What makes a commercial lease “green”?
A “green lease” incorporates terms designed to promote the energy efficiency of the property and can involve obligations on the landlord and/or tenant. Green leases are often called ‘Light Green’, ‘Medium Green’ or ‘Dark Green’ depending on how onerous these terms are but there are no fixed definitions of which lease terms will cause a lease to fall into one of these categories. As a rule of thumb, stronger obligations on the parties to comply with the energy efficiency provisions will lead to the lease being a darker hue of green.
Benefits for a landlord in granting a Green Lease
A landlord’s reasons for incorporating green clauses may be to enable it to comply with its internal ESG (environmental, social and governance) policies, or to simply to make the property more energy efficient, or perhaps to futureproof the property against future environmental legislation.
A landlord must also bear in mind the potential impact on either the current MEES Regulations or any future iterations which may result in the property becoming environmentally sub-standard during the lease term. In such case, the landlord will benefit from the lease containing ‘green clauses’ that allocate responsibility for any necessary works to the tenant’s property or allow the landlord to recharge the costs of improving the environmental rating of the building via the service charge. At the very least, the landlord will benefit from a right of entry to the tenant’s property to enable the landlord to carry out works to improve environmental performance.
What’s in it for the tenant?
Green leases are often perceived as increasing costs and obligations on a tenant to the landlord’s benefit because the current MEES Regulations do not themselves impose any obligations on a tenant to carry out or pay for works to improve environmental performance and standard lease obligations for the tenant to comply with ‘statutory obligations’ will not impose this obligation.
The tenant will also have to consider the impact on the tenant’s business of allowing a landlord access to the tenant’s property, even if works are at the landlord’s cost.
The tenant may benefit however if the tenant itself has ESG obligations, or if an increased environmental efficiency from improvements will benefit the tenant via reduced energy costs, or if the property becoming sub-standard during the lease term would result in an EPC rating too low to allow a planned subletting of the property by the tenant.
So, who pays?
Whether it would be considered reasonable for green clauses in the lease to oblige a tenant to pay for environmental improvements will depend on the length of the term, with a tenant often taking the view, on a short-term letting, that the environmental improvements will be disproportionally for the landlord’s benefit by increasing the capital value of the landlord’s investment. With leases of longer terms, the tenant will have a capital investment of its own in the property to protect. Often it will come down to the respective bargaining strength of the landlord and tenant, with larger institutional landlords often insisting on green clauses of at least some description being non-negotiable in all lettings.
What would green clauses cover?
Examples of green clauses would be:
- An agreement for the landlord and tenant to collaborate and cooperate with the aim of improving the property’s environmental performance, requiring the tenant to share data. This is often seen as on the Light Green end of the spectrum.
- An obligation on the tenant to take environmental performance into account in any repairs or alterations, even to the extent of replacing inefficient but functioning machinery or to use only sustainable materials, or requiring the tenant not to remove any alterations as part of dilapidations at the end of the lease which currently improves the environmental performance.
- An obligation on the party sourcing the property utilities to use reasonable endeavours to favour renewable energy supplies.
- An ability for the landlord to install electric vehicle charging points and to recharge the cost via the service charge.
- Terms apportioning the costs of environmental improvements.
Concluding thoughts
The environmental impact commercial real estate makes to the UKs energy profile is set to remain a hot topic in the decades to come and will affect the majority of existing commercial buildings. Landlords need to be properly advised on the futureproofing of properties they intend to let, and tenants should be advised that the growth of green leases is a reality that cannot be ignored.
The team at Weightmans has extensive experience in dealing with commercial lease acquisitions and lease renewals and can offer expert guidance on lease drafting to include green clauses. Should you require assistance, please do contact our landlord and tenant solicitors.
