A green lease is a standard form lease with additional clauses included which provide for the management and improvement of the environmental performance of a building by both the landlord and the tenant. Where such provisions are incorporated into a lease, they will be legally binding, and the provisions will remain in place for the duration of the term of the lease.
Green leases are often discussed in the context of improvements to a building's energy efficiency, but they can also include the wider environmental impacts and sustainability of a building such as water management, efficiency and fittings, waste management, and recycling facilities. Introducing such clauses into a lease will impact numerous areas of the lease, including service charge provisions, consent for alterations and reinstatement of alterations at the end of the lease term.
Green leases can range from "light green" to "dark green". Light green lease clauses impose less responsibility on the parties, such as an agreement to discuss environmental matters. Dark green clauses contain more specific clauses, which are legally binding and require a more significant level of commitment on environmental issues, such as requiring the parties to meet pre-determined environmental targets.
The incorporation of green clauses are not limited to new leases. Where a lease is already in place, the parties can enter a Memorandum of Understanding ("MoU") which provides a roadmap for co-operation between the parties on improving the environmental performance of the property. An MoU can be more flexible than clauses within a lease. It is voluntary rather than legally binding. An MoU will usually not run with the lease, so the parties will need to enter into a new MoU if a new landlord, tenant, or sub-tenant comes on the scene.
There has been a general movement towards greater energy efficiency in buildings over recent years because of concerns about climate change and the significant contribution of buildings to greenhouse gas emissions. Legislation has been introduced, imposing energy efficiency requirements for both new and existing buildings. Achieving greater energy efficiency will result in lower running costs, especially when energy prices are volatile.
There are several future commercial and physical risks against which landlords and tenants may seek protection by having greener buildings and green leases to regulate occupation of those buildings. Such risks may include:
Increasingly, occupiers consider that their premises represent what their business stands for. Sound environmental, social, and governance policies are likely to contain commitments on reducing the occupier's environmental impact and carbon emissions. Entering green leases is one way in which an organisation can demonstrate to its stakeholders and employees that they are committed to environmental change.
A key barrier to the uptake of green leases revolves around the question of who should pay for any environmental improvements or work required under the green lease and why that party should be required to pay for it.
Key to the question of who should pay for environmental improvements is the difficulty of valuing the greenness of buildings. It is difficult to assess why a building has dropped (or increased) in value: is the change in value due to market conditions, or is it due to the building being unsustainable or very green.
A green lease could impose onerous and costly obligations. Tenants may fear those landlords seeking to introduce green lease provisions are just trying to pass on more costs to them.
Green leasing provides an effective framework for both landlords and tenants to work together in achieving a common objective of reducing their environmental impact and in complying with future legislative requirements. A sustainable building with lower running costs is more marketable for landlords and more cost-effective for tenants to occupy.
For more information on green leases and any other queries about commercial leases, please get in touch with a member of our Commercial Property Team below.