The prevalence of green clauses in property contracts and lease for the most part stems from the fact that, in England and Wales, legislation imposes obligations on owners of commercial premises to achieve minimum energy efficiency standards which are contained in the Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015 (known as the MEES Regulations). Since 1 April 2023, owners can neither let nor continue to let a property which does not achieve an EPC rating of E or above – although, it is expected that this minimum rating will rise to a B or C following conclusion of the current Government consultation. Whilst there is no equivalent legislation in Scotland and Northern Ireland, the adoption of green clauses is becoming the norm for institutional landowners across the UK.
Initially landlords tended to insert green clauses into leases, which placed the financial burden of compliance with the MEES Regulations onto occupiers so understandably occupiers were reluctant to sign up to these but over the last few years the position of landlords and occupiers has started to change due to the increasing scrutiny upon collective and individual environmental footprints – and both parties being keen to ensure that positions which they adopt in contractual arrangements align with their wider ESG strategy and brand. This has resulted in more collaboration and sharing of the cost of initiatives between landlord and occupier, and greater consideration of the cost versus benefit analysis of initiatives. Now, the market norm is for green clauses in leases within the consumer sector to cover the energy efficiency of the building not being materially adversely affected by the occupier's operations, together with collaboration and cooperation obligations and sharing of data.
Given the increasing consumer pressure for sustainable products and services, commitments to achieving net zero and the evolving regulatory landscape (including the EU Corporate Sustainability Due Diligence Directive), there is now a growing movement to include climate change requirements in supply chain contracts. Arguably, it is the only effective way in which a commercial organisation can control behaviour of its suppliers (and their supply chain) in a commercial context. Certain contractual clauses, which contribute to enabling an organisation's sustainability and environmental goals, are relatively common. For example, mandating the use of certain raw materials such as FSC certified paper, or recycled plastics, and procurement processes which impose certain standards as a prerequisite for participating in a tender are not unusual, including the production of a carbon reduction plan or achievement of a certified sustainability rating. The use of detailed or project specific green clauses committing to greenhouse gas emissions targets are to date, less commonplace.
Given that certain types of green clauses have been widely used in property leases, there are lessons to be learnt to support adoption of environmental commitments in contracts governing the supply chain:
- Sharing of information – many businesses are collecting emissions data and information on energy consumption as part of their obligations in property leases. Experience from the property sector indicates businesses are happy to share this information, so long as it is in a reasonably standardised format or a format the supplier/occupier reasonably stipulates and the frequency of provision of the data does not create an administrative burden (for example, most occupiers are comfortable sharing data once a year but not more frequently). Leveraging use of existing data sources, and the commitments organisations may already have in other forms of agreement, may accelerate uptake of similar obligations in supply chain contracts and increase the likelihood of compliance.
- Collaboration – within the property sector there is now a shared allocation of risk and cost in respect of certain environmental commitments, such as agreeing targets for energy consumption reduction and recycling. This is generally on the basis that both parties bear their own costs (i.e. the landlord does not pass on its costs via a service charge) and the occupier is not required to incur material capital outlay. There are potential lessons for parties within the supply chain to share responsibility or, for larger players in the supply chain, to offer incentives to others through contractual commitments to collaborate, share knowledge and participate in green initiatives. There are some examples in the food industry of manufacturers investing collectively in the construction of recycling plants and, in return, being reimbursed with Packaging Recovery Notes (PRNs) with a value in excess of the investment.
- Contractual remedies and enforcement – failure by an occupier to meet the requirements of a lease has the potential to lead to its termination or non-renewal. This is an incentive for occupiers to ensure they comply with the requirements, including those related to climate change. Contractual remedies within a supply chain contract (for example suspension, service credits, liabilities, reduction in price, or ultimately termination for failure to comply with green clauses) may be difficult to enforce and potentially unreasonable - particularly if the commitments are not specific nor easily measurable. In order for environmental commitments to have an impact, there must be consequences. Committing to remediation plans and joint working to achieve carbon reduction targets is likely to be more effective; For example, electrification of transport network or use of processing waste for heat production.
In assessing whether to introduce new climate change requirements, we suggest that businesses:
- Review existing contract drafting and any relevant lease provisions to establish what might be modified to meet the organisation's purposes.
- Engage early with suppliers about climate change goals and expectations as part of the procurement process or in negotiations, including possibilities for collaboration and incentives.
- Ensure that any environmental targets or plans to achieve carbon emissions and reductions or net zero are clear in scope, requirements and are commercially realistic.
- Carefully consider a set of consequences for non-compliance and what is workable.
If you have any questions or would like to discuss any of these topics and what they mean for you and your business, please get in touch with our Consumer sector and Commercial Contracts experts.