The decarbonisation of buildings is essential if the UK is to meet its 2050 Net Zero target – with figures from the Department for Business and Industrial Strategy putting emissions from buildings at 30% of the total UK emissions.
Against this backdrop, and in the context of clients setting their own net zero goals and wider ESG drivers, we are increasingly seeing landlords and tenants seeking provisions in leases that reduce the environmental impact of the premises. For our institutional investor clients in particular, focus is moving to the impact on investment of inefficient buildings – and how such issues may be able to be addressed or mitigated in their lease arrangements.
The term "green lease" is used to describe commercial leases that include provisions to encourage, incentivise or require the landlord and the tenant to improve the energy efficiency of a property and reduce its environmental impact.
The concept is not new – the first suite of UK commercially focused green lease clauses were published in 2013 by the Better Buildings Partnership (BBP) and was designed to foster a collaborative approach between owners and occupiers to reduce the environmental impact of their use and occupation of buildings. More recently, The Chancery Lane Project (TCLP) has taken the approach to green lease drafting further and published a suite of clauses (as part of its Net Zero Toolkit) to help address climate change.
As a firm, we are proactively adapting and incorporating elements of TCLP drafting into our documents to build on our existing green lease drafting and in order to meet clients' needs. Our top 3 TCLP "green lease" provisions are:
- Aatmay's clause picks up a recurring theme from the BBP toolkit and the RICS' guidance that there should not be automatic reinstatement of tenant alterations. That addresses the concern that standard lease provisions require tenants to remove all of their fit-out even where it does not have an adverse impact on landlords and where it is in working order. Aatmay's clause provides a framework to allow landlords and tenants to minimise waste and to re-use materials as part of their alterations, repair and yielding up obligations. This wording can be incorporated into leases to a greater or lesser extent – for example, if required further amendments could be made to allow the landlord greater control over the circumstances when full reinstatement should be required. This shift in approach to yielding up potentially has cost savings for both landlords and tenants and a significant impact on the carbon footprint of the building.
- Rosie's clause goes further to provide that the tenant may (with the Landlord's consent) carry out works to the premises which will improve the environmental performance of the premises, the building, or the wider estate. There is a corresponding clause that provides the tenant will not be required to remove the relevant improvement unless the landlord requires the tenant to do so. The landlord can refuse consent to such alterations if the landlord reasonably considers that the works would have a detrimental impact on the reversionary interest. This provision follows the path that BBP started, which is to encourage a collaborative approach between landlord and tenant to reduce the environmental impact of the building. In our view, it is sufficiently widely drafted to include in leases without specific environmental improvement works in mind at the outset – providing flexibility for the future.
- Hannah's clause comprises 'green' service charge wording enabling a landlord to provide and charge for services linked to the improvement of the environmental performance of the building. This includes some specific suggestions - the introduction of energy efficient lighting, biodiversity to communal gardens and facilities to capture and recycle rainwater – and provisions to enable the landlord to perform any such services in such a manner or by such methods as are reasonably required to improve environmental performance (as defined) or to avoid adverse impact on the environmental performance of the property. These provisions provide a comprehensive starting point to future proof leases to address compliance with environmental legislation and enable the provision of services that are likely to become increasingly valuable to tenants in the future.
Overall, there is no "one size fits all" approach to green leases and net zero drafting, and all landlords need to develop wording that meets their goals and achieves the particular "shade of green" which is commercially acceptable to them and their tenants. Green lease clauses based on TCLP drafting are likely to be increasingly used going forward and landlords who have not yet considered them in any detail are soon likely to find themselves lagging behind their competitors.
Next in this series, we look at climate related financial disclosures and how Anna's clause can assist in navigating these evolving requirements.
