Green Leases

A green lease is a standard lease which contains additional clauses to provide for the management and improvement of the environmental performance of a building. The terms are set at the beginning of the tenancy and are legally binding for the term of the lease.

In some circumstances where a lease is already in place, parties may choose to adopt a Memorandum of Understanding to effectively update the existing lease with similar objectives to a green lease. This is not legally binding and can be amended and refined during the tenancy. Its life is not tied to the lease period and as such it provides a faster route to agreement and is often a preferred approach.

Green leases came about during the recession partly because of the additional pressure to reduce costs and also in response to increasingly stringent policy. Legislation such as CRC and EPC, alongside directors’ duties under the Companies Act 2006 regarding community and the environment, meant that there was pressure on both landlords and tenants to work together.

Today the value of environmental savings is more established, with landlords understanding the link between capital value/rent and green credentials; and tenant/occupiers realising workplace productivity. Dilapidations liability, customer satisfaction, reputational benefits and reacting to the attitudes of high calibre ‘generation Y’ staff are a range of other reasons for the take-up of green leases.

Although most common in relation to ‘trophy assets’, the popularity of green leases is increasing. In the last year major companies adopted a green leases policy – M&S, British Land and Land Securities among them. Increasingly, documents such as green fit-out guides stipulate mandatory BREEAM ratings and minimum EPC ratings are also common practice. It is likely that, at some point in the not-to-distant future, the Government will demand green leases of all property owners.
To be effective, a green lease or Memorandum of Understanding needs to be more than just platitudes, but contain practical measures to make the commercial property more sustainable. It also needs to overcome the inherent division of responsibility and diverse incentives associated with a traditional lease.

A typical green lease will feature:

Cooperation – a mechanism for sharing of data, including a forum for discussion, agreement, and communication to those involved including staff training
Energy metering – provision for audits and management along with a maintenance programme and plans for improvements e.g. lighting systems and low carbon technologies
Water and waste management including recycling plans
Implementation plans for any works undertaken and consideration of any reinstatement provisions where ‘improvements’ might be beneficial
Staff involvement such as green transport plans and creation of bio-diversity areas
Financial arrangements – principles should be set for each scenario having regard for the level of investment, payback, service charge and rent review provisions.

While green leases are undoubtedly increasing in popularity, challenges remain. In commercial property, the objectives of the landlord/owner and tenant/occupier have not always been wholly aligned: their overall perspective in terms of timescale for the life of the building and the lease will differ, and as such the payback period associated with any improvements. This institutional relationship can be adversarial, and so as with any joint initiative it will take time to build trust. Similarly where leases already exist it can take some time (and money) to agree any amendments to an existing legal document.
There are already examples of significant benefits but green leases are still seen by some as contentious and there is a reluctance to embrace them fully.

Indeed we have experience of solicitors deleting clauses from draft leases even though both the landlord and the tenant have signed up to the general ethos conveyed by those terms. Similarly, developers hesitate to accept planning conditions for fear that the additional constraints will deter prospective tenants or purchasers. There is clearly a need for more education about green leases in the property industry.
But rewards are clearly evident. And as energy costs and legislative requirements continue to rise, so too will the appeal of green leases.

Article by..Chris Richards (Senior Director in CBRE’s Building Consultancy division)