11 March 2009

Green Leases

The Government pledged to cut UK emissions by 80% by 2050 and the recent announcement saw the government set a milestone of reducing carbon emissions by 1/3 by 2020.

Energy Performance Certificates (EPCs) have been compulsory since 1st October 2008 but currently they do not serve a great purpose other than they are a legal requirement; another box to tick. There are no obligations on landlords or tenants to increase the efficiency rating of a property during their occupancy or ownership or to be environmentally friendly by using sustainable materials or measuring and taking steps to reducing energy outputs.

With the introduction of EPCs and the Government’s intention to drive their green policies, landlords and tenants are to come under more and more pressure to cut energy and fuel consumption and to improve the energy performance of their commercial premises, hence the growth of “Green Leases”.

Green Leases are very much in their infancy but they will become increasingly popular with landlords and tenants who want to stay ahead of the game and the “green” stamp of approval. It is also likely that in the near future Green Leases will be common place in the commercial property world so, to an extent, you can act now in order to future proof your lease.

What is a Green Lease?

A Green Lease does not have to differ a great deal from the industry standard lease. You are not yet likely to see strict targets for reducing emissions and energy consumption. What you can expect to see are extra clauses which, if carefully worded, are not too onerous on either party and essential if landlords and tenants are to work together in order to reduce emissions and energy consumption. Examples of what you can expect to see are as follows:

  • The tenant must co-operate with the landlords energy saving initiatives.
  • The tenant must provide information on energy and water consumption and waste management as required by the landlord .
  • The landlord is entitled to install the necessary metering equipment and energy saving devices.
  • Both parties will do nothing which may harm the energy performance rating of the building.
  • The tenant is to use sustainable materials when carrying out repairs and other works.

Why should I consider using a Green Lease?

There are a number of factors driving the introduction of Green Leases:

  • Developers are coming under increasing pressure to build energy efficient buildings and the use of a Green Lease may help them attract green tenants and sustain or even improve the energy rating of the buildings.
  • The introduction of EPCs will put growing pressure on landlords and tenants to increase the energy rating of their property throughout the duration of ownership and occupation.
  • Pension funds that are frequently commercial property landlords on behalf of their members have duties to their beneficiaries to be involved in green policies and issues concerning sustainability.
  • Under the new Companies Act, Company Directors have a duty to pay particular regard to the impact of the company’s operations on the community and environment.
  • The commercial property industry is trying to anticipate future legislation and stay ahead of the game.

What are the practical implications?

Whilst the intentions of the Green Leases are clearly virtuous, the additional obligations may have some consequences.

From the landlord’s point of view, if the green clauses are deemed too onerous, they may affect future rent reviews and may also put off potential tenants who have not yet signed up to the “green” way of thinking.

From the tenant’s perspective, the additional costs of taking on a Green Lease may not be apparent until years into the lease. There may be the obligation to use sustainable materials for repairs which are likely to be more expensive than readily available materials and the cost of the landlord installing meters in order to measure energy usage may be clawed back through any service charges.

What matters should I consider?

With early consideration and consultation with all parties involved and with careful drafting it is possible, to an extent, to mitigate any adverse implications by not making the obligations too onerous. Amongst other considerations, you should consider the following;

  • Who will be liable for any costs involved in increasing the energy rating of the building?
  • Will costs be shared or will the landlord recover any costs for any improvements via the service charges?
  • Will you be subject to any energy saving targets or benchmarks?
  • Do you have to use sustainable materials for any repairs even though the cost of doing so may be significantly more than if you used standard materials?

Light or Dark?

It is clear that certain green clauses may not be suitable for all situations. For example old outdated buildings and brand new developments will have totally different energy ratings. Any alterations or improvements will be far more expensive on an older building. Green Leases are therefore likely to take two different forms with “Light Green” and “Dark Green” leases emerging.

Light Green clauses can be more easily accommodated into a standard lease where the obligations are such that they do not specify any strict obligations. Light Green clauses include things such as:

  • Any repairs must be made by using sustainable materials.
  • Not to make any alterations which may affect the EPC rating.
  • The tenant must comply with the landlord in improving environmental performance or energy rating of the property.
  • The landlord is entitled to install energy saving equipment.

Examples of Dark Green clauses include;

  • Rent increase if the tenant fails to achieve any benchmarks.
  • Rent abatement if the landlord fails to achieve such benchmarks.
  • Landlord to waive any dilapidations claims in relation to plant and machinery which are to be replaced under any green management plan.
  • The tenant has the option to terminate the lease if the landlord fails to comply with any green management plan.
  • The landlord can increase service charges where the tenant does not reach any goals or benchmarks.

The challenge for those involved in the property industry is to incorporate these green clauses into the conventional lease. With the right advisor it is possible to include green provisions in your lease without placing too many onerous obligations on landlords and tenants alike.

Due to their onerous nature, Dark Green clauses are not likely to be incorporated until legislation is introduced. It is likely, however, that more and more leases will start to include Light Green clauses meaning the standard lease will remain more or less in its current form subject to a few carefully worded additions.

ENDS

Notes to editor:

Tony Dupreez is a solicitor and commercial property specialist at Bright LLP based at the Tamar Science Park in Plymouth and can be contacted on 01752 764848 or by email Tony.Dupreez@Brightllp.co.uk

For background information on the company please visit www.brightllp.co.uk