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5th March, 2020 by Scott Smith
As the aptly coloured muppet once said “it’s not easy being green”, but with environmental issues increasingly in the headlines and on the political agenda (see our recent articles about biodiversity net gains on developments here and the court case declaring ethical veganism a protected characteristic here), it’s only a matter of time before landlords and tenants will need to start thinking in earnest about going green. The Technology Strategy Board (now known as Innovate UK) estimate that as much as 45% of UK carbon emissions come from the construction, operation and maintenance of buildings; so-called “green leases” are one way to help tackle this.
The term “green lease” is actually an umbrella term which captures any lease which contains or refers to environmental provisions. For example, it would include a commercial lease with a non-binding environmental memorandum of understanding which sits alongside the lease and leases in a larger block which has an environmental policy.
Many commercial leases already incorporate terms linked to the minimum standard for EPCs, and with talk of a “green revolution” in mainstream politics, statutory compliance provisions could sweep up new environmental legislation which is likely to be in the pipeline (for example, consider the debate in the recent election campaign around compulsory insulation for all homes and target dates for carbon neutrality). However, a truly “green lease” will aim to go further than meeting statutory requirements and minimum standards.
Although much of the focus to date has been surrounding energy efficiency, green leases can deal with a wide range of environmental issues including recycling requirements, using sustainable materials for repairs and alterations and providing a minimum number of electrical vehicle charging points for an office.
A green lease aims for a more collaborative approach to improving the environmental impact of a building. Most green leases will contain good faith and collaboration wording to ensure that both parties will work towards the improved environmental performance of the building.
A key element of achieving improved environmental performance is through monitoring. For example, the landlord (either on its own initiative or at the tenant’s request) may install meters to measure energy or water use as a way to quantify improvements over time, and the lease may contain obligations on both parties to share environmental data. This data can be used to set targets for and measure improvements in energy use, water use, carbon emissions and other environmental metrics.
Whilst the environmental benefits of a green lease are clear, there are commercial impacts (both positive and negative) for landlords and tenants to consider when thinking about including environmental provisions.
Environmental provisions are most likely to affect landlords through the covenants for services and service charges – for example, a requirement to provide suitable recycling bins in the common parts, or improve water use efficiency. More onerous green leases may also require capital expenditure by a landlord to make physical changes such as installing cycle parking and storage, electric vehicle charging points or better insulation.
The knock on effect for tenants is that service charges may be higher for environmentally conscious services and rents may be higher to fund more sustainable buildings. If the lease contains provisions about ensuring repairs and alterations are sustainable or energy efficient, this could also have a cost implication, whilst efficiency savings could bring cost benefits.
A green lease could form part of a bigger corporate and social responsibility plan for both landlords and tenants to demonstrate their commitment to environmental issues. Likewise there are employee wellbeing benefits from encouraging sustainable practices such as cycling.
Environmentally progressive lease terms may also help to “future-proof” a lease by requiring parties to comply with new legal requirements before they are brought into force. For example, there have been recent consultations about increasing the minimum energy efficiency standard to a “C” or even “B” rating by 2030, but ambitious energy efficiency targets could see this standard being met voluntarily over time through small changes rather than a large capital investment when the target becomes mandatory.
A final consideration for both landlords and tenants is forfeiture provisions. These are often drafted to kick in for breach of any tenant covenant, but the parties may wish to exclude forfeiture for breach of environmental terms to facilitate a more collaborative approach to improving the sustainability of the building and its occupation.
To date, take up of green leases has been slow, but with the MEES regulations becoming compulsory for all residential leases by 1 April 2020 and all commercial leases by 1 April 2023, and growing political commitment to environmental issues, the onus will increasingly be on building owners and occupiers to consider their buildings’ impact on the environment. Prudent landlords should think about “easy wins” to stay ahead of the curve such as ambitious energy efficiency provisions, installing meters or introducing short form memorandums of understanding surrounding environmental issues for their portfolios.
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