In our second of a series of three articles about green leases, we look at the key considerations for tenants negotiating ‘green’ clauses in leases.

As discussed in our first article (Green Lease FAQs), green leases contain contractual provisions designed to promote environmentally responsible practices for both landlord and tenants, and in turn seek to enhance the energy efficiency of buildings.

Green clauses are adaptable and can be used to solidify a broad range of sustainability commitments, from a building’s energy consumption to the materials used for fitting-out.

The Code for Leasing Business Premises (issued by the Royal Institution of Chartered Surveyors) encourages parties to include provisions relating to sustainability and the environment in their leases in order to urge cooperation between the landlord and tenant throughout the term of the lease.

These ‘green’ provisions will range from ‘light green’ clauses which encourage parties to adhere to non-binding principles and are largely aspirational in nature, to ‘dark green’ provisions which will be more specific, place a greater onus on one or both parties, and tend to be legally binding.  Most modern leases have a blend of these provisions. We discuss some common clauses below.  

  • Waste Management Policies: Green leases often include provisions outlining waste reduction and recycling strategies, encouraging tenants to minimise waste generation and adopt environmentally friendly practices for waste disposal. These tend to be easier to comply with and would generally be in the ‘light green’ category.
  • Reporting and Performance Monitoring: Green leases typically include data sharing clauses for monitoring and reporting on environmental performance, allowing both landlords and tenants to track progress towards sustainability targets and identify areas for improvement. This can be a useful tool in measuring progress towards any sustainability targets, but tenants should be careful to ensure that they have the means to collate and share their data and they should also consider the cost to them of doing so. Ideally, for a tenant, this will be drafted as a ‘light green’ clause without any penalty if they are unable to comply. The parties should also consider confidentiality provisions if there is a concern about data being shared.
  • Energy Efficiency Measures: These ‘darker green’ clauses may require landlords or tenants to implement energy-saving initiatives such as installing energy-efficient lighting, heating, ventilation, and air conditioning systems. The aim will be to reduce energy consumption and operating costs and procure renewable energy sources where economically viable. This can lead to significant long-term savings for both landlords and tenants but the upfront costs associated with implementing sustainability measures can be off putting. The potential benefit for occupiers will be evaluated in the context of the length of their tenancy, and, ultimately, who will pay for the measures; what initially appears to be a landlord cost may eventually be charged back to the tenant via the service charge. Occupiers should seek advice before entering into the lease so they are aware of the wider implications of what is being agreed.
  • Social Impact: Green clauses can be broadened to provide for sustainable business practices or workplace employment initiatives. Tenants occupying environmentally friendly buildings often experience improved indoor air quality, comfort and productivity, leading to higher levels of employee satisfaction and retention. In the office sector, landlords are finding it increasingly necessary to focus on wellbeing initiatives to attract occupiers. There is a definite trend towards demand for quality end-of-trip facilities (such as showers and cycle parking) and improved employee satisfaction to encourage staff to choose ‘WFO’ rather than ‘WFH’. Of course, this will come at a cost to the tenant when negotiating the rent.
  • Use of Sustainable Materials: During construction and fitting out works, the parties may agree provisions to ensure the building’s environmental performance is maintained or enhanced by assessing and minimising the carbon impact of construction activities, including the use of Whole Life Carbon analysis in the design, procurement and construction stages of the works.
  • Achieving Minimum Certifications*: There are numerous industry certifications that buildings can acquire, and leases may include positive measures to achieve, or measures not to prevent the achievement of, target certifications such as BREEAM Excellent or Outstanding, WELL Certification of Gold or Platinum, NABERS UK star rating of Excellent or Market Leading, achieving a SmartScore certified building or being ISO14001 and ISO50001 accredited. These may, in part, be guided by planning requirements, particularly where the premises are within a newly developed building.
  • Energy Performance Certificates (EPCs): The Minimum Energy Efficiency Standards (MEES) Regulations introduced a minimum EPC rating requirement for most new commercial leases on 1 April 2023 (for more information, see our MEES article here). Since then, the negotiation of lease clauses around obtaining and maintaining EPC certificates has become much more complex and these clauses are generally towards the dark green end of the scale. Lease provisions tend to focus on works carried out at the premises and their impact on the EPC rating of the property. For a well-positioned tenant however, they can go so far as enabling a tenant to terminate the lease if they want to dispose of the property and are legally prohibited from doing so because the EPC rating does not meet the MEES requirements. The future timeline for the MEES regulations and minimum EPC requirements is uncertain but what we do know is that there is only one trajectory, and that is towards more stringent regulations requiring buildings to perform better in their energy emissions. As with many of the points discussed here, the key issue at lease negotiation stage will be who bears the cost of attaining the regulatory requirements. Claims that the improvements will be to the betterment of the landlord’s asset value will be pitched against the tenant’s reduced running costs.

In summary, while green lease clauses are often seen as being landlord driven, with high costs consequences for tenants, occupiers with their own ESG related targets are increasingly looking to incorporate these terms into their leases with a view to achieving and maintaining sustainability within their premises. In each case, both parties should consider including green clauses to improve the sustainability of the building they manage or occupy.  

In our third and final article in this series, we will discuss the impact of green provisions on the more standard lease clauses such as rent review, alterations and service charges. 

*Links to various certification sites are for information only. Fox Williams does not verify and is not affiliated with any provider or website.


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