The phrase ‘green lease’ is often used as a general term to refer to several different types of document or clause, covering different types of environmental obligations.
Essentially, a green lease is a series of provisions within, or associated with, a commercial property lease, that encourage or require the landlord and tenant to reduce the environmental impact of the premises. Accordingly, it would be inaccurate to think of a green lease as a specific type of document or as an industry standard.
Carbon footprint or environmental footprint?
Green Leases are often discussed in the context of improvement to a building’s energy efficiency. This is because reducing greenhouse gas (GHG) emissions in order to combat climate change is a high priority for the UK both at the international and national level.
However, green leases can go far beyond energy efficiency to include the wider environmental impacts and sustainability of a building, including:
- Water management
- Waste management
- Sustainable materials for reparations and alterations
- Green transport
Altering the landlord and tenant relationship
Traditionally, the structure of a lease requires the landlord and the tenant to comply with different obligations. The tenant pays the rent and service charge and complies with its obligations relating to its occupation of the building. The landlord complies with obligations relating to the services of the building and grants the tenant ‘quiet enjoyment’.
However, where a landlord and tenant want to add green lease provisions to their lease arrangements, they will have a new, joint objective to minimise the environmental impact of the premises. This shared focus will require a collaborative approach, in which communication, education and co-operation are key.
Reasons for green leases
There are a number of reasons why landlords and tenants may want to enter into a green lease. These include the following:
- To achieve greater energy efficiency
- To provide some protection from future commercial or physical risks
- To comply with corporate social responsibility (CSR) policies
- To comply with statutory requirements to report on environmental issues
- To comply with the government’s public procurement requirements
The key difficulty revolves around the question of who should pay for any environmental improvements or work required under the green lease, and why they should be required to pay for it. This is a particular issue in a difficult economic climate where budgets and staff are limited and may not stretch to include sustainability issues.
Most commercial leases are drafted so that the cost of improvements is borne by the landlord and cannot be charged to occupational tenants through the service charge. A landlord may not wish to invest its money in new energy efficiency or water efficiency technologies where the tenant will be the one to benefit from lower energy or water bills (this is sometimes known as the “split incentives” problem). The building would be greener, but that will only benefit the landlord financially if the building therefore increases in value. Before the credit crunch, some commentators envisaged that a two-tier market could develop, with green buildings being sought out at a premium, and less green buildings being less marketable. Will the landlord be able to ask for a higher rent on a new lease of a greener building, or at rent review following a green improvement to a less green building?
Similarly, a tenant taking a new lease is unlikely to want to incur capital expenditure on environmental improvements with a long payback period, which may not produce costs savings until after the end of the lease. Landlords may seek to incentivise tenants to make environmental improvements by offering financial rewards for achieving energy or water efficiency, but this does not sit comfortably in a standard institutional lease, and it is also unlikely that the tenant will plough the financial incentive into further environmental improvements.
Therefore, the costs issue remains problematic. One approach is to introduce only green lease obligations that will incur little or no cost, and to concentrate initially on education, changing tenant behaviour, and building a co-operative relationship into which more expensive initiatives can be introduced at a later date. To date, this has been the approach that has won most support from both landlords and tenants.
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