Green Lease Provisions: Landlord vs Tenant or Landlord & Tenant
The Minimum Energy Efficiency Standards (MEES) have obliged developers, landlords and occupiers to focus on energy performance. The tricky part is working out who will be responsible for improving the property, meeting the targets and ultimately, who pays for it.
One way of ensuring compliance and avoiding disputes is through the introduction of green lease provisions to new and existing leases.
The purpose of including green provisions within a lease is to enable landlord and tenant to work more collaboratively, clearly identifying the roles and responsibilities of each in relation to compliance with the MEES, ESG targets and reducing carbon emissions arising from the operation and occupation of a building.
Green provisions are not limited to new leases. Where a lease is already in place, the parties can enter into a Memorandum of Understanding (MoU) which can provide a roadmap for co-operation to improve environmental performance.
To date, many green provisions in leases have been limited to aspirational provisions, with nothing binding on the landlord or the tenant. However, stronger provisions are becoming more common, influenced by the resources and ESG policy agendas of both landlords and the tenants.
What are green provisions?
Green provisions can include, but are not limited to, the following:
The requirement for a tenant to provide an annual environmental management plan which charts what is required to achieve and deliver net zero within a certain timeframe. This may be introduced where a landlord has made a net zero commitment or wants to look to improve their estate year on year.
The encouragement of circular economy principles - a requirement for both landlord and tenant to consider reclaimed, re-used or recycled goods or materials for alterations or refurbishment.
A requirement for the landlord to act reasonably and permit energy efficient alterations during a tenancy if a tenant proposes alterations.
The potential for rent incentives if the tenant upholds green household management practices.
A provision that allows the landlord to invest in renewable energy and install it within the demise during the term. This may be particularly relevant within a multi-let office building.
A provision permitting the landlord to recover the cost of improving the environmental performance of a building through the service charge, even when not required to improve by statute.
A requirement on the tenant to protect and uphold high levels of energy performance obtained by the landlord. This is in relation to a tenant’s fit-out or a request to alter the premises. The provision must restrict the tenant from stripping out/ removing the good work of the landlord and reducing energy performance.
A requirement that requires the tenant to uphold the energy efficiency levels within a building.
A requirement that following any tenant works, if applicable a new EPC is commissioned.
A provision which allows a sensible approach to be taken in relation to a tenant obligation to reinstate a property at the end of the term. The landlord may want the ability to insist that certain alterations that enhance the energy performance of the building remain in place at the end of the term.
A tenant may want to protect themselves against the need to decorate at the end of the term if it is likely that the landlord will need to carry out extensive works in relation to energy performance at the end of the term in order to legal re-let.
A landlord may want to reserve the right to access the building to do works in order to ensure compliance with future policy. This may be accompanied with the right to do works in order to obtain or maintain an EPC rating.
A requirement on the tenant to provide data showing utility readings/ usage.
A requirement on the tenant to include within their operation a waste reduction and recycling plan or policy. Similarly in a multi-let building, a tenant may require this of the landlord.
A requirement on the landlord or tenant to monitor good practice in relation to water efficiency within the building.
Specific requirements on landlord or tenant to comply with certain environmental standards, or achieve certain targets, accreditations or certificates that go above and beyond current regulatory requirements.
Why would a tenant be interested in green provisions?
The key drivers as to why a tenant would want to entertain some of these provisions are:
To achieve utility cost savings
To benefit from enhanced workplace wellbeing which helps to retain and attract talent by showing a commitment to sustainable practices
To meet ESG policy and comply with MEES
To enable forward planning for sustainable changes in the workplace, rather than having to react to external pressure
To benefit from a clear exit strategy in terms of dilapidations or reinstatement
To avoid costly and lengthy landlord and tenant disputes
Why would a landlord be interested in green provisions?
The key drivers for a landlord are:
To address investor, regulatory and lender concerns in relation to energy performance and ease environmental reporting
To meet increasing tenant demand for sustainable buildings
To improve or protect capital value and future rental value
To benefit from green loan finance and improved interest rates made available for efficient buildings with the right credentials
To avoid costly and lengthy landlord and tenant disputes
As we work toward net zero by 2050 - London by 2030 - the research indicates that 80% of buildings that will exist in 2050 have already been built, which emphasises why it is so important to get this right now and start improving the current building stock.
The introduction of green provisions to any lease are an excellent mechanism to bring transparency and alignment between landlord and tenant, as well as making buildings as sustainable as possible. The green provisions will continue to evolve and will embed themselves within everyday leases as health, wellbeing and biodiversity become a larger part of the landlord and tenant lease negotiations. The sooner we embrace them the better.
Do seek independent legal advice in regard to green provisions within leases. The information within this blog provides insight into some of the current topical issues surrounding green leases and energy performance, however, should not be relied upon and does not constitute legal or valuation advice in any way.
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