What makes a lease green?
Real Estate Associate Gaye King looks into the “green lease” trend which is happening now.
What is a green lease?
A “green lease” generally refers to a document which incorporates different types of provisions relating to environmental obligations. It is generally used to encourage landlords and tenants to reduce the environmental impact of the property such as reducing carbon emissions, water and waste management, using sustainable materials for repair and alterations, complying with energy efficiency regulations and implementing greener transport measures.
As it currently stands, as there is no legal requirement in the UK to use a “green lease” in the private or public sector, and as such, many green clauses in leases are more aspirational in nature so that they are not binding on the landlord or the tenant. Examples of green obligations include reporting on the environmental performance of the buildings on an annual basis and keeping track of the cost of utilities. It has been mooted that any strict provisions could adversely affect the value of the property, assessment of the open market rent on rent review, remedies for breach, obligations for reinstatement at the end of the lease and they could have repercussions on duties to give consent to alterations and the workings of service charge provisions, as landlords would be looking more closely at the environmental impact of any works or repairs on the property. It can be seen from the leases being entered into today, that there is a reluctance to impose more onerous “green” clauses.
Old or new properties?
Green leases do not just apply to new properties. They can have a big impact on an older property as they enable the property to be managed in a more environmentally-friendly way, reducing the property’s environmental footprint. When a green lease is used for a more modern building, then although it may already be at a high standard, the green lease will be designed to help maintain that high standard during the term of the lease.
“Shades” of green leases
There are three common types of green lease ranging from “light green” to “dark green”. Light green lease provisions are likely to be not legally binding and require a limited commitment to environmental issues and the obligations tend to be limited to improving energy efficiency. On the other hand, dark green leases are likely to contain legally binding provisions, requiring a higher level of commitment to environmental issues, which will be wider in nature to those contained in light green leases.
Advantages of green leases
Both landlords and tenants may prefer to enter into a green lease to achieve a greater energy efficiency, lower running costs for properties, provide protection future commercial risks and to comply with statutory requirements and to demonstrate their commitment to corporate social responsibility.
Drawbacks for a green leases
Green clauses in leases currently tend to impose any cost for “improvements” (as opposed to repairs) on the landlord which cannot be charged to tenants through the service charge. The issue for a landlord is that they may not want to invest in new energy efficiency measure where the tenant will be the only one to benefit from those works, although, it could be said that, the landlord would benefit from such improvements if the interest in the building increases in value. On the other hand, a tenant would not want to incur expenditure on improvements that have a long payback period, as they may not benefit from the savings sufficiently during the lease term. As a result of this reluctance, landlords may seek to incentivise tenants to make environmental improvements by offering financial rewards for being more energy efficient.
Another issue for the tenant is that a traditional lease requires the tenant to reinstate the property to the original state at the end of the term and this could discourage a tenant from making any environmental improvements during the term of the lease. One would hope that landlords will be sensible and agree that green improvements would not need to be removed at the end of the term.
Interaction with other environmental schemes
Green leases work well with other environmental schemes such as:
- Energy Performance Certificates (EPC). An EPC contains information about the energy efficiency of a building. An asset rating of A (the most energy efficient) to G (the least energy efficient) is given. An EPC is limited as it only certifies the energy performance of a building and does not provide information as to how water is consumed or how much waste is produced. An EPC is generally used to try to get owners/tenants to carry out energy efficient improvements to bring the rating up. Generally you would expect to see in an EPC clause in a lease that a tenant must not carry out work which would invalidate an EPC or negatively affect the asset rating. The expectation is that the bands for compliance will rise fairly soon from Band E to Band C and that the minimum cost to incur to secure an exemption on cost grounds will be going up materially.
- Minimum Energy Efficiency Standards (MEES). Under the MEES regime, landlords of the most energy inefficient buildings are required to improve their energy efficiency and as a result it is important to include clauses on MEES in a lease.
We are seeing a big move towards making properties more energy efficient and this will mean that landlords will start to use more “green leases” to ensure that the energy efficiency of their buildings are maintained/improved and to ensure that there are clear provisions as to how the cost of any such improvements are dealt with.
For any more information on the issues highlighted, please speak to our Real Estate team.