Green leases – time to take notice
Green leases were much heralded a few years ago as the property industry’s answer to environmental concerns.
However, the reality is that for a lot of landlords and tenants, the ‘green lease’ concept has been ignored as a trendy label that has no relevance to them. Many would be hard pressed to even describe what a green lease is, other than potentially requiring them to spend lots of money!
A ‘green lease’ is simply a general term used to refer to provisions contained within a lease or associated documents that encourage or require the landlord and the tenant to reduce the environmental impact of the property. The provisions do not need to sit within the lease itself; where they have been used in practice, they are commonly set out in a memorandum of understanding between the parties.
The provisions are most often discussed in the context of improving a building’s efficiency, and it is becoming common for leases to include provisions dealing with energy performance certificates, and also allowing the landlord to refuse consent to alterations which might reduce the energy efficiency rating of the building.
However, the provisions can go far beyond energy efficiency and deal with wider sustainability issues such as water management, waste management, use of sustainable materials for any alterations or building projects and repairs, and green transport scheme provisions at the building.
Sometimes these provisions will be collaborative arrangements that are not legally binding between the parties; in other leases a significant level of legally binding contribution will be required from both landlord and tenant. Historically, stronger obligations have been included in leases of new environmentally efficient buildings rather than older building stock. In the future, as more legislation is imposed requiring existing building stock to be improved, there will be no choice but to impose specific obligations on each party in the lease.
A recent review by the Better Buildings Partnership Working Group considered the uptake of green leases in the UK and discovered, not surprisingly, that uptake was not as good as might have been hoped. The main barriers to green leases include a perception of increased costs (and who should be responsible for paying those), whether there is any value in carrying out ‘green’ improvements (eg in the context of achieving a better market valuation of the property) and a lack of general understanding as to how green lease provisions could be incorporated in practice. There is a general fear that a green lease could impose onerous and costly obligations which tenants, in particular, fear that they would have to meet. It is worth noting that this need not be the case. Green policies (such as changing light bulbs to a more energy efficient model, turning off non-essential lighting when the property is unoccupied and not doing anything which might prejudice the energy performance of the premises) set out in a non-legally binding memorandum of understanding, can be a good starting point.
It is becoming more apparent that energy efficiency and sustainability issues are not going to go away.The property industry is therefore going to have to take green leases far more seriously, otherwise the government is likely to legislate.
As always, if you need commercial and pragmatic property advice, we’re here to help so please get in touch.