Why Everyone Wins From Sustainable Properties
The UK’s net zero promises have created a fast-moving landscape for the property sector.
The good news is that the introduction of green leases can help both landlords and tenants to contribute to their zero carbon and other Environmental, Social and Governance (ESG)-related goals. This is because emissions from leased premises where the tenant has the operational control form part of the carbon footprint of both the tenant and the landlord.
There is no institutionally acceptable form for a green lease. The Better Buildings Partnership (BBP) recommends that as a minimum, owners and occupiers should look to agree ways in which they will share data and co-operate on improving environmental performance at buildings.
“We think it’s important for conversations about green leases to begin at the Heads of Terms stage, and agents need to be alive to this. Landlords and tenants may have different views on what the ESG goals should be – and who will pay.”
Laura Jones – Associate, Real Estate
How businesses can respond?
- A forum for discussion helps. It can take a variety of forms depending on the size, nature and complexity of the building, says BBP. It can range from simple telephone conversations, to an agenda item on an existing occupier liaison forum or an in-person meeting of a special management group.
- Tenants matter. Every company will have its own ESG goals to bring to the table with large corporate occupier clients aiming to be carbon neutral by 2030 assisted by green clauses in leases.
- Easy wins. This can include automatic light sensors to reduce energy and associated costs, having dedicated recycling bins installed, and having provisions around REGO electricity and water supply. These are all becoming increasingly common in the market.
- Compromise. Green clauses may have to take existing lease provisions into account, for instance where light sensors conflict with a requirement for a shop front or other parts of the premises to be lit.
- Legalities. Green clauses can be incorporated into an existing lease through a variation of a lease or side letter, but that will depend entirely on the respective will and priorities of landlord and tenant.
- Early conversations. These enable the parties to better understand each other’s environmental aspirations, identify where opportunities for collaboration exist, and develop an understanding of how improvements can best be undertaken.
Net zero deadlines
Almost £2.5bn of rental income in England is generated by energy-inefficient commercial real estate in England, according to an investigation by Estates Gazette.
But the clock’s ticking. From 1 April 2023, landlords won't be able to sell, lease or continue to lease commercial buildings in the UK that don’t have an EPC rating of E or above.
It won’t stop there. There’s the proposal for the requirements to tighten to a rating for C or above by 1 April 2027 and B or above by 2030.
Business benefits
- The bottom line. Green leases will reduce emissions and improve environmental performance, with obvious cost-saving benefits.
- Feelgood factors. Greener buildings are positive for a company’s reputation both externally and internally. Enhancing the working environment can boost well-being and help staff retention and recruitment.
- Lendability. Sustainability credentials are increasingly seen as a standard characteristic of good-quality commercial space. Banks also have their own ESG goals, and may well begin to tilt lending policies in favour of long green leases.