How ‘green leases’ could help the owners and occupiers of commercial buildings

Mat Lown is a partner at property consultancy Tuffin Ferrably Taylor

Under the Climate Change Act 2008, the UK must reduce its carbon emissions by 80 per cent by 2050. With commercial buildings estimated to be responsible for approximately 20 per cent of the UK’s property-related emissions - and as only 2 per cent of these properties are replaced annually - it is essential that we make our existing buildings more energy efficient.

Furthermore, under the Energy Act 2011 there is the prospect that from 1 April 2018, buildings with an F or G rated energy performance certificate could be unlettable. Owners and occupiers need to work together to make commercial buildings more energy efficient, and compared to the historic adversarial relationship between owners and occupiers, ‘green leases’ are seen as one way to encourage a more collaborative approach.

What is a green lease?

A green lease is an agreement between a landlord and tenant of a commercial building that includes clauses addressing environmental issues such as energy performance. The specific lease provisions can range from dark green (legally binding restrictive covenants) to lighter green (non-binding obligations that require less of a commitment from the occupier). A memorandum of understanding is an alternative and, as it is likely to be voluntary, is a less contentious way of incorporating green provisions in an agreement.

Scope for collaboration

Managing and occupying buildings in a more energy efficient way can present opportunities for owners and occupiers. From an owner’s perspective, there is a need to address the risk of a property becoming unlettable and that may entail carrying out works where the owner has no right to do so. Making a building more energy efficient could also help preserve and potentially enhance the property’s value. For an occupier, there is the prospect of lower energy costs and protection against energy price volatility. There are also reputational benefits for both parties.

Areas where owners and occupiers can collaborate include:

• Sharing data on energy consumption, including installing smart-metering technology that automatically sends data to both owners and occupiers.
• Encouraging a more resource-efficient approach to maintenance, complying with the repairing obligations in the lease and making sure that building services installations run at optimal efficiency. This could entail repairing rather than replacing a building’s components and limiting the extent of removal of an occupier’s fixtures and fittings at the end of the lease.
• When a lease comes up for renewal or extension could be a good time to consider provisions to improve energy performance. An owner may fund improvements in return for a longer lease or by a rent increase.
• Paying closer attention to the effect of any alterations on energy performance and considering the opportunity to combine these with works that improve energy efficiency. Where an owner is responsible for the repair of a building with the associated costs recovered from the occupiers via a service charge, there is an opportunity for the improvements to be made, provided a clear business case to the occupiers for doing so, such as through a ‘pay as you save’ model whereby the forward-funded costs are recovered from savings in energy bills over the life of the leases. For the occupiers, the service charge costs stay the same.

In conclusion, green leases or green provisions, especially MOUs, are just the starting point and should set the scene for greater owner and occupier dialogue. Improving the energy efficiency of buildings should benefit both parties, helping to make the case for carrying out works. Finally, a collaborative approach provides greater opportunity to identify and make improvements at a time when it makes sense to do so and that minimises the associated costs.

Further reading

Better Buildings Partnership’s Green Lease Toolkit