Shades of green

The term "green lease"  is most often used, to define a lease which incorporates a number of "green" clauses, intended to encourage landlords and tenants to adopt sustainable practices which will reduce environmental impact and improve energy efficiency of a building. 

Background

The government calculates that around half of all energy consumed in commercial and industrial buildings in England and Wales is in the rented sector and introduced the MEES Regulations in 2016 as a means to solve this problem. The Regulations place the onus on landlords to make energy efficiency and heating improvements to their buildings where a  building is substandard. A building is currently substandard if it has an EPC rating of below "E." From April this year, landlords are in breach of the MEES Regulations if they let or continue to let a building which is substandard, without a legitimate reason or exemption.

The government's White Paper, Powering our Net Zero Future (Dec 2020) set out the government's aims to achieve net zero across the UK by 2050. Within the White Paper, there is a keen focus on how emissions from the built environment will be tackled. As well as introducing the Future Homes Standard, with the aim of ensuring that all new-build homes are zero carbon ready, the government also set out its proposals to further improve the energy efficiency of the current building stock in the UK. The government has, since the issue of its White Paper, consulted on its proposals to tighten the current minimum standards and it is widely expected that all rented non-domestic buildings will be required to have an EPC rating of B by 2030.

This will bring a significant percentage of commercial buildings within the UK into the "sub-standard" category and has been one of the main drivers for the increased use of green clauses in leases, as landlords consider how they fund the required energy efficiency works, future proof their buildings against the likely changes and encourage tenants to take more responsibility for sustainable practices. Tenants in turn will be concerned with being fettered from carrying out certain alterations and also wary of provisions which appear to pass on the costs of MEES type works on to them.

At the same time, organisations, particularly larger organisations are more likely to have developed their own internal ESG policies and are seeking to reduce their own environmental impact. Entering into green leases not only demonstrates adherence to these policies but also supports the organisations' values and reputation. Against this background, green lease drafting has been given more prominence.

Different shades

In the UK, there is currently no legal requirement for a lease to include green provisions and therefore, there is no market standard or accepted practice around the drafting of such clauses. 

Under the Law Society Guidance issued in January 2023, solicitors are encouraged "in all appropriate cases to discuss with their clients whether to include green provisions in leases they are producing and negotiating" and to consider the availability of model green clauses. Later guidance from the Law Society around the impact of climate change issued in April this year, includes guidance to solicitors around understanding and reducing their client's climate impact. Further sector specific guidance is expected from the Law Society later this year.

There are a number of resources which are freely available and which are increasingly being adopted and adapted in letting transactions.

As far back as 2013, Building Better Buildings Partnership published its Green Lease toolkit which includes some model green lease clauses along with a set of best practice recommendations. We are expecting an updated toolkit imminently and it is anticipated that this revised guidance will help inform future market practice.   

The Model Commercial Lease has produced a schedule of sustainability provisions which can be incorporated into its suite of precedent documents and The Chancery Land Project has a raft of precedent green clauses in its toolkit which can be plugged into any number of agreements where parties are keen to adopt sustainable behaviours.   

Green lease clauses are typically identified by reference to shades of green so that a dark green clause is the most onerous, requiring a significant commitment and cost to environmental matters, whilst the lighter the green, the less onerous the clause. 

What is clear is there is no one size fits all approach. In practice, the drafting will very much be influenced by a number of commercial factors including cost, the age and type of the building, parties’ commitment to environmental issues, guided by their own internal policies and the term of the lease, for example.   

What does a green lease cover?

Whilst a green lease typically addresses the parties' commitment to improving the energy performance of a building, it can go further and include provisions around wider issues such as the metering of energy, waste and water management and carbon reduction.  

At present, the provisions generally tend to centre around the following key issues:

Data sharing – Effective data sharing is crucial for both parties to know that what they are doing is the right thing and meeting their agreed targets. The sharing of this data helps to generate KPIs and create future benchmarks.

Sustainable practices – Green leases will typically contain obligations on the landlord and tenant to adopt practices and work together to improve a building's energy efficiency. This may include more light green obligations around cooperation, sharing ideas and setting objectives.

MEES drafting – as mentioned above, compliance with MEES is a landlord obligation but there are a raft of issues which will need to be addressed to protect both parties' interests. The cost of the works will be the most obvious concern for both parties and who foots the bill is likely to be a matter for negotiation. If the works are improvement works then a tenant would usually be resistant to contributing, although there is sometimes a willingness to concede by tenants who are keen to foster best sustainable practices. Landlords may also want to ensure a tenant is prohibited from carrying out alterations that may adversely affect the building's EPC rating or oblige them to use sustainable materials when carrying out alterations. Where a lease includes a right of entry for landlords to carry out MEES works, the tenant will want to minimise disruption to the tenant's business and the landlord will need to consider the availability (or loss) of the consent exemption if the clause is widely drafted.

The courts have thus far been reluctant to impose extensive green lease provisions in a renewal lease but, given the proposed changes to the legislation, the court's position may well change on this, as these types of provisions become more prevalent.

Conclusion

The inclusion of green clauses will depend very much on the parties' appetite for sustainable provisions and how costs will be shared (if at all). Organisations will no doubt have their own clear policies and concerns around reputational damage for failing to comply with them. It is an area which is constantly developing and there is no doubt that the drafting will evolve as government policy and regulation evolves and parties become more focussed on these issues.