Commercial leases – going green?

Sustainability is rising up the agenda for many in the food and drink sector and the industry is making great strides in adopting schemes to address environmental, social and economic sustainability to drive sustainable supply chains.

The Food and Drink Federation recently said that they and their members are fully committed to cutting CO2 emissions, promoting efficient water use, building a more circular economy for packaging, embedding environmental standards in transport practices and reducing food waste. They also wish to increase understanding of sustainable supply chains and natural capital.

In relation to property, businesses are seeking to address their sustainability goals by requiring more energy efficient buildings and the use of green leases.

What is a green lease?

A green lease usually means a lease in which the landlord and tenant include provisions reflecting their joint objective to minimise the environmental impact of the premises. They incorporate clauses whereby the owner and occupier undertake specific responsibilities and obligations regarding the sustainable operation and occupation of a property. Thinking about a green lease as a specific type of document or as an industry standard is misleading, and green lease provisions do not even need to be in a lease. It may be more helpful to think about a series of green commitments, to improve the sustainability of a building. In the UK, there is currently no statutory requirement for green leases to be used, and these provisions have generally been developed from the private sector.

Green leases are often discussed in the context of improvements to a building's energy efficiency, but they can also include the wider environmental impacts and sustainability of a building such as water management, water use, efficiency and fittings, waste management, minimising waste, and recycling facilities. Introducing such clauses will impact numerous areas of the lease, including service charge provisions, consent for alterations and reinstatement at the end of the term. Green leases are often divided into "light green", "medium green" and "dark green" to reflect the different types of provisions that may be used, whether they are legally binding, and the extent of the burden they place on the parties.

Many believe green leases are only appropriate for new buildings designed with sustainability in mind. However, a green lease may have an even more important role to play in older buildings – allowing the building to be occupied and managed in a more environmentally-friendly way, reducing the building's environmental footprint.

Why go “green”?

There are numerous reasons as to why landlords and tenants may want a green lease, including:

Energy efficiency

Concerns about climate change and the significant contribution of buildings to greenhouse gas emissions has led to a move towards greater energy efficiency in buildings, and several pieces of legislation have been introduced imposing energy efficiency requirements for both new and existing buildings. Achieving greater energy efficiency will result in lower running costs, especially when energy prices are volatile.

Future-proofing

Landlords and tenants may both seek protection against future commercial and physical risks by having greener buildings and green leases to regulate occupation of those buildings. Such risks may include volatile energy prices and supply, shortage of water supply and landfill space; and the direct physical impact of climate change on buildings – buildings must be able to cope with possible extreme weather events.

ESG policies

Increasingly, occupiers consider that their premises represent what their business stands for, both to employees and the world at large. Having sound environmental, social and governance policies helps with recruitment and retention, especially for the younger workforce where climate change is of such importance. Entering green leases is one way in which an organisation can demonstrate to its stakeholders and employees that they are committed to environmental change.

Barriers to green leases

Landlords and tenants may be hesitant to agree a green lease for a number of reasons:

Costs 

Who will pay for any environmental improvements or works required under the green lease and why? Often, leases are drafted in a way that the cost of improvements is borne by the landlord, but a landlord may wish to share costs where the tenant will benefit from lower utility bills. A greener building will benefit the landlord if the building increases in value.

Time

A tenant taking a new lease will not wish to incur capital expenditure on environmental improvements which have a long payback period, and which may not produce costs savings until after the end of the lease term (particularly if they do not anticipate renewing). Common green wording involves the parties agreeing to engage with each other to agree environmental targets and strategies in relation to energy use, water consumption and waste management and use reasonable endeavours to achieve these targets – this requires both parties committing time (and energy!) to set and achieve targets when this might not be high on the priority list.

Understanding

A green lease could impose time-consuming and costly obligations, and tenants may fear that landlords seeking to introduce green lease provisions are doing so to simply increase their costs. Therefore, a good understanding between the parties of what a green lease is trying to achieve is important.

Going “green” in the food & drink sector

Since 2013, Marks & Spencer has incorporated new green clauses to its existing property leases, to help landlords improve their environmental performance. Their policy is part of an agreement with members of the UK’s ‘Better Buildings Partnership’, which is a collaboration of major landlords working towards improved sustainability in their commercial building stock. This means that M&S stores and landlords will share waste information and data on gas, electricity, and water consumption in respect to M&S occupied buildings.

In summary

Owners and occupiers of buildings are increasingly looking at ways to reduce energy consumption and become more sustainable, but it can often be a difficult issue particularly for older buildings. It is hoped that as green leases become more popular this will change, and they will provide the framework for landlords and tenants to work together for their mutual benefit – property with a reduced environmental impact and lower costs is more marketable for landlords and more cost effective for tenants to occupy.

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