Green leases place obligations on landlords and tenants to manage the environmental impact of properties. Green leases tend to only relate to commercial properties and although not legally required, recently there has been a movement towards them and the demand is likely to increase.
Why have a Green Lease?
Concerns about climate change have been growing in recent years, leading to an increased willingness to tackle the environmental impact of buildings. The Government are seeking methods to improve the environmental efficiency of properties. For example, from April 2023 the Minimum Energy Efficiency Standards (MEES) prohibit a landlord from letting a commercial property where the energy performance certificate rating is below E.
As the focus on environmental efficiency grows stronger, companies are shifting to a ‘greener’ approach and landlords are looking to ‘future-proof’ their properties in anticipation of stricter environmental laws and policies. Landlords and tenants are also seeking to protect themselves against potential risks, such as reduced water supply, the shortage of landfill space and insecure energy supplies.
For this reason, green leases are becoming more attractive to landlords and tenants as they can incorporate clauses targeting the following:
- The consumption of utilities, by specifying the type of utility sources which can serve the property and the efficiency of such sources. For example, requiring a tenant to use energy efficient light bulbs or to switch their lights off after trading hours;
- The use of sustainable resources for repairs and alterations, such as using recycled materials and minimising waste;
- Waste management and using recycling facilities;
- Encouraging green transport, which could include the installation of cycle racks and electric vehicle charging points; and
- The sharing of environmental data for analytical purposes which could consider the impact of certain green clauses and offer further recommendations.
With the rising cost of energy prices, there is an incentive for landlords to ensure their properties have minimum energy waste, as this is more attractive for potential tenants who will be able to reduce their operational costs.
Green leases are also a great tool for positive marketing. Tenants can use them as a way to meet their social responsibility targets and therefore, use them to their advantage for promotional purposes; especially as the consumer market shifts towards a more environmentally conscious approach. Household retailer Marks and Spencer have followed this strategy, as they have pledged to incorporate green clauses in all of their stores in a bid to become more environmentally friendly.
Types of Green Clauses
Green clauses are divided into three categories. The greater the shade of green, the higher the burden on the respective parties.
Light Green Clauses require limited commitment from both parties and are generally not legally binding. For example, the provisions could require the tenant not to carry out any alterations or improvements to the property which would adversely affect the property’s energy performance rating.
Medium Green Clauses create obligations on both parties; however, they are unlikely to impose any unreasonable financial burden. For example, incorporating energy efficiency targets in the lease.
Dark Green Clauses are legally binding and require significant commitment to environmental issues. These clauses will impose the greatest financial burden on the parties, although, the result of such provisions will also result in the most positive environmental impact.
Who Pays? – The Key Considerations
Landlords generally bear the cost for improvements to a property and whilst the landlord may be able to charge a premium for a green lease, it would only be viable if there was sufficient demand in the market. For this reason, landlords may be reluctant to invest into their properties to improve their environmental efficiency, as the benefit goes to the tenant.
A potential solution would be for the landlord and tenant to set up a joint environmental improvement fund, however, this makes the lease less attractive to tenants and it may also cause contribution issues for multi-let properties.
Most leases include ‘yielding up’ provisions which require the tenant to return the property in the repair and condition that it was, at the start of the lease. Although the landlord is unlikely to make requests to remove alterations improving the overall efficiency of the property, if the landlord enforced this obligation, this would mean costs for the tenant if they have made any improvements during the term of the lease.
Green lease clauses are not only limited to new leases. For existing leases, landlords and tenants can enter into an agreement called a Memorandum of Understanding. The agreement would not be legally binding and therefore, they are more flexible as they can be updated without amending the lease. The Memorandum will still set out the landlord and tenant’s intentions on sustainability, and what measures can be taken to reduce the environmental impact of the property.
It is important to consider that a Memorandum of Understanding will not bind the property, therefore, if the parties change, then a new agreement would be required. As such agreements rest upon the landlord and tenant’s commitment to environmental considerations, this may be a contentious area and the provisions may not be easily agreed upon.
Both landlords and tenants have a responsibility to implement measures to improve the overall environmental sustainability of a property. Generally, both parties will benefit from making the improvements, however, cost considerations may come into play. There is flexibility and different options available to meet the required needs of both parties, therefore, green provisions are likely to be considered more carefully when drafting leases and agreements.
If you are a landlord or tenant considering a Green Lease, please contact our Commercial Property department by emailing email@example.com or calling 0116 289 7000.