Green Leases are not new, but they are entering into a new generation and stepping into the spotlight as investors, occupiers and funders seek to meet ESG targets and, ultimately, drive real change in the property industry. To shine a light in more detail on these leases, we provide a handy FAQ guide.
What is a green lease?
A Green Lease is a lease which seeks to impose duties and obligations relating to a building’s sustainability on the parties to the lease and respond to tenant and investor demands for sustainable buildings. They are generally designed to encourage mutually beneficial behaviours in landlords and tenants of buildings.
There is no hard and fast definition of a green lease and the label can be misleading. Put simply, a lease can be described as a ‘green lease’ if it includes ‘green clauses’.
Green clauses are provisions within the lease which encourage landlords and/or tenants into environmentally friendly practices with the aim of improving the environmental impact of the building or meeting legal standards.
The extent of green clauses can differ greatly from one lease to another. The clauses vary from ‘light green’, being less onerous clauses which generally seek cooperation between the parties, and usually go no further than a statement of intent rather than a binding obligation, to ‘dark green’, which create legally binding obligations often requiring one or more of the parties to incur substantial costs in order to comply.
Is a green lease a legal requirement?
No, a green lease is not currently a legal requirement in England and Wales. However, there may be other factors which require green provisions in leases such as planning policies relating to the specific building or development, and the Minimum Energy Efficiency Standards Regulations 2016 (‘MEES Regulations’), which apply to commercial and industrial buildings in England and Wales.
Subject to certain exceptions, the MEES Regulations currently require a building to have an Energy Performance Certificate rating of ‘E’ or better before it can be legally let. The MEES Regulations place this obligation on the landlord rather than the tenant but tenants should be alert to the risk of the resulting expenses being passed onto them in their service charge. You can read more about the MEES Regulations in our article published last year, here.
Who benefits most from a green lease?
This is dependent on the drafting of the specific green lease. Often the clauses are led by investor or lender requirements and this can come from both landlords and tenants. More often we see green leases being driven by landlords, but we have also experienced tenants (particularly where they have their own ESG targets) negotiating green lease provisions in order to satisfy their internal board, and external investor and client requirements.
As more companies seek to become B-Corps we are likely to see a swing of the pendulum towards more tenant-driven green lease requirements.
In a subsequent article we will discuss some green lease provisions and what to be wary of from a tenant’s perspective.
Why should I consider entering into a green lease?
A green lease can future-proof against upcoming environmental legislation and issues, preventing challenges further down the line.
They can also support internal ESG commitments, values and sustainability goals, as well as external commitments with stakeholders.
Whilst they can also serve to reduce future environmental related costs for tenants, they do often require up-front costs which, if not footed by the landlord, may not be appealing or viable for tenants, particularly those with shorter term leases.
Can I push back on green lease clauses if my landlord is insisting on it?
A landlord cannot change the terms of a lease once it has been completed but if you are negotiating a new lease (including a renewal), resisting these clauses can be challenging and will depend on your bargaining power in the circumstances. Tenants should seek early professional advice when discussing the commercial terms of their lease, and when negotiating the finer detail of any green provisions in the lease itself.
A landlord insisting on green leases might be bound by planning requirements or requirements of their facility agreement with their lender, which may make it more difficult for tenants to negotiate against.
Can I insist on green lease provisions if my landlord does not wish to include any?
We encourage an open conversation around green leases and often a satisfactory outcome can be reached. Again, the bargaining strength of the parties will factor here as there are no statutory provisions enabling tenants to force their landlord’s hand. The larger institutional landlords will be more difficult to sway but they will of course have reputational factors to consider. We can support meaningful discussions between landlords and tenants with regard to including green clauses in their leases.
My lease seems to have a few ‘green-ish’ provisions in it. Can I label it a green lease?
The descriptor ‘green’ should be used with caution in light of greenwashing concerns which impact many industries. Regulators, including the Competition and Markets Authority, and other sector-specific regulators, have recently shifted their focus to clamp down on any claims that are perceived as greenwashing.
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