Nyree Applegarth, Partner and Head of Property Litigation, looks at what green leases mean to landlords and tenants
The commercial property world has – at long last - started to get to grips with green leases and ESG (environmental, social and governance).
Green leasing can cover two aspects:
A contractual obligation in a lease on the part of the landlord or tenant to improve the energy efficiency of the building.
Or
A less formal commitment documented in a memorandum of understanding that is attached to the lease.
In both instances, landlords and tenants should work together to manage and improve a building's environmental performance.
According to JLL's Decarbonising the Built Environment Report, 34% of occupiers globally already had some form of green lease obligations in place by the end of 2021 and a further 40% plan to sign up by the end of 2025.
It is likely that more regular negotiations will also take place over consent for tenant alterations that are linked to the environmental performance of proposed works, as well as more environmentally friendly reinstatement provisions and terms that deal with the increased cost of buying specifically green energy or undertaking works to improve a building's environmental performance.
New MEES (Minimum Energy Efficiency Standards) coming into effect on April 1, which will see all commercial buildings have to meet an EPC rating of E to be lawfully let. The government says it may also increase it further by insisting on a minimum rating of B by 2030, with a potential interim milestone of C by 2027.
I expect lease obligations around improving energy efficiency and a building's environmental performance to become much more prevalent in lease renewal discussions and for these issues to become more and more contentious.
It has long been the norm for lease terms to prohibit a tenant from undertaking any works that would reduce a property's EPC rating.
But over the past 12 months what was once a non-issue is now becoming problematic as more landlords and tenants seek advice over who has responsibility for paying utility charges.
Many commercial leases contain all-inclusive rents, which means a tenant pays a set amount to its landlord to cover the principle rent and the utility charges.
However, over the last 12 months, these leases have become financially unviable for landlords that are faced with huge utility costs because they are unable to pass on the cost to their tenants.
This is inevitably going to become a battleground for lease renewals.
Another issue that legal firms are seeing are lease renewal going to county court. Before 2020 it was rare for an uncontested lease renewal to go near a court, but since the pandemic, trials in these cases have become increasingly common.
There have been reported cases regarding the inclusion of pandemic clauses and turnover rents and a spike in the number of unopposed lease renewals that suddenly the courts are being asked to determine.
It is likely that green leasing provisions are going to maintain that pressure on the courts, as they become the points of contention in lease renewals, and it will be interesting to see how the courts will approach the inclusion of new green leasing provisions whilst balancing the interests of the parties and a global desire to improve energy efficiency.
Originally published 21 March 2023.
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