading to concerns as to whether rental levels or capital value will increase for more energy efficient buildings; and
• The stream of evolving legislation and retail/working patterns, which has added to a desire from tenants to maintain as much flexibility as possible in leases.

What is a green lease?

A green lease is a standard form lease with additional clauses included to provide for the management and improvement of the environmental performance of a building. It can address wider sustainability issues such as water and waste management and the use of sustainable materials for buildings.

The provisions in the lease are legally binding on the landlord and tenant and remain in place for the duration of the lease term.

The extent to which green clauses are adopted depends on how “green” the parties wish to be and the circumstances of the transaction, eg the age and nature of the building.

Leases can vary from “light green” to “dark green” depending on the extent of the obligations contained and how onerous they are.

Of course, it is clear that targets cannot simply be met by improving the efficiency of new buildings, and so the deficiencies of existing buildings must be addressed. For parties who already have a lease in place and do not wish to negotiate a variation in order to “go green”, or who desire more flexibility for other reasons, the Green Lease Toolkit offers the alternative option of a memorandum of understanding.

This is a separate, voluntary agreement between a landlord and tenant, which is not legally binding. It can run alongside a lease for a chosen length of time. The MoU addresses the same matters as the green lease clauses, but it cannot be enforced if either party is in breach of their obligations under it.

Both green lease clauses and the MoU offer a framework for collaboration on environmental issues between owners and occupiers of both new and existing buildings, by addressing matters such as:

• The promotion and discussion of strategies to improve the environmental performance of the tenant business and/or the building it is in;
• Sharing data on environmental performance, which may extend to agreeing targets;
• Limitations on the ability to do works to the unit (or require reinstatement of alterations) if they will adversely affect the environmental performance of the tenant business and/or building it is in;
• Rights for the landlord or the tenant to carry out works which enhance environmental performance.

For multi-occupied commercial buildings with shared services to demised areas, a green lease may also encourage parties to collaborate through an environmental forum, to manage, monitor and record the environmental improvements of a building.

Green principles in practice

While it is not currently obligatory to include green clauses within a lease or to enter into an MoU, energy efficiency and sustainability issues are being given increased attention. Further legislation is also a real possibility.

A number of landlords have already engaged with this direction of travel. By way of example, the Grosvenor Estate added new green lease clauses to their standard lease in 2020 and details commitments on its website to:

• Collect, analyse and act on building energy and water consumption data;
• Transition properties onto 100% renewable energy at highly competitive and less volatile prices;
• Improve the environmental performance of buildings;
• Expand waste and delivery consolidation locally to reduce traffic and pollution; and
• Share knowledge and insights on sustainability through a sustainability forum.

This approach may encourage greater interest from occupiers, particularly those with their own ESG concerns, or who want a shared approach to the costs of consumption monitoring, etc. However, for tenants focused on dealing with the challenges to their business following Covid-19 and/or Brexit, the longer-term benefits of a simpler and more cost-effective route to improve energy efficiency may not feel like a priority at present. Despite this and similar issues for landlords adjusting to the changes in the property market post-Covid, it seems likely that many landlords will respond to the increasing focus on ESG and look to adopt more green lease clauses and similar measures relating to environmental performance and sustainability over the upcoming years.

An original version of this article was published in Estates Gazette on 2 November 2021. For more information on the above please contact Emma Humphreys, Phil Webb or your usual Charles Russell Speechlys contact.