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As the focus on ESG continues across all markets, it is clear that sustainability is no longer ‘just good marketing’ for businesses and corporations. Mounting pressure for transparency from regulators, consumers, investors and stakeholders necessitates organisations to provide data-backed sustainability credentials to safeguard their reputation.
According to the UK Green Building Control Council, the environmental impact of our built-up environment accounts for approximately 25% of the UK’s total carbon emissions. In 2021, The Northern Irish Government published the Northern Ireland Energy Strategy – the Path to Net Zero Energy – which overall aims to achieve complete decarbonisation by 2050.
Businesses must be alive to the reality of sustainability in commercial property transactions extending beyond design construction. For instance, the Strategy’s commitment to energy savings of 25% from buildings and industry by 2030 is particularly poignant against the backdrop of an energy crisis. It is clear that improving energy efficiency will remain at the forefront of landlord and tenant priorities.
A popular approach to meeting these objectives takes the form of commercial landlords and tenants entering into green leases.
Broadly speaking, a ‘green lease’ describes a commercial lease agreement centred on joint collaboration from landlords and tenants, ensuring buildings are sustainably operated, inhabited and managed.
Green leasing is not a ground-breaking development in our legal system. For example, in 2013, The Better Building Partnership (BBP) published a “Green Lease Toolkit” offering comprehensive guidance for landlords and tenants of commercial premises to branch into green leasing. However, we are now seeing a renewed interest in this area with the rise in ESG focused business practices.
Green leases aim to address and overcome the split incentive between landlords and tenants for energy efficiency, ensuring both parties can reap the rewards of eco-friendly investments.
The absence of a universally agreed definition provides flexibility for landlords and tenants to adapt their sustainably-centred clauses, aligning with developments in law and government guidance.
A green lease may contain a declaratory statement preceding any green commitments, highlighting a landlord and tenant’s joint commitment to reducing their environmental impact through economising on resources and monitoring emissions.
The Chancery Lane Project (CLP) has published a suite of green lease clauses for landlords and tenants, covering areas from emission reductions to green service charge provisions.
Every CLP clause is accompanied by “essential notes and guidance” outlining the relevant climate issue, how to incorporate the clause, alongside the impact of the clause and links to statutory obligations.
Notably, each clause is assigned a child’s name, highlighting the legal sector’s role in preserving our planet for future generations.
While their content is by no means exhaustive, the clauses provide a useful framework for encouraging conversations between landlords and tenants on green leasing.
Focusing on waste reduction, Aatmay’s Clause encourages landlords and tenants to prioritise using recycled, reclaimed or sustainable materials and products when completing alterations and repairs to commercial premises.
Rosie’s Clause enables tenants to propose environmental improvements through building alterations with their landlord’s consent. Landlords are obligated to act reasonably in allowing these and not delay consent, provided the works would not impede on the landlord’s reversionary interest in the premises. The clause further provides that tenants are not required to remove any ongoing works without prior notice, which must solely be on the same basis as above.
Toryn’s Clause aims to offer tenants a modest rental rebate for investing in ‘green’ household management, recycling, and enabling landlords’ tenants to install renewable energy solutions while the premises is occupied.
Lotta’s Clause focuses on ensuring leasehold premises generate energy from renewable electricity sources, cutting costs and emissions for landlords and tenants.
Oisín’s Clause sets out options for encouraging landlords and tenants to prioritise investing in the construction of renewable energy projects to provide further green electrons in the electricity grid supplying their leasehold premises.
Turning to service charges, Hannah’s clause permits landlords to recoup the costs of environmental improvements to commercial premises. This is facilitated through amending service charge provisions to incorporate this expenditure.
As industry standard service charge provisions do not provide for improvements (save for where items are beyond economic repair), encouraging landlords to enhance their buildings’ efficiency would represent a significant shift from traditional practice.
There are various reasons to enter into green leases, however the strongest reasons include:
Positive ESG credentials are golden tickets in today’s commercial real estate market. By entering into a green lease, landlords will ideally attract high value, environmentally conscious tenants and stakeholders with similar values. This may drive a better return of investment for landlords through a higher tenancy rate, driving competition against properties which are yet to follow green standards.
In the background, both Westminster and Stormont have legislative targets of achieving Net Zero Carbon Emissions by 2050, outlined in the Climate Change Act 2008 and Climate Change Act (Northern Ireland) 2022 respectively.
Landlords must remain vigilant to incoming changes brought by The Minimum Energy Efficiency Standards (MEES). From 1 April 2023, it will be unlawful (subject to limited exceptions) for landlords in England and Wales to continue leasing premises on existing leases with an Energy Performance Certificate rating of F or G. A similar policy has been in place for granting new leases since April 2018. If the current energy crisis isn’t enough, incurring a fine of up to £150,000 and being named and shamed on a public register should be a strong incentive for landlords to cut costs by eliminating energy wastage.
It is advisable that landlords go beyond this requirement and aim for lower ratings, as the UK government is seeking to cap EPC for commercial premises at a minimum B rating by 2030. Similar rules are likely to be adopted in NI in due course.
While landlords and tenants will incur a short term cost through incorporating energy saving initiatives into buildings, creating an energy efficient building now will enable both landlords and tenants to benefit financially in the long term.
To ensure an effective sustainability partnership, good practice should include discussion of the following topics:
Whether the initiating party is the landlord or tenant, both must co-operate in agreeing the scope and language of the lease.
The more knowledgeable party should educate the other on the shared value of green leasing early in the process, to ensure an informed decision is made. This early engagement will be vital, particularly where landlords are considering provisions which brush tenant privacy, including data sharing of energy use, meter data and efficiency monitoring.
Pre-drafting negotiations must establish the parties’ expectations for the green provisions and cover; monitoring, enforceability and remedies for breach of contract (if treated as legally enforceable clauses.) Landlords and tenants should agree whether the provisions should be framed as ‘light green’ principles or strict ‘dark green’ strict obligations.
When selecting prospective tenants, landlords should remain conscious of their existing certifications with LEED (Leadership in Energy and Environmental Design) and Building Energy Rating (BER) as Ireland’s most popular green certifications for commercial premises. Tenants’ plans for refurbishment, occupation or operation of the building should be scrutinised to ensure any relevant certifications will not be adversely affected.
Adopting an eco-friendly approach to operating and maintaining commercial premises will inevitably incur a short term cost to the parties involved. In the context of a multi-let building, early conversations considering how costs will be split between tenants and the landlord is vital to ensure co-operation in fulfilling their green commitments.
As green leases are not standardised, provisions should be drafted by a solicitor with expertise in ESG and green leasing concepts to ensure the responsibilities of landlord and tenant are clear. The commercial real estate team at Cleaver Fulton Rankin can provide expert guidance and advice in this area.
Cleaver Fulton Rankin also has a dedicated ESG hub, designed to help your business meet your Environmental, Social and Governance targets through providing tailored, expert legal advice and services. With a wealth of experience advising on ESG projects and a wealth of industry knowledge, Cleaver Fulton Rankin provides an expert multidisciplinary approach to advising on sustainable business solutions across a variety of sector areas including corporate & commercial, energy & renewables, banking & finance, planning and environment, housing and real estate, employment, public procurement, and other general matters.
This article has been produced for general information purposes and further advice should be sought from a professional advisor.