A greener future for landlords and tenants – green leases

Sponsored feature | Tessa Crocker, associate, HCR Hewitsons

As landlords and tenants strive to meet environmental, social and governance (ESG) targets the ‘green lease’ is becoming an increasingly attractive option to prospective tenants who place an emphasis on sustainability. Likewise for landlords who may have spent considerable sums on constructing or refitting a building to a high standard and wish to see that standard maintained by its occupants.

So, what is a green lease and what advantages and disadvantages are there to signing up to one?

A green lease is a standard form lease which includes extra covenants intended to protect or enhance a building’s environmental performance. However, parties’ attitudes and expectations of green leases will depend on the nature of the property being let and the type of tenant those premises will attract.

Green leases can often require a greater degree of commitment, know-how and resources than has historically been the case, often including obligations such as collection and sharing of energy performance data, the mandatory use of alternative waste collection and recycling schemes, and purchase of renewable energy.

Where the landlord shoulders most of the administrative and practical burden of sustainability initiatives, the convenience to the tenant may be outweighed by a higher service charge.

Additionally, tenants are reporting that landlords increasingly require a greater level of technical detail to be supplied when making applications for consent to carry out alterations. This is so that that the potential impact of the works on the building’s energy efficiency can be assessed.

Some landlords are now insisting upon the use of sustainable materials in tenant works and may require the works to meet a certain recognised and measured standard, such as the Building Research Establishment Environmental Assessment Method (BREEAM).

While this may be well-intentioned and may not be an issue for the larger, corporate occupier or those taking space in a brand new high-spec building, the long-term trend towards shorter commercial leases might mean that landlords of less environmentally-efficient premises have difficulty attracting tenants willing to accept the extra cost of carrying out enhanced fit out works which, in practice, will only benefit the landlord.

It is also questionable whether, and to what extent, a landlord can enforce green lease provisions. The provisions are often not absolute obligations and instead encourage reasonable efforts and cooperation with the landlord’s ESG policies.

Consequently, the landlord may have difficulty demonstrating that there has been a breach of covenant which has resulted in a quantifiable loss. Bringing the lease to an end by forfeiture is unlikely to be deemed appropriate in these circumstances, and it’s unclear to what extent a commercial landlord would value absolute compliance with green lease covenants above preservation of their rental income stream.

The growth of green leases potentially means more points for negotiation. However, both landlords and tenants are well advised to move towards a more proactive and collaborative approach to leasing. This is so that the challenges presented by ever-increasing legal and regulatory requirements can be met, and to demonstrate their ongoing commitment to operational sustainability, carbon reduction and meeting their ESG objectives.

For more information, contact Tessa Crocker, associate, real estate, on 01223 447459 or 07570 683545

Visit hcrlaw.com.