It is estimated that the built environment contributes to approximately 25% of the UK's carbon footprint. Both landlords and tenants have their own ESG strategies, focusing on reducing their emissions, and collaboration is essential to align both strategies and ensure the parties can each meet their respective ESG objectives.
Whilst green leases have been around for some time, there has been a definite shift in the last few years as to how these are perceived and treated by owners and occupiers. Previously, green lease clauses for the most part placed obligations on the tenant; for example restricting works the tenant could carry out at premises and obliging the tenant to allow entry for the landlord to undertake energy efficiency works. There is now a greater emphasis in green leases on fostering collaboration between the landlord and tenant on sustainability and sharing of the cost involved, particularly from the tenant’s perspective where this will result in operational savings in the short to medium term.
The Better Buildings Partnership is a collaboration of leading property owners, and it has developed a suite of provisions with the support of over 30 organisations, aiming to provide a balanced set of green leases clauses for use by both owners and occupiers of commercial buildings. The green lease toolkit is a starter for ten intended to open the dialogue between owners and occupiers to drive positive transformation in the environmental and social performance of buildings. It contains green lease clauses graded as ‘light green’, ‘medium green’ and ‘dark green’, to give owners and occupiers a choice of obligations based on their objectives, and which stage they are at in their ESG journey.
There are five aspects of the green lease toolkit, which demonstrate the evolution of green lease clauses:
1. Data Sharing
This in itself is not something new in leases, but it has become increasingly important and requires the parties to regularly and transparently share data on energy, water and waste consumption. A new feature of such clauses, which is in the toolkit, is that some landlords are asking for an open mandate from tenants to obtain data directly from the tenant’s suppliers. This may reduce the administrative burden for a tenant in collecting and sharing such data themselves but some tenants may have concerns around confidentiality of the data and will want to maintain control as to what data is being shared and how it can be used by landlords.
2. Green Energy
This is a requirement, often phrased as a reasonable endeavours obligation, to procure electricity from a 100% renewable energy source. This is applicable to both tenants and in multi-let buildings to landlords as well. Parties will often want to caveat this obligation so that it applies only where the energy is available at commercially reasonable rates, particularly due to the uncertainty of the current renewable energy guarantees of origin (REGO) certificate system.
3. Embodied Carbon
In the context of green lease clauses, embodied carbon is (a) the greenhouse gas emissions that occur through extraction of raw materials, their manufacture to building materials and their transportation; and (b) the greenhouse gas emissions that occur when buildings are constructed and then works are carried out to those buildings, including fit out and strip out. The toolkit contains provisions relating to circular economy principles during the life of the lease and requires that any works to the building or alterations use materials in a way which minimises embodied carbon, and which are recyclable or reusable. As with green energy, this obligation applies equally to landlords and tenants where there is a multi-let building. The ‘light green’ option does limit the obligation, so it is only applicable where it does not result in a material increase in cost, and the parties will also be keen to ensure any commitments in a lease to reduce embodied carbon follow the same trajectory as the set out within their ESG strategy.
4. Waste Salvage
In multi-let buildings some landlords have had a waste policy for some time, but the obligations in newer green lease clauses are wider and relate to minimising the amount of waste sent to landfill, and optimising the amount that can be salvaged throughout the life cycle of the property. As a society we need to address the significant amount of rubbish from buildings which is sent to landfill. The ‘light green’ clauses simply refer to a reasonable endeavours obligations to minimise the amount sent to landfill and to salvage/recycle as much as reasonably practicable. Without targets or data, it is hard to see how this would be measured. The ‘dark green’ clauses go much further and include a joint salvage target placed on both the landlord and tenant, as well as data capturing obligations. Tenants will already be considering how their waste/stripped out fixtures and fittings may be reusable. This will clearly need to form part of wider corporate strategies, project management and programming, so that one strip out can be aligned for use on the fit out of another building, with consideration being much wider than one individual asset.
5. Social Impact
The toolkit contains clause to promote social impact measures. This responds to a growing demand for leases to address social issues and for “responsible leases”. Key factors in determining whether it is appropriate to include social impact clauses in the lease will be the location of the building, the nature of the asset and the occupier, and the community the building serves. Many tenants will, however, have their own social impact initiatives and objectives, and they will be keen not to have any obligations in a lease which conflict with those wider corporate objectives; for example, the landlord may want to include lease obligations relating to social impact initiatives in the immediate vicinity of the building whereas the tenant may be a national operator with a partnership with a national charity. The toolkit recommends that social impact measures in a lease, particularly one with a substantial term, are not strictly prescribed and allow for targets to evolve over time. Building in flexibility and collaboration between the parties in this way may allow for both landlord and tenant to use the building to deliver a positive social impact.
Green leasing is an area which will continue to develop over the coming years as we all progress in our ESG journeys and as the statutory framework around sustainability of buildings evolves. Many green lease clauses, which are now on the ‘light green’ end of the scale, will move further towards ‘medium green’ and ‘dark green’ and we will no doubt see greater acceptance that occupiers and owners alike will likely need to incur additional costs in order to achieve more stretching objectives.
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 Real Estate experts.
