Sustainability and environmental performance are becoming increasingly prominent within the commercial property sector. This is as a result of multiple factors including environmental and climate change concerns, regulatory pressures, and market demand. A key driver behind this shift is the growing pressure on landlords, from their investors, to increase the Environmental, Social and Governance (“ESG”) performance and appeal of their property portfolios. The inclusion of green lease provisions is a practical way in which landlords can deliver on these objectives.
With green leases becoming more common practice, prospective tenants need to be aware of the different types of green lease provisions and what implications these provisions may have.
What are some common green lease provisions?
Energy Efficiency: A green lease may include provisions requiring a tenant to use energy efficient equipment such as using energy efficient lightbulbs and to install sub-meters to more accurately measure and control utilities, including heating.
Energy Performance Certificate (“EPC”): Under a green lease a landlord may commit to conducting building works which aim to improve the EPC rating of a building. For example, upgrading the central heating or air conditioning system, or installing insulation. Given such improvements will be costly, a prospective tenant should consider whether they will incur any cost liability because of such improvements. Whether a prospective tenant is happy to incur such costs may depend on factors such as the length of their lease.
Data Sharing: These provisions may require a landlord and tenant to record and exchange their energy and water usage, so the overall environmental performance of the building can be monitored. Tenants may also be placed under an obligation to attend a meeting to discuss this data and ways the building’s environmental performance can be further improved.
Sustainable Fit-Outs: Tenants completing a fit out of a property should look out for green provisions requiring the fit out to be sustainable. For example, requirements to use low-carbon, non-toxic, recyclable materials.
Sustainable Energy: Landlords may also impose requirements that the utilities used at a property are from a sustainable source. Tenants should consider the practicalities of complying with such requirements.
Waste Management provisions: The extent of this obligation will vary depending on the size of the landlord’s property and the size and nature of the tenant leasing the property. Common provisions include shared responsibility for reducing landfill waste and encouraging recycling and composting. Certain leases may even go as far as to require a tenant to record what proportion of their waste is recycled and relay this information back to the landlord.
Service Charge Provisions: Tenants entering a green lease should pay close attention to the service charge provisions and the extent to which a landlord can recover the cost of sustainability initiatives. These types of works can be extremely costly, and tenants need to consider whether they will be under an obligation to meet such costs.
What Should Tenants Consider Before Signing?
Before entering a lease, prospective tenants should consider the possible cost implications associated with green provisions, as they can often result in a large cost burden being placed on the tenant. Tenants should look to mitigate these potential costs as part of their negotiations. Particularly those tenants entering a short-term lease (e.g. five years or less). Tenants should also consider any possible operational disruption a green lease may cause to the running of their business.
Alternatively, tenants may find such green lease provisions beneficial and may wish for at least some of them to be included within their lease, as they may help the tenant to meet their own ESG and sustainability goals.
Although there are currently no statutory requirements that a tenant must agree to incorporate green provisions within a new lease, it is clear that they are quickly becoming common practice. With this in mind, prospective tenants should try to view the inclusion of green lease provisions not just as a burden, but as an opportunity to improve their energy efficiency and strengthen their own sustainability credentials.
Early engagement and practical negotiations between the parties is key, particularly considering the specific type of tenant and the building(s) involved. A collaborative approach from both a landlord and a tenant will put them in the best position of creating a green lease that works well for both parties.
If you would like to discuss anything raised in this blog, please contact Phil Hunt or Megan Evans on 0121 236 7288.
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