Ahead of the game

A green lease is a standard form of commercial lease with some additional clauses that facilitate the building being used in a more environmentally efficient manner. They provide an excellent opportunity for the landlord and tenant to improve the sustainability of the property and simultaneously encourage a closer owner-occupier relationship.

At first glance, the imposition of 'green' burdens on the landlord and tenant in the fairly grim economic and property markets seems unreasonable and unattractive. However, this short-term view denies the landlord and tenant long-term benefits of green clauses as well as denying the parties the opportunity to get a head start on what may, in a few years, become mandatory environmental and property standards.

Various targets have been set by Europe and subsequently by UK legislation. The Climate Change Act 2008 sets legally binding targets for reducing greenhouse gas emissions by 34 per cent by 2020 and 80 per cent by 2050, measured against a 1990 baseline. Further legislation is expected when the European Union's Energy Performance of Buildings Directive (EPBD), which introduced the energy performance certificate,is reviewed.

The Carbon Reduction Commitment (CRC) scheme '“ a trading scheme for carbon emissions for buildings consuming greater than 6000MWh/yr through half hourly meters '“ is a good example of a progressive environmental scheme introduced as part of the government's commitment to achieve environmental targets. The CRC league tables are a mechanism through which the competitiveness between organisations is maintained and the desire not to be near the bottom of the league table motivates organisations to emit less carbon. In addition, there is a cost to organisations in having to purchase additional allowances should it exceed its allocated allowances in any given year.

Similarly, for green leases the desire to portray a better corporate social responsibility (CSR) image and achieve CSR targets will motivate organisations to agree green clauses. For instance, Marks & Spencer have introduced a 'Plan A' environmental policy with an aim of becoming the 'world's most sustainable major retailer' with plans to open a 'green' factory as part of its CSR targets. The desire for organisations to achieve targets introduced by the government is just as important as achieving targets set internally within an organisation.

Section 172 of the Companies Act 2006 provides that directors have a duty to have regard 'to the impact of the company's operations on the community and the environment'. Compliance with this duty will not only encourage public support but it will also enhance both insurers and shareholder support.

Advantages

The benefits of a green lease must exist for landlord and tenant in order for both parties to voluntarily commit. Benefits include:

• Cost savings: the initial cost of constructing or renovating a green building may be more expensive, but an energy-efficient building will safeguard the capital value of the property and will reduce the operating cost in the long term. The Australian experience shows a ten per cent increase in market value of the property and a five to ten per cent increase in market rent.
• Investment: it is likely that large institutional investors will eventually come under pressure from their own investors and the public at large to ensure they invest in more energy-efficient buildings which meet CSR commitments.
• Getting ahead of the game by preparing for and adjusting to the impact of potential future legislation.

Barriers

Some of the barriers preventing the uptake of the inclusion of green clauses are:

• Short-term leases: investing capital to improve the energy efficiency of buildings is likely to reap benefits in the long term. However, tenants on a short-term lease will not be attracted to a property which needs significant funding because they will not be around to enjoy the benefits.
• Difficulty in incorporating improvements in existing leases or on a renewal of a lease. The landlord may have a greater bargaining power if the tenant has been occupying and running a business from the same property for years.
• Breaches: it may be disproportionate to impose forfeiture penalties for a breach of a green clause. It may be the case that a green lease has to provide for separate, more appropriate, penalties on breaches of green clauses. This can become convoluted!
• There is an inert conservatism within the property industry to voluntarily embrace this relatively new development, partly because of the perception of the upfront costs involved and partly because of the lack of expertise and knowledge of the subject.

These barriers are easily overcome through the process of negotiation. The obligations imposed on each party by entering a green lease can be as stringent or as lax as the parties' desire. Agreements can vary on a scale starting at a voluntary and flexible agreement through to a legally binding management agreement with financial penalties.

Different shades of green

A 'one size fits all' green lease would be impractical. Therefore, the parties have the option of applying different shades of 'green' to determine the strength of the green clause according to their specific circumstances:

• A light-green lease will consist of cooperation between landlord and tenant. It will not contain legally binding commitments but it will simply encourage a more sustainable operation of the building.
• A mid-green lease may involve some commitments; however, failure to action these will not constitute a breach.
• A dark-green lease would include obligations to reach defined targets and may impose penalties for any breach.

As a matter of practicality, the parties should initially test the waters by adopting a 'light-green' approach with the green clauses set out not in the lease itself but in a memorandum of understanding (MoU). The MoU will not alter the existing terms of the lease '“ therefore a MoU will be suitable for lease renewals '“ and will enable the parties to voluntarily agree energy-efficient targets through a formal mechanism which does not have to be legally binding. For instance, a joint strategy can be agreed on waste management that includes recycling targets and periodic reviews. If the parties wish to ensure continuity, the obligations in the MoU should be binding on successors in title.

As the concept of green leases becomes increasingly adopted and familiar in the market, the parties can enter a formal binding contract by way of a management agreement. Using the waste management example again, the parties can agree a more stringent burden such as working with suppliers and contractors to ensure packaging and delivery to the property is kept to a minimum. A building committee can also be established to share initiatives on waste and energy reduction between owners and multiple occupiers.

The green lease itself lies at the peak of the spectrum where the parties will incorporate the green clauses within the legally binding lease itself. The clauses themselves can be of different shades of green and the parties can negotiate this when finalising the heads of terms. When advising clients instructions should be sought on the penalties, if any, that the parties wish to impose in the event of a breach of a green clause incorporated within the lease.

The parties may wish to incorporate financial penalties in the lease. Alternatively, the parties could agree to settle a breach of green clauses via a dispute resolution process.

The green lease toolkit

The Better Buildings Partnership (BBP),a collaboration of London's leading commercial property owners, published a green lease toolkit which sets out guidelines for owners and occupiers based on the Australian green lease model.

The guidelines are a useful insight into the core elements of a successful green lease: data sharing and cooperation between the landlord and tenant. This can be achieved in several ways:

• Setting up a building management committee: this is a particularly useful means of management for properties in multiple occupations as it would encourage communication between the landlord and all tenants regarding the management of environmental aspects of the property and the sharing of best practice. The committee would include managing agents and occupier representatives.
• Audits: audits need to take place on a regular basis and at least once a year. Various environmental factors can be audited, such as waste management and energy consumption. This data should then be shared between the landlord and tenant so progress can be recorded and monitored.
• Cooperation on strategies: reasonable cooperation is needed between the parties in order to achieve joint targets and maximise the benefits of a green lease.

The adoption of a green lease will require willingness within the property sector to adopt an environmentally friendly attitude to business and the realisation that over time there will be mutual benefits for landlords, tenants and the public at large.

This is already recognised by some of the largest retailers in the country such as Hitachi and Marks & Spencer. M&S' chairman, Sir Stuart Rose, states that sustainability is 'not just the right thing to do morally, but also makes strong commercial sense'.

The sooner this is recognised by those involved in completing a lease the sooner we will be on our way to a more sustainable and environmentally friendly property market.

Copyright & permissions